Monday October 18, 2010 - 13:03:25 GMT
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Gold under Pressure as U.S. Dollar Mounts Strong Rally
The stronger U.S. Dollar is putting pressure on December
Gold overnight. Long traders began taking profits in gold on Friday following a
turnaround in the Greenback, triggered by conservative comments from Fed
Chairman Bernanke regarding quantitative easing.
The overnight sell-off has helped form a two-day top in Dec.
Gold at $1388.10. The new main range is $1237.90 to $1388.10. This makes
$1313.00 to $1295.30 a potential downside target. The swing chart indicates
that a break through $1325.80 will turn the main trend down.
December Silver is developing a similar patter, but not as
bearish as gold. The short-term range in Silver is 22.35 to 24.95 with a
retracement zone at 23.65 to 23.34. The bigger picture suggests a possible
break to 21.37 to 20.52 based on a range of 17.79 to 24.95. In addition to the
retracement zone targets, a steep uptrending Gann angle at 23.87 is still
providing strong support.
Last night, silver broke the Gann angle but stopped short of
testing the minor 50% level at 23.65. The actual low was 23.71. After testing
this retracement level, the market regained the uptrending angle, reducing some
of the developing bearishness.
Look for weakness to develop under 23.87 and a possible
acceleration to the downside under 23.65.
The U.S. Dollar confirmed Fridayâ€™s closing price reversal
bottom with a follow-through rally overnight. The Greenback hit a 10-month low
against a basket of currencies on Friday, but rebounded after Federal Reserve
Chairman Ben Bernanke expressed uncertainty as to how much monetary easing the
Fed would allocate to its quantitative easing program.
Following an almost 5 percent decline in October after
investors increased bets the Fed would apply at least $1 trillion of new
quantitative easing, traders pared bets on speculation the amount may not be
nearly that amount. The overnight trading action suggests that the market may
have priced in too much QE into the market.
Adding uncertainty over the Fedâ€™s next move along with
short-term oversold conditions, investors face the challenge to either take
profits on short positions or put up with a possible choppy trade until the
next Federal Open Market Committee meeting on November 2 and 3.
Some traders are also questioning whether Bernanke has the
votes to implement a strong enough QE program although itâ€™s been reported that
at least 2 Fed members are leaning toward supporting an aggressive QE program.
Bernanke said on Friday that he fears deflation more than
inflation. He also suggested that the Fed must do something to stay on course
to reach its mandate of 2% inflation. This can only be accomplished through
aggressively flooding the market with money.
So while there is a lull in the Dollarâ€™s downtrend and a possible
short squeeze taking place, many traders expect this current move in the Dollar
to be short-lived. Once the Fed restarts the money printing machine, the
Greenback should resume its uptrend. This may mean a 2 week consolidation or
short-covering rally until the Fed meeting.
The December Euro closed below 1.40 for the week, taking the
air out of some analyst forecasts for a move to 1.45. The outside move closing
price reversal top could also be indicative of the start of a substantial
correction. Last nightâ€™s follow-through break confirmed the reversal top.
This weekâ€™s rally through the last swing top at 1.4028 to
Fridayâ€™s high at 1.4159 appeared labored. At times it seemed traders were
tentative about going long at such a lofty level. In addition, much of the move
seemed driven by a comment from the ECBâ€™s Axel Weber calling for an end to the
central bankâ€™s asset buyback program rather than sound economic reasons.
Although the weakness started early in the U.S. session,
Federal Reserve Chairman Ben Bernanke didnâ€™t help matters much when he failed
to clarify the Fedâ€™s quantitative easing plan.
Bernanke gave a speech on Friday which failed to give
traders the clarity they needed to continue to pressure the Dollar. Some feel
that Bernanke may be lacking the consensus he needs to implement the QE program
that he feels is necessary to revive the economy.
Technically a break through the last swing bottom at 1.3775
will turn the main trend down on the daily chart. The main trend indicator
turned long on September 1. Besides turning the main trend to down, a break
through this level may be setting up for a 50% correction of the 1.2587 to
1.4159 range to 1.3373.
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