Gold Follows Through As Dollar Weakens

By Colin Twiggs
September 17, 2009 3:00 a.m. ET (5:00 p.m. AET)

These extracts from my trading diary are for educational purposes and should not be interpreted as investment or trading advice. Full terms and conditions can be found at Terms of Use.

US Dollar Index

The US Dollar Index continues to decline, testing short-term support at 76 — which increases upward pressure on gold, crude oil and general commodity prices. Medium-term target for the index remains at 74*. Recovery above the descending trendline is most unlikely, but would warn of reversal to a primary up-trend.

* Target calculation: 78.5 - ( 83 - 78.5 ) = 74

Gold

Spot gold confirmed its breakout above $1000 with a rise above short-term resistance at $1010, and is now testing $1020. The primary advance offers a medium-term target of $1100*, but first expect retracement to test the new support level. Reversal below $970 is unlikely, but would warn of a correction to test primary support at $900. In the long term, breakout above $1000 offers a target of $1300*; failure of support at $900 is most unlikely, but would test the November low at $700. The primary determinant of gold direction is US inflation expectations and consequent stability of the dollar.

* Target calculations: 1000 + ( 1000 - 900 ) = 1100 and 1000 + ( 1000 - 700 ) = 1300

The Market Vectors Gold Miners Index [GDX] is testing its upper trend channel after breaking resistance at $45. Divergences between gold miners and spot gold often forewarn of changes in the spot price.

Silver

Spot silver broke through resistance at $16 before advancing to the upper trend channel. Breakout above the trend channel would offer a target of $19*. Expect medium-term retracement to test the new support level. Respect would be a bullish sign, while failure of support would indicate weakness. Reversal below $15 is unlikely, but would warn of a bull trap.

* Target calculation: 16 + ( 16 - 13 ) = 19

Platinum

A recovering RJ/CRB Commodities Index indicates stronger industrial demand for platinum. Breakout above resistance at $1300 signals a primary advance with a target of $1500*.

* Target calculation: 1300 + ( 1300 - 1100 ) = 1500

Crude Oil

Crude oil threatens to complete a large ascending triangle, testing resistance at $72/$73 a barrel. Breakout would signal a primary advance with a target of $84*. Reversal below the rising trendline is unlikely, but would warn of a bull trap.

* Target calculation: 72 + ( 72 - 60 ) = 84

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Investing isn't about specific forecasts, but about repeated actions and long-term discipline .... taking greater risk in periods where the average return/risk profile is strong, and avoiding risk where the average return/risk profile is weak.

~ John Hussman