Dollar's Buy Signal and its Implications for Gold
We got the silver signal, we saw the analogy to the previous low-CPI-number surprise, and now we have this.
We have a situation in the USD Index that is a screaming buy alert.
There are really important buy signals and there are moderately-important ones. And then there are weak ones. What we see on the USD Index is not one, but a combination of three important buy signals.
The USD Index is after a corrective downswing that took it to the 61.8% Fibonacci retracement level (almost). This level provides strong support in general, but it works particularly well for the forex market.
Now, since the USDX almost (!) moved to this level, it might be the case that it dips before rallying back up, but the move lower is unlikely to be significant, if we see it at all.
I marked the downside target with a green ellipse, and as you can see, it was already reached, but there’s still some room for the U.S. currency to move a little lower.
The second important bullish indication comes from the RSI indicator. The latter moved very low compared to its usual course of action. It just bounced off the 30 level, which serves as a classic buy signal, and something that indeed worked for the USDX over and over again.
The only time, when the RSI was lower than it just was, was at the yearly bottom in July. At that time almost nobody wanted to view USD’s move below 100 as a buying opportunity, just as it’s not being viewed as such right now. And yet, that was exactly what started USD’s massive rally.
The third important factor that needs to be kept in mind is the aspect of time. The USDX has the tendency to reverse its course close to the turn of the month. The month is about to end and there’s no doubt that the most recent move was to the downside.
This means that it’s not only the case that the USD Index is likely to reverse from the current price levels – it’s also about time that it does that.
Given the negative correlation between the USD Index and the precious metals sector, this very likely means that the tops in gold, silver, and mining stocks are either in or about to be in.
As far as mining stocks are concerned, what I wrote in yesterday’s intraday Gold Trading Alert, remains up-to-date:
If you feel like the market is running away, and that the bullishness is overwhelming, please keep in mind that this is exactly the feeling that accompanies local tops. This is the trying time, where so many investors panic and get on the wrong side of the trade. Let’s take a look at the GDXJ chart for details.
The GDXJ just did the following:
- Moved slightly above its August high without confirming this move.
- Rallied after below-expected CPI numbers in a way that’s very similar to what we saw in July (and rallied pretty much as much as it did back then, indicating that the rally is likely over.
- Rallied after a flag formation, in a way that is almost identical to the rally that preceded the flag (marked with orange, dashed lines). The moves that follow this formation are likely to be as big as the ones that preceded it. In other words, it’s likely that “this is it”.
On top of the above, the RSI just touched the 70 level which is the classic sell signal. That’s what started the huge 2022 slide – the RSI was at that level when it topped in April 2022.
So, all in all, today’s upswing might seem to be a bullish game-changer, but it’s all part of a bigger – bearish – pattern. The April – October 2023 slide was followed by a zig-zag correction. That’s it. The next huge wave down is likely to start any day or hour now.
There’s one thing that I’d like to add on top of that today.
The RSI moved above 70 which is not only a classic sell signal, it’s also something that already worked many times. I marked the previous cases with red arrows, and as you can see the implications were not minor. These were one of the top moments to be sticking to or entering short positions in the mining stocks, and one of the absolutely worst moments to drop short positions or enter long ones.
This is very likely where we are right now, also because of the situation in the USD Index.
Naturally, the above is up-to-date at the moment when it was written. When the outlook changes, I’ll provide an update. If you’d like to read it as well as other exclusive gold and silver price analyses, I encourage you to sign up for our free gold newsletter.
Przemyslaw K. Radomski, CFA
On the date of publication, Przemyslaw K. Radomski did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.