Generally, the U.S. dollar will trade inversely to both gold and the euro currency, so these are good markets to take a look at in tandem. The dollar index futures and euro futures both saw unusual gaps on Monday, April 12, and I’d be looking for these gaps to close to formulate a trading strategy.
Euro Futures
If you trade currencies, you no doubt have been watching the situation in Greece. It seems as if every two days we see something positive, then we see something negative. It’s become a bit maddening. On April 11, European Union finance ministers said they would offer Greece as much as 30 billion euros in three-year loans this year, at about 5 percent. The International Monetary Fund pledged another 15 billion euros. This relief package for Greece looks like the real deal, and we saw a rally in the euro extend to a third day on Monday, April 12.
The euro saw a gap higher at the open on April 12, a very rare event. This gap is seen from 1.3506 on Friday to 1.3567 on Monday. Typically, the market likes to retrace its steps when we see these types of gaps, and they are closed. So I expect the euro to pull back.
Dollar Index Futures
In the dollar index, we see a chart that’s the mirror of the euro move, with a gap on the downside on April 12. I am looking for the dollar to move back up, closing the gap from 80.85 to 81.01, and meet trendline resistance.
Gold Futures
June gold futures posted a double-bottom on the chart on March 24-25, 2010, near $1,086 – $1,087 an ounce. From there, you can see the trend is clearly higher. Those lows coincided with strength in the U.S. dollar at that time, tied to the problems in Greece. However, gold remained strong even as the dollar started to subsequently decline. There has been some disconnect in these markets, from what we would expect to see. Traditionally, gold and the U.S. dollar trade inversely to each other, as gold is priced in dollars. Gold’s strength could be tied to large systems (“black box”) traders who are buying gold regardless of the dollar, but that’s just speculation on my part. I don’t expect this disconnect to last, however.
Trading Strategy
I see a three-fold trade idea for these markets. I would recommend buying the dollar index futures for a bounce as it moves higher to close its upside gap. I would also consider selling the euro, as it moves lower to close its downside gap. Cover your position and exit the trades when the gaps are closed. If and when these gaps are closed, that’s when I’d look to buy gold. This is a very short-term type of strategy based on technical factors. When you start to see volume dry up in a trending market, that’s when I’d be more cautious about a bullish gold position. I’d also want to see Bollinger bands pointing in the same direction as the stochastics for confirmation. Look for your technical indicators to reinforce your idea, or tell you when it’s time to bail.
Jim Comiskey is a Senior Market Strategist at Lind-Waldock. He can be reached at 888-800-5373 or via email at jcomiskey@lind-waldock.com.
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