This week’s reversals i.a. in gold price, are the most important technical development that we saw this week, so that’s what I’ll start with.
The week is not over yet, so a lot can still change, but nothing from today’s pre-market movement suggests that it will change. In fact, the USDX is slightly higher.
The USD Index is right after a profound reversal and a comeback above the all-important 100 level.
The level itself is critical as round numbers tend to be very important technically (=psychologically). Breakdowns and breakdowns are important, but their invalidations are even more important. The latter proves that the market was “forced” to move in a given direction but that it doesn’t really want to go there / in that direction. USD’s rally is a perfect example.
The fact that the reversal came after RSI moved to its yearly lows and the level from which it then moved higher for weeks (and the same happened in the USD Index itself) makes the outlook even more bullish.
The above chart features not only the bullish reversal In the USD Index but also the bearish reversals in gold and silver.
I marked this week’s performance of both precious metals and the previous times when we saw similar reversals. Declines followed in those cases – significant ones.
Additionally, let’s keep in mind that it’s about time for the USD Index to reverse.
The USD Index tends to form major bottoms close to the middle of the year, and that’s where we are right now.
The 2008, 2011, and 2014 bottoms all formed in the middle of those years.
The situation in the biggest component of the USD Index: the EUR/USD exchange rate confirms the above outlook.
The RSI based on the Euro Index was just practically right at the 70 level thus flashing a sell signal. These signals were very reliable in the past, especially when the Index was right after a short-term breakout.
Those breakouts were then invalidated, and bigger declines followed.
The first small breakout was already invalidated. Now it’s a second attempt, which is likely to be invalidated, too, just as the history shows.
Its bearish on its own as it’s a sign of weakness, but what really stands out is that those comebacks and (failed!) attempts to move to new highs are typical for the European currency. Tiny fakeouts were what preceded declines – massive ones – many times in the past. Even the situation in the RSI indicator (upper part of the above chart) points to the situation right now being similar to what happened previously.
And as the euro declines, the USD Index rises. And gold declines as well. The same with copper.
As gold declines, mining stocks are very likely to decline more (as they’ve done in the previous months and years).
This creates one of the greatest trading opportunities of the year – and when taking a medium-term focus – of the decade.
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Sincerely,
Przemyslaw K. Radomski, CFA
Founder, Editor-in-chief