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Get Support Or Die Tryin'

12/16/05 11:18:27 AM
by David Penn

After retracing 50% of its advance from the September lows, the US Dollar index futures are begging for a bounce.

Security:   DX
Position:   N/A

"Many men wish death on me
Blood in my eye dawg and I can't see
I'm trying to be what I'm destined to be
And ----- trying to take my life away"

With apologies to 50 Cent ... but if a middle-aged, Jewish guy from Philly like Jim Cramer can talk about "pimpin' all over the world," then surely a brother from the Pacific Northwest can analogize the financial plight of the greenback and the once-upon-a-gangsta life of rapper 50 Cent, no?

After all, from Helicopter Ben Bernanke, heir to Alan Greenspan's throne on the Federal Reserve, to the twinkle in the eyes of gold bugs as the yellow metal bests $500 an ounce, it is clear that if there is a hunted asset class out on the mean streets of the financial metropolis, that asset is the American dollar.

FIGURE 1: US DOLLAR INDEX CONTINUOUS FUTURES, DAILY. Having corrected half of its autumn advance without a significant bounce, potential support remains at both the 50% and the 61.8% retracement levels.
Graphic provided by: Prophet Financial, Inc.
In recent weeks, the dollar hunters have clearly marked their quarry. After rallying from 86 in earliest September to more than 92 by mid-November, the US Dollar Index continuous futures slid sideways before slipping sharply in December (Figure 1). Finding temporary support at the 38.2% retracement level after one particularly severe selling session, the dollar edged lower still in subsequent trading, most recently finding support at a fully 50% retracement of the September to November advance.

FIGURE 2: US DOLLAR INDEX CONTINUOUS FUTURES, DAILY. The depth of the MACD histogram during the dollarís latest plunge suggests that lower prices still will be necessary before a clear-cut bottom is in place.
Graphic provided by: Prophet Financial, Inc.
For better or worse, it appears as if the greenback might have further to fall. One reason I suspect this is the fact that the moving average convergence/ divergence (MACD) histogram is continuing to make new lows as price does (Figure 2). While not every decline needs to be concluded with a positive divergence, most significant bottoms do create such divergences. Note also that the stochastic is making lower lows along with price as well. The fact that neither indicator looks poised to create a positive divergence is, at a minimum, a warning that there may be more selling to come for the greenback.

It is hard to argue that the dollar's difficulties can be laid at gold's doorstep. Both assets were in uptrends over the September to November time frame -- the dollar more aggressively so. The dollar topped in November and gold appears to have topped in December. Interestingly, both tops appear to be relatively temporary. The top in the greenback, for example, was not accompanied by a clear negative divergence in either the MACD histogram or the stochastic. And while gold did display a month-on-month negative divergence (November to December) in the stochastic, the size of the MACD histogram in December suggests that the upside for the yellow metal is far from limited.

All that said, it will be worth watching to see if any bounce in the dollar over the next several days will be coincident with any further deterioration in gold.

David Penn

Technical Writer for Technical Analysis of STOCKS & COMMODITIES magazine,, and Advantage.

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Date:†12/20/05Rank:†5Comment:†May I ask what is the relationship of the Eur/USD price activity displayed on the website to the points made in this article regarding the dollar continuous futures contract and gold? Would this be worth a commentary?

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