Potential for Sucker Rally on the Dollar
March 5th, 2008WARNING: This is not a recommendation to buy, sell or hold any financial instrument.
There’s potential for a sucker rally on the dollar. Looking at the daily interval chart of the U.S. Dollar Index, we see a stochastic cross up under 20. There’s no way to know if it will rally or not, but I can tell you what often happens in cases like this.
Once a major support is taken out and new lows are in (in this case the support was 74.50), the issue will often retrace back up toward the previous support (which is now overhead resistance).
The point of this post is to to mentally prepare dollar bears for a bounce, while pointing out some levels to watch. The most critical number is 74.50. I shaded the zone between where it is now and 74.50. This is prime sucker bounce territory. Suckers will see a bounce and think, “The bottom is in,” and go long. As suckers load up on long positions, the big boys get ready to blow the support columns.
USDX daily interval
I’ve also drawn the Fibonacci retracement grid from the high on Feb. 7 to the low on Mar. 3. Notice how the 38.2 line is above 74.50?
Maddening, isn’t it? While I don’t expect it to rally above 74.50, if it does, there’s the 38.2 resistance as well as well as 75 a bit higher.
Finally, look at the MACD cross down on the weekly.
USDX weekly interval
We had all those weeks of massive intervention and manipulation which created a lot of noise, and now we’ve got that cross down anyway. In summary, don’t let a short term rally right here rattle your cage too much. I watch this everyday. I’ll revisit the analysis if some of those overhead resistance levels get taken out.
Taking a quick look at gold: It has been whacked out overbought. Expect volatility. Near term support at $955.
Gold daily interval
So far, this recent knock down looks like an attempt to shake the apple tree. That is, as gold was closing in on $1000, big players shook out smaller speculators who came in thinking that $1000 was imminent. In other words, lock profit and use it to buy more gold lower in the run-up to Helicopter Ben’s “Vigorous Response” later this month. If that’s what happened, we could see an ascending triangle start to take shape, but I don’t want to get too far ahead of myself. Like I said, the indicators on the weekly are in overbought territory, just like they have been for months. They’re going to unwind at some point. Too bad there’s no way to know when. Trend lines and Fib fans and retracements are the ways to look at this one on the longer intervals.
In summary, short term shake outs possible on fake dollar rallies/cranks, but the overall uptrend is still very much intact. In fact, I just bought a couple more grams during these recent red candles.
