Things Are Looking Up, Slowly

01/09/2012 8:15 am EST

Focus: COMMODITIES

Curtis Hesler

Editor, Professional Timing Service

We're getting to a place where the markets may finally be turning in investors' favor but it won't happen quickly or all at once, says Curtis Hesler of Professional Timing Service.

As the financial problems in Europe have intensified and their potential solutions have become more muddled, a good deal of currency has shifted out of the euro and into the US dollar and related items like US Treasuries.

Our Rydex US dollar trading program had us in for the ride, but it took profits and stepped aside on December 13. It moved out of the Rydex Strengthening Dollar Fund and into the Rydex US Government Money Market Fund.

As we go to press, the dollar is close to the level at which the model turned neutral, and as yet, the next sell point has not been reached. That will require the March 2012 US Dollar Index to trade at 78.25 or lower.

The result was a nice trading profit for those who participated, but there are wider ranging implications that reach beyond the interest of dollar traders. The next sell will be very important in stimulating the next rally in the precious metals, and it carries implications concerning the bond and stock markets as well.

There are a couple of quick things to point out. Hopefully, these simple technical musings are not tedious and will be something you can find beneficial after my November 2012 retirement.

First, old highs are always a problem. That is where you will find overhead resistance because folks that bought those highs will be anxious to get even and get out. You can see that the 81 level is significant.

I have to comment that resistance and support—although I often refer to them as specific price points—are better thought of as “zones.” The resistance in the current rally will be found between 80 and 82. Exactly where you choose to take profits is a bit of a judgment call that is influenced by other factors. We took profits at 80.40 in the dollar program, resulting in a very decent profit of 12.7%.

The other factors include the behavior in the RSI (Relative Strength Index) and MACD. RSI touched overbought
readings and then began to fail against the late December rally. MACD has not recovered to its level at the October high, and has set up multiple sell warnings.

All in all, the omens are clear that this rally in the US dollar is coming to an end. The key level to watch next is the May low. I expect to see that low broken on the downside during 2012. My long-term outlook since the early 2000’s was to see the dollar fall into the low 60s, and I still believe that will transpire over the next few years.

The US Dollar Index does not tell the entire story, since it is made up of a basket of currencies and measures the dollar against the lot. Over half of the lot is the euro. The euro falls and the dollar rises in seesaw fashion due to the math.

However, as time is marching on, all currencies are falling. Money should be a store of wealth; but when purchasing power erodes, that currency becomes weaker. In other words, even though the dollar and the euro will trade places from time to time creating the illusion that one or the other is stronger, the truth experienced by those using either currency to purchase necessities is that both dollars and euros are buying less over time.

It is better to measure your dollar against gold than against euros. Some 11 years back, you could buy 1/250 ounce of gold for a dollar. Now all you can get is 1/1,600 of an ounce for that same dollar. The game becomes complicated when paper assets become undervalued and tangible assets become overvalued. At some point—perhaps when your dollar will only buy 1/5,000 ounce of gold—the tables will turn.

In the early 1980’s, that occurred. The dollar was beaten too far afield and gold became too expensive. We will see that happen again, but not for a while...not until the Dow/gold ratio, now at about 7.8, falls under three at the very least.

While the dollar has rallied, gold has been weaker than I expected, but $1,550 is still an important support level. Again, support is a zone, and the zone really extends between $1,550 and $1,480.

There has been some short-term supply dynamics with a fresh Libyan supply of 144 metric tons and a Greek supply of 111 metric tons. Some of this is a bit under the radar, but short term forces will not do anything but present a buying opportunity for powerful entities.

The nice thing is, we needn’t bother with fundamentals like these if we pay attention to the technical signs. The deep, oversold level in MACD hints at a pending buy signal coming when the heavier line crosses up and over the lighter line.

Another big positive here is the two oversold readings in RSI accompanied by positive divergence. Although the correction has lasted longer than I expected, and although the November low did not pan out as anticipated, we are nonetheless seeing a major buying opportunity. By the time the US dollar rolls over, gold will be well on its way to new highs.

Hold on to your positions, and if you feel underinvested, accumulate during weakness. Do not focus on exactly where the ultimate low is going to be (we are close if not there already), but focus on the changes that are underfoot along with the new high in gold we will see this year.

If you want a forecast, I expect $2,500 bullion during 2012. It is also possible that this forecast will be grossly shy of the mark.

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