Thursday, August 28, 2008

One more leg down

During this phase of the bull market gold should move inversely to the dollar. Many point to gold's decoupling during 05 as proof that gold will rise despite a strengthening dollar. I think they are going to be wrong this time. First off gold was responding to hurricane Katrina and then the rally continued on the Fed flooding the world with liquidity to cushion the after effect of Katrina's devastation. Unless the Fed does something stupid like suddenly cutting rates again I don't see the dollar all of a sudden breaking down.

Looking at the dollar chart we can see an obvious change of character. Previously when ever the dollar became overbought it immediately sold off. This time the dollar got overbought and then just continued to stay overbought. At this point the dollar is in a high level consolidation. This is completely different action than we've seen in the past.

Notice in the first chart I've marked the weekly cycle lows. These cycles average 18 weeks in duration. The low 2 weeks ago was three weeks early. We should ideally get one more leg down before this cycle bottoms. Of course it is possible that the cycle bottomed early but with the dollar consolidating as it is I wouldn't be surprised if the dollar pushes through the 78 level before seeing a more significant correction.

Also gold is following oil at the moment. Oil is rising on the hurricane threat. Notice the stock market is no longer crashing on rising oil? It's probably a safe conclusion that the market is starting to discount this rise in oil as temporary since hurricane season will be mostly over within a month.