Bearish Dollar Outlook Good News for Precious Metals

In previous essays, I emphasized that the long- and short-term trends for gold are up. In today’s article, I will feature the current situation in the USD and euro indices and in the general stock market. After analyzing each of them, I will move to implications for the precious metals investors.

Let’s start with the analysis of the USD Index (charts courtesy of http://stockcharts.com.)



Our first chart this week is the very long-term USD Index chart. We see little change in the situation since last week. There has been no confirmed breakout above the late 2010-early 2011 highs, and the long-term trend remains down.



In the short-term Euro Index chart, there are some visible changes. Though not yet confirmed, there is a visible breakout above the short-term declining resistance line. This is positive news for the euro currency itself and bearish news for the dollar.

We have an early indication here that the USD Index will finally begin to decline as the sluggish situation seen during this month seems to be reversing. It is too early to draw conclusions, however, since the breakout here is not yet confirmed.

Consequently, the situation in the USD Index is a bit more bearish due to a sign of a possible breakout in the Euro Index. Since this move is not confirmed, the change is not extremely important yet, but the situation is more bearish for the dollar now as compared to recent weeks.

Let’s move to the stock market.



In the long-term S&P 500 Index chart we see that stocks moved close to an important resistance line formed by the 2008 and 2011 tops. It appears likely that a period of consolidation could begin very soon, and the recent rally will likely pause for a bit.



In the short-term SPY ETF chart, a proxy for the general stock market, we have a signal from the relative strength index levels that a local top may be close. This is based upon comparisons to past patterns where similar RSI levels have coincided with local tops as seen last July. A pause here in the recent rally would not be a surprise and could, in fact, be a healthy development for the general stock market.



In the Amex Securities Broker Dealer Index (^XBD) (proxy for the financial sector) chart this week, we see a breakout above the declining resistance line. This follows a strong move to the upside, and although we could see a move back to the support line (and then likely a reversal), the financials do appear to be showing signs of strength. This is a bullish development for stocks in general, as the financials often lead the general stock market to higher (or lower) prices.