By Sol Palha
This is one topic we spoke of extensively over the past few months and we are going to list excerpts from some past updates with emphasis on the Dec 16th market update.

The dollar is testing a 2 year support zone, and as long as it can stay above this level on a monthly basis the outlook will remain bullish.

The dollar is also putting in a falling wedge formation, which is normally bullish. It also continues to issue new positive divergence signals almost on a weekly basis. There is also a very large short position in the dollar, so a strong move up will most likely produce a short squeeze which could lead to a domino effect. We notice that the move towards extremes is hitting almost every asset class. We have yet to witness an extreme event, which has not produced a counter move in the opposite direction that is just as strong if not stronger.

To signal that the outlook is changing the Dollar now needs to trade past the 75.80-76.00 ranges for at least 5 days in a row. If the dollar manages to do this it will be in a position to trade to 80. Market update Nov 24, 2009.

We have been stating that the dollar is due to for a turnaround when almost everyone has been calling for its demise. Long term we agree, but in the short to intermediate time frames we feel that the dollar is going to give one last dying gasp. No beast ever gives up and dies without putting up a tough fight and the dollar is a very huge beast.

The dollar has broken out of falling wedge (bullish pattern) and the euro has broken down from a rising wedge (bearish pattern). One of the most glaring bullish factors that we feel almost everyone has missed is the action that has taken place in the Gold markets. Gold surged to put in a series of new highs as the dollar broke down.

In the past 24 months, the dollar put in what we consider to be 3 important new lows. We are going to list the lows below in chronological order.

Gold broke past its 1980 highs of roughly 850 several months ago. When Gold traded past its March 17, 2008 high of 1014 should not have the dollar at least tested the low it put on that day. Gold then went on to trade past the 1100 mark and then past the 1200 mark and by now one would have expected the dollar to crack wide open and at the very least trade below 71.30. Strangely the dollar did not even trade below 74.50 and on a monthly basis it never closed below 75.

This is the single most glaring discrepancy we have noticed and yet no one is talking about it. The Gold bugs and even the main stream media now rants and raves about how everyone is jumping into Gold. They even mention central bankers who are supposedly busy purchasing gold. Let’s stop here for a second. Were not central bankers selling Gold when it was trading in the 300-700 ranges? Yes, everyone claims these guys are dumb and stupid, however, we think they are actually very devious buggers. They have generation’s worth of knowledge when it comes to currency manipulation. They are probably buying gold to trick the majority into thinking that Gold is going to roar upward without a correction. After all it does not cost them anything to buy Gold does it? All they have to do is print more money.

Gold traded 21% above its March 17, 2008 high. It traded as high as 1227 before pulling back. Logically that means that the dollar should have traded at least 3-5% lower than its March 17 low. Instead it actually traded 4% higher. The above data clearly indicates that something is wrong and that the dollar instead of taking a beating was actually putting up a very strong fight. Look how fast Gold pulled back when the dollar mounted a small rally. What do you think will occur when and if it trades to and possibly past the 80 mark?

If the above factor is not enough to make you ponder, consider the following factors
Psychologically every Tom, Dick and Harry thinks that the dollar is toast, that investing in commodities (primarily Gold) and competing currencies are the best options available to them. It is now estimated that close to 99% of traders think that the dollar is dead. Remember that extremism always brings about the opposite result no matter how good the investment might look; in this case it would be a dollar rally. Gold used to be viewed as a contrarian investment but if you look about now, its anything but contrarian and its increasingly becoming a main stream idea. Markets are forward looking beasts and we think in the short to intermediate time frames the markets have already priced in the worst when it comes to the dollar.

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