Gold, dollar, Oil, Dow Update 8-22-08

A lot occurred this week that gave us a clearer indication of what to expect going into next week. Gold seems to have bottomed out, the dollar halted its monumental rise, and the oil market showed strength and the main markets began to break down again due to weakness in financials.

We are currently trading about $45 higher in the gold market than a week ago. We haven’t made any lower lows, and we saw some very impressive gains on high volume this week. When looking at the dollar index, which doesn’t have any more legs, there is good evidence to suggest the $775 level was as low as we will go. The chart below doesn’t justify the inverse head and shoulders that had formed on the 1 hour chart. You can tell however that the pattern seems to be forming with the right shoulder still needing to be completed. The formation should have us test the 800 level early next week, then a surge towards the end of the week. We will see how this develops. I’m holding positions in AUY and HL. On a dip to 800 I’ll be adding others as well.

The dollar like I mentioned earlier has run out of steam. We broke a long-term downtrend line but have crept back under it. We went from being extremely overbought to extremely oversold is a short period of time. I’m very uncertain about the direction of the dollar. Many are suggesting that weakness in Europe and the UK will cause them to begin cutting rates, but we already knew that was a possibility and is probably factored into price already. Many have theorized the gold market will decouple from the dollar as European investors pour into gold for a safe haven from their weakening currencies. I think this is a definite possibility however I don’t think it is likely in the near term.

The main markets have staged an impressive rally today, however I doubt it will lead to any sustained further gains. There is a solid band of resistance in Dow 11700-11800 which causes any gains near this area to fizzle out. I’m doubtful we will reach this area again anyways. Looking at the bigger picture we are completing a right shoulder of a large head and shoulders that has been developing since February. We are starting to roll off. I think new lows in the Dow are very likely in the next month or so, thanks again due to weakness in financial stocks. I’m holding a strong position in SKF; I’m confident next week we will see it perform well.

$140 oil is not a thing of the past. In June-July the market was simply overextended. The long-term trendline all the way from January 07 lows has not been breached. We also stabilized right above the 200-day average and saw some strength this week. I think it is safe to be long in oil from this point. This market trades similar to natural gas as well, so I’m bullish on both from here. I’m adding positions in Chesapeake Energy CHK, and NGAS.