So Where's the Dollar Heading Next? Here's One Easy Indicato

Joined : 23 Dec 2007 Posts : 239 Location : Nigeria

Today's commentary is by Sean Hyman, Currency Director and editor of The Money Trader.

Good Day Currency Traders!

Want to know where the dollar's headed? It's easy. Just watch gold prices.

If you look at the gold charts right now, gold is coiling up into an ever-tightening symmetrical triangle pattern This lower volatility will force gold to break out of the pattern into a higher, directional volatility - and it's looking like that direction will be UP!

Here's how this triangle pattern works: Bulls and bears are constantly in a tug of war; pulling gold back and forth. However, prices tend to make less headway on each pull. In other words, the price range (high to low) tends to be less with each passing day. This causes the volatility to drop.

Just when it almost gets to a point of boredom (which is about two-thirds of the way through the triangular pattern), gold will typically break-out one way or the other - as I've noted with the black lines drawn on the chart below.

Gold Bulls - Get Set to Pull the Trigger and Buy!

Watch to see which way gold breaks out of this triangular pattern. Once this pattern breaks, gold should move US$70-80 an ounce very quickly. And we could see that happen as early as January.

OK, so that's my trading tip-of-the-day for all you gold-bugs out there - but what does a breakout move in gold have to do with figuring out the dollar's next move?

That's an easy one...gold and the dollar are exact opposites. They tend to move in different directions from one another. So just as soon as gold starts to break free from this triangle pattern, you'll be able to predict the dollar's next move - in the opposite direction. So if gold does indeed break out on the upside, the dollar will head one way: Down!

At the top of the price chart, the RSI (Relative Strength Index) just broke its downtrend line and is heading higher. This is a bullish sign for gold.

The MACD (Moving Average Convergence Divergence) indicator below the price chart seems to indicate the same thing. So my bet is for gold to rise and break to the upside out of this pattern. In that case the EUR/USD would head higher as the dollar dives.

As Gold Goes, So Does the Euro

With the U.S. economy spiraling out of control and U.S. interest rates heading lower, I'd say it's not very likely that gold will head significantly lower anytime soon. Also, with shaky times in the U.S. economy, money tends to run to gold as somewhat of a "safe haven."

Nonetheless, I'd rather be wrong and make money. So if gold does fall, look for the dollar to bounce, and the EUR/USD exchange rate to head lower. The dollar wouldn't have much trouble gaining until gold finally hit its 200 simple moving average (red line on the price chart).

Bottom line: If gold goes up, the dollar should fall and the EUR/USD will rocket higher. If gold breaks downward, the dollar will regain some life and head higher, causing the EUR/USD to plummet lower. And that's your directional indicator of the day on the U.S. dollar!

Sean Hyman, Currency Director