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March 21, 2010

Dollar Cycle

The dollar is playing games with us. The long-awaited breakdown in the DX appeared to be coming to fruition early in the week as price took out the February reaction low. Only the breakdown didn't happen. The DX surged back nearly a point and a half Thursday and Friday to close the week only a whisper away from the closing high for the entire rally out of December.

dollar index rally

The dollar also formed a weekly swing high with the marginal break of the February reaction low. However, the surge higher to close the week near highs places the DX in a position to form a weekly swing low with any strength early next week. Now, I'm not going to get into too much detail about cycles, but suffice it to say that the formation of a swing low would most likely mark the transition to a new intermediate cycle. Such a development would open the door to several weeks of higher prices for the dollar.

The initial push higher into a new dollar cycle would fit neatly into the expectation for a stock market correction. After racing higher for more than a month, equities are due for a pull-back, and what better time to do so than right after drawing in salivating technical traders with a breakout?

s&p 500 correction

I would expect the 65DMA to provide support for a pull-back, and due to the technical strength displayed by this rally, I would also expect price to make new highs afterward.

Of course, all these developments won't sit well with gold bugs. A rising dollar is going to produce a tremendous headwind to gold price, and combined with a falling stock market, mining shares are facing discounts (to put it diplomatically).

gold daily price chart

The best hope for gold bugs in the case of a new dollar cycle would be for that cycle to fail quickly. A failed cycle would produce 3-4 months of a declining DX and help juice what I expect to be the final rally in the cyclical stock bull. However, the prudent action for now is to sit tight until the situation clarifies. I reduced my precious metals exposure Friday by selling a mining position. If the DX forms its weekly swing low, I will also dump silver futures and wait for the technical to realign bullishly for gold.

 

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