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July 5, 2012

Dollar Antics Continue

For about the gajillionth time in eight or nine months, the dollar broke hard in one direction at precisely the point it should have done the opposite. Today's rally took the DX to a new daily cycle high, strongly suggesting the cycle will now form as right-translated.

DX Daily

Cycles can offer no solid guidance for the near term direction of the DX now. Given a RT nature, though, I'd put the odds at a little over 50% that the current cycle pushes to a new, intermediate cycle high... unless, of course, we presently hear whispers from the Fed regarding a new round of bond purchases. Given the fact that Britain, Europe, and China are already igniting stimulus efforts, we cannot idly dismiss the possibility of seeing a salvo from the U.S.

Possible Fed actions aside, the good news is twofold. First, risk assets pretty much ignored a sharply higher dollar. Gold and oil were only down modestly, as were stocks, while commodity indexes edged higher. This action demonstrates resistance to... or perhaps disbelief in... a higher dollar, and also stands as perfectly normal within the context of current cycle interpretations. Second, if the dollar's daily cycle is forming as RT, the DX is obviously not going to set an ICL in conjunction with the next DCL. Why is this fact good news? Because it means the current cycle will likely run a normal 15-22 weeks, offering more time for an intermediate decline.

DX Weekly

In fact, I'm beginning to wonder if the dollar didn't set a yearly cycle low in stealth mode back in April. Note the trend line break. Also remember that the dollar's yearly cycle tends to run 10-14 months. The 2011 yearly low printed right at the beginning of May, so we are now actually beyond the regular timing band for the 2012 yearly low. Seeing the current daily cycle form as RT would also push the next ICL another month or more further out. Finally, labeling the April pivot as a yearly low also explains the powerful rise out of that low.

I don't know how well PMs would weather a further dollar rise, but considering gold's action alone, a $20 retreat after a quick $75 of upside is nothing to fret over. However, we should keep a close eye on what appears to be a larger triangle pattern forming in gold:

Gold Daily

It's anyone's guess as to whether the lower bound will be tested again, but I think every trader should be mentally prepared for that potential outcome. Keep in mind, however, that even a marginal downside break would not be a solid signal to bail on positions. The only proper stop at this point is a break of the previous DCL at $1547. Such an occurrence would produce a failed daily cycle and put gold's intermediate cycle in decline.

 

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