USD Index Gains Reinforce L-T Bullish Count, Trips Key Gold Threshold

October 4, 2016 3:23AM CDT

USD INDEX

The extent and impulsiveness of overnight's rally and pressure on the past month's 96.25-area resistance bodes well for our longer-term bullish count as it identifies the past month's labored sell-off attempt as a corrective/consolidative structure that warns of a resumption of Aug's uptrend that preceded it.  The 240-min chart below also shows that yesterday and overnight's rally left Fri's 95.34 low in its wake as the latest smaller-degree corrective low and new short-term risk parameter this market is now minimally required to fail below to jeopardize the impulsive integrity of a more immediate bullish count and throw the market back into another intra-range relapse.

Dollar Index 240 min

Dollar Index Daily

The daily chart above shows the importance of the (96.24-area) 61.8% retracement of Jul-Aug's 97.57 - 94.07 decline that has capped this market has resistance for the past month.  A clear break above this area doesn't guaranty a sustained rally thereafter given the aimless whipsaw risk typical of such range-center conditions.  But after a clear 3-wave and thus corrective decline in Jul-Aug, a resumption of May-Jul's even broader rally to eventual new highs above 97.57 should not come as a surprise following a break above the 96.26-to-96.34-range that has capped the market for the past month.

Contributing to a long-term bullish count is:

  • still historically low/pessimistic sentiment indicated by our RJO Bullish Sentiment Index in the weekly chart below
  • an exact and Fibonacci minimum 38.2% retrace of 2014-15's 78.90 - 100.39-rally holding the 15-MONTH sell-off attempt from Mar'15's 100.39 high
  • labored, lateral, corrective-looking behavior from Mar'15's 100.39 high that warns of a resumption of the secular uptrend that preceded it.

Dollar Index Weekly

The quarterly chart below puts the past YEAR-AND-A-HALF'S mere lateral chop into perspective.  On this scale this massive consolidation appears as a mere (4th-Wave) bull-flag within a textbook 5-wave Elliott sequence up from May 2011's 72.69 low that has the remaining 5th-Wave rally to new highs above 100.50 to complete the sequence.

These issues considered, longer-term players remain advised to maintain a bullish policy with a failure below 95.34 required to pare exposure to more conservative levels and a failure below 18-Aug's larger-degree corrective low and key risk parameter at 94.07 required to cover the position altogether.  Shorter-term traders with tighter risk profiles are advised to approach setback attempts to suspected former resistance-turned-support around 96.00 as corrective buying opportunities ahead of further and possibly accelerated gains to and eventually through 25-Jul's 97.57 high.  A failure below 95.34 is required to negate this call and warrant moving to the sidelines.  Finally, we would remind traders that this market remains deep within the middle-half bowels of a 19-MONTH range where the odds of aimless whipsaw still have to be considered high, so a more conservative approach to risk assumption and muted directional expectations are also advised.

Dollar Index Quarterly

DEC GOLD

Given its typical inverse correlation to the USD Index, the fact that the gold market has this morning broken the absolutely pivotal 1305.5-level that has supported it since late-Jun's bust-out would seem to reinforce our bullish count in the Index.  The daily log scale chart below clearly shows the relevance of 01-Sepo's 1305.5 low and exact 38.2% retrace of May-Aug's 1201.5 - 1374.2 rally.  This area was also former key resistance from 02-May that, since broken in late-Jun, played its role as new support very well.

This morning's break below 1305 reaffirms the 2-MONTH downtrend from 02-Aug's 1374.2 high and exposes potentially steep, even relentless losses straight away due to the extraordinary bullish sentiment currently accorded gold.

Gold Daily

The most damning evidence for a sharp move lower in gold is the stubbornly frothy bullish sentiment indicated by our proprietary RJO Bullish Sentiment Index shown in the weekly log scale chart below.  At a whopping 92% reflecting 287K Managed Money long positions to just 25K shorts reportable to the CFTC, this long-and-wrong exposure serves as fuel for downside vulnerability as the market forces its capitulation.

The combination of today's clear break of a major support condition at 1305 and historically frothy sentiment warns of a peak/reversal condition in gold that could be major in scope.  Per such a bearish policy remains advised ahead of further and possibly relentless losses with strength above at least Fri's 1331.5 minor corrective high and micro risk parameter required to defer or threaten this call.

Gold Weekly

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