The Dow Report: The US Dollar and Gold at the Crossroads Again
By Tim W Wood CPA, July 30, 2004
The dollar and gold both stand at important technical junctures. Below is a daily chart of the dollar. I have labeled each of the cycle lows that have occurred since the intermediate-term cycle low in February. Notice that the April and May short-term cycle lows each occurred at a higher level than the previous low. Also, notice how the dollar moved impulsively up into the cycle highs and each of these highs occurred at a level above the previous high. The moves up into these cycle highs tended to be of a longer duration than the moves down into the lows. This is known as bullish right cyclical translation.
Then, in early May there was an intermediate-term cycle top due. Knowing that this top was due, we were on guard for its occurrence. This is in part what made me so cautious on gold at the time. Then, when the hard and fast move up into the mid-May high began to fizzle, the intermediate-term indicators turned down, which also warned of this top. Notice that the lack of follow through was then followed by a break down below the May short-term low. This served as cyclical confirmation of the top. Following this break down the dollar moved into the June short term low, which was lower than the May low. Notice how the rally out of the early June low was brief, had no follow through and failed to move above the previous high. This is known as bearish cyclical left translation and was all expected following the short run up to the top in May.
Now, it’s time for the intermediate term cycle low to occur once again in the dollar. Thus far, it appears that low occurred on July 19, 2004 at 87.20. Notice how the price behavior has changed and now seems to be impulsing up rather than down. This is a positive development for the dollar as it tend to confirm the intermediate-term low. However, in order for this intermediate-term cycle to remain positive, it must clear two very important hurdles. The first one is that the July 19, 2004 short-term cycle low MUST hold. The second one is that the June 16, 2004 top MUST be exceeded.
So, as it stands today, it appears that the dollar has most likely made its very important intermediate-term cycle low. Now the question is; which force is greater, that of the bull or that of the bear? If the dollar should break below 87.20, it could result in a most serious decline for the dollar as this could very well then trigger some even longer-term cyclical failures. But, if the dollar should break above 90.56, it would be a bullish development for the dollar and would serve to further confirm even longer-term cycle lows. The jury is now out. All we can do is wait for the verdict of the market and be prepared to go with whatever that verdict may be.
Chart 1: Daily Chart of US Dollar
Below is a daily chart of gold. I have marked the intermediate-term cycle low, which occurred in March as well as the one which occurred in May. I do not like the fact that we have now seen two consecutively lower intermediate-term cycle lows. However, the shorter-term cyclical structure is currently positive. Notice how the rally out of the May 2004 intermediate-term cycle low was followed by a very positive short-term cycle. When I say "positive," I mean the structure of the cycle was bullish. Look at how price impulsed up into the June 1, 2004 short-term cycle top, but the decline into the June short-term cycle low was brief. This created what we call a right translated cycle. In other words, it moved up longer than it moved down. This served as cyclical confirmation that the intermediate-term cycle low had likely occurred.
Chart 2: Daily Chart of XAU and Gold
Then, from the June short-term cycle low the next advance was born. This advance was also positive in that it was right translated and it moved above the June short-term cycle top. From the July top, gold began to move down into the short-term cycle low. That decline is still underway. I must say that I do not like the fact that gold has retraced as much of the last cycle advance as it has. However, as of this writing, the decline into this short-term cycle low has held above the June low, which occurred at 382.50. This short-term cycle low is now due and as long as the decline into that low holds above 382.50, the short-term cyclical structure for gold is positive.
Once this low is established, gold MUST then move above the July short-term cycle top, which occurred at 409.60. Failure to move above this level would create a failed short-term cycle. This would then likely indicate that we have seen the intermediate-term cycle top. More troublesome would be that this intermediate-term top will have then occurred below the April intermediate-term top.
I have also included the XAU/Gold relative strength indicator at the top of the daily gold chart. Notice how this indicator diverged or failed to confirm the April intermediate-term cycle high. Additionally, notice how the advance out of the recent intermediate-term cycle low has, thus far, also not been confirmed by this indicator. This lack of confirmation is telling us that the gold stocks are weaker than gold and this has historically been a leading indicator for gold. Ideally, this indicator needs to move above the downward sloping red line. It would be very positive if this indicator could move above its May high. A break in this indicator below the June lows would serve as bearish confirmation.
The important hurdle for gold is to see a break above 409.60 as the next short-term cycle advances. Failure to do so will be a technical warning. Also, in the process of trying to advance above the July short-term cycle top, gold MUST hold above the June short-term cycle low at 382.50.
So, I hope that you can see why gold and the dollar are at such important technical crossroads. Both are facing the same dilemma. Both are trying to hold above their most recent intermediate-term cycle lows. One will succeed and the other will fail. The jury is out. As market participants we must listen to the market and the verdict should be coming soon.
Tim W. Wood
© 2004 Tim Wood