first majestic silver

The Truth is Now Emerging!

November 21, 2009

The US Dollar Chart below - courtesy stockcharts.com - is whispering some very quiet yet potentially important messages. For example, the non confirmation of the rising bottoms on the MACD chart and the falling bottoms on the Price chart are indicating that the "rate of decline" of the US Dollar index has been slowing.

In particular, the "gap" (lower opening than previous closing) at around 83 caught my attention. Technically speaking, if this gap was a "breakaway" gap then it should have been followed by at least one and probably more "runaway" gaps that were not covered. In July there was another small gap at around 80. Arguably, an attempt was made to cover this second gap when the index pulled back - but the pullback not quite enough to cover it. It may well have been a runaway gap.

If it was a runaway gap then it can be used for measuring purposes. 83 minus 80 = 3. The target move for the Index following the second gap was 77 (80 minus 3). This target was reached. In so doing, that technical chapter closed and a new one opened.

At around 76 another downside gap was formed and this one was covered. Because it was covered it cannot be considered to be another runaway gap.

Could it have been an "exhaustion" gap? If so, it might have been whispering that a bottom in the US$ Index was near.

Of interest, the US$ index fell to a new low thereafter, but the MACD bottom was higher than the previous MACD bottom. That is called a "technical non confirmation" and we should pay attention to non confirmations. Often they are meaningless. Sometimes they turn out to be very meaningful.

Taking all of the above into account (including the original breakaway gap at 84), a case can be made that the US Dollar Index may bounce up as high as 84 to cover that gap. This is just one clue. We should keep our minds open for the moment.

Now, turning to another matter: Do you remember that falling wedge which couldn't possibly have been a falling wedge because a falling wedge is a consolidation pattern within a Bull Market and the US Dollar Index is not in a Bull Market?

Well, here it is again, courtesy DecisionPoint.com:

Note how the PMO oscillator seems to be wanting to flatten out and note also how the index closed above the upper boundary of the falling red trend line. This is not yet definitive, but it is the second time it has happened in three weeks. Again, we need to pay attention to these subtle little clues.

Now, just to jog our memories, I am reproducing a chart below that I included in an article I wrote at the end of October. (see: http://www.financialsense.com/fsu/editorials/bloom/2009/1030.html)

The reader is entreated to take a closer look at the weekly chart from DecisionPoint.com. Notice how the dollar index chart is getting closer to the support of the rising red trend-line?

What the ..?

In combination, these charts caused me to sit up and take notice. As a consequence I had a closer look at various gold charts and what I found was fascinating.

Compare the two weekly charts of gold below

:

Chart 1: Weekly Gold Chart, Courtesy StockCharts.com

This chart seems technically overbought. There are no gaps. The RSI is in deep overbought territory, as is the MACD. At 50, the black MACD line is overbought and the blue histograms have not risen to the same level as they previously reached in March. It could be argued that this is a bearish non-confirmation. But it could also be argued that the rate of rise in the gold price as been slower and more steady (and more robust) than the run-up from $700 to $1,000.

Interestingly, when we look at the chart below, a different picture emerges. Note the gaps in the gold price over the past few weeks.

Chart 2: Weekly gold chart, courtesy DecisionPoint.com

Note, first, that the PMO oscillator is nowhere near its previous peaks. Next, note the breakaway gap that manifested three weeks ago and the two runaway gaps that have materialized since. My guess is that one reason for the discrepancy between these two charts (Stockcharts gold price and DecisionPoint gold price) may be that DecisionPoint takes the closing gold price for the week in the USA whereas Stockcharts uses a more international orientation given that the markets trade 24 hours a day across the planet. What we can conclude from these two charts in combination - provided my interpretation of the two different databases is correct - is that it has been non US purchasers who have been pushing the gold price up after the US market has closed. That's why the price gaps up in the USA on the following Monday.

But if it is true that foreigners outside the USA are buying gold - and given that the US Dollar and the Gold price "should" move inversely - then why is the Dollar Index chart sending out these potentially bullish whispers?

Perhaps we can find an answer to this question in the GoldDollar Chart, also courtesy DecisionPoint.com.

Whoa! A Double Top. What might this mean?

Well, what it might mean will depend on whether the goldollar index falls back from the resistance being offered by the double top or punches through this resistance.

If it pulls back then the probabilities favour a Gold Price that will fall at a much faster pace than the Dollar Index will rise.

But the gaps on the DecisionPoint.Com gold chart "may" be pointing to a gold price that wants to run up further.

If this happens - and the reader is cautioned that the call cannot be made until after the event - then we may be entering a whole new ballgame!

If the gold price runs up further and the US Dollar Index rises from the 75 level then it is arguable that the US Dollar Index has bottomed.

But how could that possibly happen? The US economy is stuffed. The country has too much debt at all levels. Unemployment is rising. Etc etc etc.

It can happen for one reason that this analyst can think of, and that reason revolves around an article which reported on the views of Societe Generale (see:http://www.telegraph.co.uk/finance/economics/6599281/Societe-Generale-tells-clients-how-to-prepare-for-global-collapse.html). In an article entitled "Société Générale tells clients how to prepare for potential 'global collapse'", the bank warns of the possibility that your and my worst nightmare should now be contemplated.

Quote from this article: "Under the French bank's "Bear Case" scenario (the gloomiest of three possible outcomes), the dollar would slide further and global equities would retest the March lows. Property prices would tumble again. Oil would fall back to $50 in 2010."

Now, if you were a big holder of US Dollars (like China or the Arab countries) what would you do? I know what I would do. I would scramble like crazy to accumulate as much gold as I could and I would also scramble like crazy to protect the US Dollar against collapse. I would do both of these things.

All of which is both cosmetic and academic. Because if the authorities do not move to address the "causes" of the current economic malaise, it's only a matter of time before Societe Generale's fears materialize.

Conclusion

The truth is now emerging! The charts of the US Dollar Index and the Gold Price - when read together - are telling us that the current economic/financial paradigm may be on the brink of crumbling.


Minting of gold in the U.S. stopped in 1933, during the Great Depression.
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