Stalemate resolution imminent?
Most of January gold has been stuck in a narrow range between $420 and $428 awaiting developments in the dollar - awaiting the outcome of the dollar's struggle to break above the resistance at 84 on the index.
Earlier in the month it looked as if gold would drift a little lower and then proceed to base in the vicinity of its long-term uptrend, now at about $410. Instead it has marked out what is looking increasingly like a countertrend rally within an intermediate downtrend, implying that it more likely to break sharply lower soon towards the $410. We will know soon enough for, with gold very close to the intermediate downtrend line and the dollar perched just beneath resistance at 84, a resolution of this stalemate appears to be imminent.
The dollar meanwhile has been trading in a very tight range for nearly 2 weeks which cannot be expected to continue for much longer. It has held up well after breaking sideways out a small rising wedge pattern, and is evidently finding support at the 83 level.
Although the dollar is clearly being sold at the 84 level, the resistance at this level looks close to being absorbed. There are several reasons to anticipate further advance by the dollar, at least to the 85 resistance level, and possibly further to the big resistance in the 87 - 88 area. These are the breakout from the 3-line fan shown on the 6-month chart, which usually leads to a significant rally, and the big candles that initiated this advance at the start of the month. The 87 area would be the logical place for a significant countertrend rally to terminate, close to the falling 200-day moving average. A move to this level would, however, involve a breakout of the long-term downtrend channel shown on the long-term chart. This would, at the very least, necessitate an adjustment of the trend channel, and could lead to a prolonged correction to the entire bear market in the dollar to date.
Asked to come off the fence I would have to admit that I am not sure which way this is going to break, but would say that I believe there is a 70% chance of the dollar breaking higher here. What is clear is that a sharp move, a resolution of this pattern is likely soon, probably this coming week. Should the dollar succeed in breaking higher and running as far as the 86 - 87 area, gold can be expected to be forced back down to its long-term uptrend line currently at about $410, and it will be very important that this holds. Should this scenario unfold, gold stocks, which are already right down on their long-term uptrend lines, will drop sharply, break 200 on the HUI and head swiftly for the 150 - 160 area, where there is strong support, this level being viewed as a major "buy spot." This scenario, and appropriate defensive action, were discussed in the last Marketwatch.
Silver is a similar story to gold at present, although it has enjoyed a more significant rally since its brief plunge at the turn of the year. It has probably not escaped the notice of many interested in silver that it has had the habit over the past year of losing the gains of many weeks within the space of a couple of days, and if the dollar breaks higher here it is likely to do so again. The dollar is in a finely balanced position right now and is poised to make a significant move, probably this coming week, which is considered to be more likely to be up than down, for reasons set out in the Gold Market update.
A break higher by the dollar is expected to precipitate a retest of the early January lows in the $6.35 by silver, with a possibility of a further fall to support in the $6 area, gold being expected to test its long-term upturned line now at about $410 at the same time. Such a move would result in an immediate break of important support by the precious metal stock indices, with the XAU index probably retreating swiftly to the 70 area. This scenario, and appropriate defensive action, were discussed in the last Marketwatch.