One Thing Is Key for Gold, Oil, Stocks

04/18/2011 12:25 pm EST


What happens next in the US dollar index is likely to determine the future price movement for stocks and red-hot commodities like gold and oil, writes one trader.

The week that was left many investors running for the exits on Monday and Tuesday as prices in the equity, energy, and precious metals markets plunged.

The US dollar index futures tried to work their way out of a descending channel, but came up unsuccessful. The dollar index rallied in several morning sessions, but usually was met with heavy selling later in the day, which either muted gains or pushed the dollar index lower.

The other notable development last week was some Fed drivel, which solidified the central bank’s continued efforts to devalue the US currency and hold short-term interest rates hostage. In addition, it seems more likely with every press release from a Fed governor that QEII will expire in June and QEIII will not be pursued unless economic conditions worsen.

Recent statements from Federal Reserve chairman Ben Bernanke and several of his minions show that they believe we are not experiencing real inflation in the economy.

Apparently, the Fed does not believe that most Americans need food to eat or gasoline to drive to their jobs, assuming they have one, since around 16% of the adult population capable of working is either unemployed, underemployed, or taking part-time work.

Apparently, they seem to believe, the increase in food commodity prices are only going to last for the short term and have little consequence, according to the Fed. We have also been told that energy prices are just a blip and that it is nothing more than a short-term market perturbation. Gold and silver prices continue to break out to new highs, but still, we have no inflation.

Long-term readers known that I generally do not get involved in macroeconomic discussions about inflation, deflation, stagflation, or any other type of “flation” because I am not an expert in those areas.

What I do know is that food prices are rising in most countries and energy prices are volatile and seem likely to continue to probe higher, even if Goldman Sachs (GS) analysts disagree.

Yes, Goldman Sachs can be wrong, and there is a relatively strong precedent for them to enter into rather onerous financial transactions.  

Speaking of Goldman Sachs, does it seem odd that Goldman Sachs comes out and says oil prices are going to continue lower and then a large selloff takes place?

Then, in a strange turn of affairs, the very next day, Bank of America (BAC) energy analysts say that oil prices could go to $160 per barrel. I wonder if any Goldman Sachs energy traders used the statements to scoop up oil at a cheap price. Is that a conflict of interest?

At the very least, the timing was interesting, and the Bank of America comments are also intriguing, not to mention the fact that oil prices have bounced back since Goldman’s entrance into the void of market predictions. I wonder if this latest prediction is as accurate as their prediction that oil prices were going to $200 per barrel in 2008?

Finally, is Goldman Sachs playing the Federal Reserve’s song loud and clear for everyone to hear? All of these questions will most likely go unanswered, but at the very least, they are thought provoking.

NEXT: The Most Critical Chart to Watch This Week


Where do I think oil is headed? A one-word answer: higher. Obviously, I could be wrong, but my stance on oil is not just about tension in the Middle East or increasing demand from emerging markets.

In fact, I believe that oil will continue to move higher because we are in the later stages of this bull market cycle and most cycles end with commodity prices pushing higher and energy-related stocks putting up solid gains. We are in that period now, and while it could last for several months or even a year potentially, I believe that we have further room to run.

More than anything else, I firmly believe that the US dollar index is the most critical chart to watch in coming days and weeks. The daily chart is shown below:

Click to Enlarge

If the dollar breaks down, which aligns with my expectations, I would expect it to test the lows reached back in November 2009. If we see prices test the November lows in the coming days/weeks, I expect oil, precious metals, and equity prices to continue to work higher.

However, we could see a huge breakout in all three asset classes if the US dollar index tests the November lows and they do not hold. If a breakdown transpires, we could see a huge rally in gold and oil. It can be assumed that equity prices would rally, but it would depend on how orderly the US dollar sold off. A quick glance at the key levels in oil futures can be seen below:

Click to Enlarge

NEXT: Latest Chart Analysis for S&P 500 and Gold


As far as the future for equities prices is concerned, we continue to have an inverse head-and-shoulders pattern on the S&P 500 (SPX) daily chart.

If the pattern plays out, it would presage a rally that could extend as high as 1,450 on the SPX. However, a breakdown below the key 1,300 area presents a possible retest of the 1,250 lows.

Right now, I’m leaning to the bullish side on the back of a sliding dollar and my expectations that earnings may not be as bad as expected. Until we get a breakout higher or a breakdown lower, I continue to believe the S&P 500 is pinned in a range between 1,300 and 1,340.

The daily chart below illustrates the inverse head-and-shoulders pattern as well as the key channel high and low:

Click to Enlarge

Finally, gold futures sold off early in the week but have since rallied back and have taken out previous highs. Silver futures also broke out to new highs after experiencing selling pressure early in the week.

After the Federal Reserve made it rather clear that they were not going to tighten interest rates in the short run, precious metals and oil futures have rallied. While the two may not go hand in hand, it is a rather interesting coincidence, particularly when various financial institutions have different opinions about the future price of oil referenced above.

If the US dollar index falters, I expect gold and silver to continue higher. The daily chart of gold is shown below:

Click to Enlarge

In closing, I am going to be focused on the US dollar index futures this week, looking for clues as to whether we are going to see a breakout, a breakdown, or whether we will remain in a range-bound market.

At this point, anything could happen, but unlike the Federal Reserve, I’m leaning towards the idea that inflation is here, and unfortunately, it might have just arrived.

If the Federal Reserve becomes too accommodative and waits too long to raise interest rates to slow down inflation, then the Federal Reserve might have not only let Mr. Inflation in the door, but they likely just asked him to stay for dinner.

By JW Jones of

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