The U.S. Dollar Index (DXY) is worth watching closely today, with important implications for gold, writes Mike Paulenoff.

The DXY is pressing on key support at 96.40/50.  This represents the June 7 pullback low as well as the 200-day moving average, the major support level from September 2018 and the major upward trendline off of the February 2018 low at 88.25, which initiated the up-leg to the April 2019 high at 98.33 (see chart).

DXY

Given the cluster of many important support points at 96.40/50, a sustained (closing) breach of that zone likely will have significant technical implications that point DXY towards the 94.00 level, amounting to a potentially rapid decline of 2.5%.

Such a decline will argue that the February 2018 to June 2019 advance in the US Dollar Index has both peaked and topped ahead of a period of dollar weakness that generally will present tailwinds for the commodity and precious metals markets. 

With respect to gold, the price reaction to a USD breakdown will be interesting because August gold futures already have rocketed 11% from $1,272 in early May to $1,415.40 last evening, which may have anticipated USD weakness.  In fact, anticipating this rally, we added the Direxion Daily Gold Miners Index Bull 3X Shares (NUGT) to our MPTrader.com model portfolio in early April, exiting on Jun 20 for a 33% return.

If any rally in gold reverses sharply from $1,420 in the upcoming hours -- amid and despite USD weakness -- the divergence will serve as a warning that gold is ripe for a correction of its $140 advance.

That said, should August gold climb and sustain above $1,420, my work will point to $1445/50 as a minimum next target zone.  That would suggest that its multi-year upside breakout will continue unabated, perhaps in reaction to the combination of an easier Fed, a weaker USD, rising inflationary expectations, and heightened geopolitical tensions.

gold

Mike Paulenoff is a veteran technical strategist and financial author, and host of MPTrader.com, a live trading room of his market analysis and stock trading alerts. Sign Up for a Free 15-Day Trial to Mike's Live Trading Room!