An objective look at the US Dollar and Gold

Posted by downtowntrader | 12/17/2009 12:43:00 AM View Comments

One of the most talked about financial stories this year was the continued decline in the US Dollar. With the government reducing interest rates to zero in an effort to combat a possible depression, the dollar has endured one of the longest declines in its history. The decline in the dollar has helped push Gold to all time highs, and has forced investors to search for asset classes with a higher rate of return such as the equities market. Recently the dollar has started to turn higher, and many are speculating a possible end to the decline. It also seems that participants for both sides in this asset class are also staunch in their belief of the ultimate outcome. On the one hand, Dollar bears believe the current policy will spark hyper inflation as the Fed has made it clear they will keep the presses running. Some dollar bulls believe the real threat is deflation, and that the economy remains very vulnerable.

One of the benefits to using technical analysis, is there is no need to be emotionally tied to a trade. The charts simply display what is occurring in an objective manner. One way to objectively look at a trend is to overlay the chart with multiple moving averages. This method overlay’s a chart with two clusters of moving averages, one a slow group, and the other a fast group. By paying attention to the moving average clusters, a trader can easily assess the current trend and remain objective about a trading opportunity.

While some traders are starting to get bullish on the US Dollar, a multiple moving averages chart of the PowerShares DB US Dollar Index Bullish ETF (NYSE:UUP) is showing that the US Dollar remains in a steep decline. All of the fast moving averages shown in green remain under the slower moving averages. While UUP itself has finally climbed over the cluster of moving averages, it will take much more work to bullishly align the moving averages. It is very possible that the dollar is setting an important low, but realistically, it takes several weeks to months for a stock to transition from a steep decline to an up trend. Often, the down trend is broken and turns into a consolidation. Bulls would be wise to use caution until UUP can begin to drag the moving average clusters into an uptrend.

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