October 19, 2009

Dollar vs Gold and Crude Oil Futures

The Dollar remains in decline, and Gold remains in the news. Is this really the lead story?

The 60 minute bar chart above compares futures contracts of the Dollar (in green) vs Gold (gold, on the left) and Crude (red on the right). Blue vertical dashed lines denote key pivots in Oct 09. A red trend line is plotted for the Dollar, with corresponding blue trend lines for Gold and Crude. Lastly, a solid black line annotates swing high pivots in the Dollar, and swing lows in Gold and Crude.

In the grander scheme of these charts, clearly the Dollar remains in decline. While there is room to recover, the trend is plainly down. Both Gold and Crude are distinctively in corresponding up trends as might be expected given the Dollar decline. Whether you subscribe to inter market relationships between the Dollar and these two instruments, there is no denying their presence above.

What of Gold in particular though? The first of two blue trend lines matches the swing pivot highs from the Dollar on 05 Oct 09 and 12 Oct 09 respectively. After rising an additional day in lock step with the Dollar, Gold began to sell off. Taken from the broader perspective, it appears the precious metal is merely catching its breath. Indeed, relative to Crude, Gold appears to have gotten ahead of itself.

Crude, meanwhile, has been a secondary story to Gold. While the Dollar has continued to sell off, this commodity has quietly advanced for several months. This has largely been seen as a recovery from the precipitous sell off of 08 highs, but the story appears ready to change. Looking toward the end of the chart in Crude, price action has broken away from its trend line, and appears to be accelerating.

Which trends will appear most dominant, and which commodity will benefit most, is yet to be determined. The Dollar continues to languish near the lower end of critical support, and technically looks ready to fall even further. Using inter market analysis, one would expect Gold and Crude to continue to rise. While true, this could take some time (and patience) on an individual basis. Either market (Gold or Crude) could breakaway from their longer term trend lines, accelerating to the upside. Technicians should pay attention to these shorter time horizon charts to gain a sense of the outcome which is unfolding before our eyes.

Jeffery E. Lay, CMT
President
Talon Eight, LLC

Disclaimer: This post is intended solely to disseminate information, and is not, and shall not be construed to constitute financial, investment or other similar advice. All posted material should be independently verified for accuracy and current applicability. Readers of this post are referred to the Risk Disclosure for further information.

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