Thursday, October 3, 2013

Metals & the US Dollar

It continues to appear as if the major metals are in a bottoming process.

When I last wrote about gold, it had successfully broken through both a declining trend line and its 50-day moving average only to then pullback.


Regarding the price retreat from the recent break in the downtrend, I wrote, "it wouldn't be surprising to see price retrace a bit more to $1330-$1350," which occurred and then some as gold has dipped just below $1300 before recovering. The daily chart above shows what looks to be a bullish inverse head-and-shoulders formation developing. I always strongly caution against jumping the gun and overly anticipating a price formation before its fully established, but better to at least be aware that this bullish pattern could be unfolding. Note also that $1300 looks to be a decent support level (orange line) and that the MACD had finally risen above zero, a bullish sign. Finally, I would also mention a key point: since the $1200 low this past summer, many of the wide candles are white, inferring range expansion on up days; compare to pre-1200 level months where most of the time the wide candles were red, i.e. more-severe down days dominated -- a gradual change in control of buyers over sellers.

Not surprisingly, the chart of silver very much resembles that of gold (over time, the correlation of gold and silver has tended to be 0.70, very high).


As with gold, silver also looks to be potentially carving out a bullish inverse head-and-shoulders formation. In addition, the MACD successfully rose above zero and note also the many wide-range white (up day) candles since the "head" or post-$19 level versus the many wide-range red (down day) candles pre-$19 level.

When I last wrote about copper, I discussed how smart(er) money appeared to be making a very bullish bet on the metal.

The price of copper then was at the $3.15-3.20 level and currently it resides at about $3.30. Again, as with gold and silver, copper also looks to have a bullish inverse head-and-shoulders formation in the works, with $3.35 serving as the possible neckline. Price is now on the right side of the 50-day moving average (bullish) and the orange line depicts a maturing uptrend. That said the 200-day moving average at $3.37 and the preliminary neckline of $3.35 serve as overhead resistance in the near-term.

Closely related to the price behavior of these metals is the US dollar (USD) as commodities in general tend to move opposite the USD.

The chart above shows the USD versus the Reuters-CRB commodities index (CCI) with the rolling 1-year correlation in the lower inset. Clearly the relationship is historically negative or inverse.

That said the picture for the USD appears bearish.

The USD recently broke down through support at $81, mustering a brief snap-back move only to then roll over to the current level of $80. In the chart above, I drew what appears to be a bearish complex head-and-shoulders formation, complete with the breach of what could be considered a neckline at $81. Granted, not a classically-drawn formation, but perfect is frequently the enemy of the good. Support does exist around $79, but to me this chart looks broken.

The weekly chart of the USD also looks vulnerable.


A multi-month rising trend line has been broken and if $79 doesn't hold, the next fairly well-defined level of support is at the $74-$75 level. Also note that a Death Cross -- when the 50-day MA declines through the 200-day MA -- recently occurred. 

In isolation, this bearish outlook for the USD is a bullish tailwind for commodities.

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