Two weeks ago, I wrote about the dollar setting up for a sharp selloff.
Since then, the U.S. dollar index (DXY) – which tracks the buck’s performance against a basket of other currencies – has declined by as much as 2.36%.
This recent weakness in the dollar means that one of my favorite markets is now setting up for an exciting bullish breakout.
I’m talking about gold…
Gold and the U.S. dollar have an interesting relationship. While the value of the dollar isn’t the only factor that influences the price of gold, it’s an important variable.
Historically, the dollar and gold tend to move in opposite directions.
When the dollar falls, gold goes up. And when the dollar rises in value, gold prices tend to drop.
That’s why I keep a close eye on what the DXY is doing. If the DXY looks like it’s about to have a big move, then I’ll look at the gold market to see if it’s ready to trade in the opposite direction.
So, today we’re going to check out a weekly price chart of one of my favorite gold stocks, the VanEck Gold Miners ETF (GDX), to see if this is the case.
As Jeff Clark wrote last Thursday, gold futures are trading in a consolidating triangle pattern.
When this pattern completes, it almost always results in a big burst of energy.
And now, GDX has broken out of its own pattern.
Based on the current setup, GDX is setting up for one monster of a move.
Let’s take a look…
I’ve drawn this pattern using blue trend lines. Old-school technical analysts call it a falling wedge.
A telltale sign of a falling wedge is when both trendlines are pointing in the same direction.
The deeper the prices trade within the wedge, the narrower the space between the lines becomes – increasing the odds that a breakout is going to happen.
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I’ve also included a 200-day moving average (MA – red line). This MA should serve as strong technical support.
If we put all of this technical evidence together, I believe there’s a strong case for what would be a long overdue rally in gold and gold stocks.
So, let’s quickly recap that evidence…
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The U.S. dollar is breaking down.
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Gold futures are close to breaking out of a year-long triangle pattern.
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GDX has just broken out of a year-long falling wedge pattern.
These factors set the stage for great trading opportunities in gold and gold stocks.
And if I’m right, it’s going to be one monster of a move…
Happy trading,
Imre Gams
Analyst, Market Minute
Reader Mailbag
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