Long-Term Dollar Index And Where Gold is Heading

TVC:DXY   U.S. Dollar Currency Index
Here is the monthly chart of the DXY , going back to 2003. Look at how beautifully the Dollar obeys the parallel lines. There is the dominant downtrend (white), and the secondary uptrend (green). The chart is obeying the logic of both lines. Which one will prevail in 2018?

Price broke out of a wedge in 2014 and rallied hard, peaking at the end of 2016, and touching a longterm down trendline . The Stoch/RSI made a lower high, warning that momentum was low. This gave way to a drop in 2017.

The last months of 2017 saw a small rally. This was interesting, as it peaked where former trendline support becomes resistance. This rejection was accompanied by an even lower Stoch/RSI. This tells me two things: 1) the Dollar is lacking bullish momentum and had room to fall further over the coming months. 2) BUT - price is adhering the up tendlines, warning that the Dollar is preparing for a rally in the coming years. IF the Dollar is to rally, then it COULD make a final MAJOR low at an approprirate up tendline. The last support I have marked on my chart is the trendline that joins the 2011 low and the 2014 low. That line represents the perfect spot for a long-term long Dollar position.

BUT... the complicating factor is that we're now at minor trendline support - a line that connects with the 2008 low. This area is also a mix of support and resistance . Longterm, we're in a messy point in the chart.

Near-term, we could rally. But the logic of the trendlines and the nearterm momentum suggests this would be short-lived, and a resumption of the downtrend should continue. For this to happen, we would need to break and close below this month's low. Previous candle structure supports this view.

A break of this month's low leaves plenty of room to dig into the lower bband. In other words, it opens the door to make the final monthly low at the lower green trendline , hilighted in yellow. This is also a confluence of historical resistance. For confirmation, we want to look closely at the Stoch/RSI. If that makes a higher low, with the Dollar touching support, that is bullish divergence , and the Dollar is a BUY.

So what does this mean for Gold?

At the start of the year I presented the case for a 2018 Gold breakout. If I'm correct that the Dollar will fall, mostly in 2018, then it supports the view that Gold will do the opposite. However, don't get too excited. If the Dollar touches support and bounces hard, this will put an end to a Gold rally. So, in 2018, we should be looking for a Gold rally, a breakout, and then a failure.

Near-term, Gold is pulling back slightly, just as the Dollar is green for the month. Buying support in Gold is preferable, especially if the Dollar fails to close above December's open. From there, the Dollar will need to take out last September's low, and the next downtrend line (white) to give Gold the power to breakout.

The other scenario is that the Dollar does not break this trendline , and instead, consolidates without touching major support or resistance. This would manifest as another rangebound year for Gold .

Though possible, I'm currently bias against this scenario, for all reasons mentioned above, as well as my conviction that volatility will rise in 2018.

This is my long-term view. As for the execution of trades, this is done on a day-by-day basis. We will need to see how the market behaves at key levels. For this month, watch for a buyable long entry in Gold , coincident with a failure at monthly/weekly resistance for the Dollar. We will take it from there.

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