Trading Precious Metals and the Dollar

By Chris Vermeulen of TheGoldAndOilGuy.com

NEW YORK ( TheGoldAndOilGuy.com) -- There is a potentially big trading setup in precious metals and the dollar. Since mid-October, gold started to show signs of distribution selling. Only a month later, silver started warning us that some big players were taking some profits. Distribution selling is easy to spot on the charts. You will see high-volume selling accompanied with strong moves to the downside.

Now if we look at the dollar chart we see the exact opposite price action. We see sharp rallies during October and November. It's normal to say that gold and silver move inversely to the dollar, so this price action makes perfect sense.

The interesting thing with the dollar is that in November and December it rallied, breaking through a key resistance level. Since then, it has been consolidating above support. If this bullish pattern (bull flag) plays out, then it's just a matter of time before the dollar makes another strong rally upward, which will put downward pressure on stocks and commodities.

Take a look at the charts below.

Dollar Index Daily Chart

The 50-period moving average has provided key support/resistance levels for the previous trends. If it holds true going forward, then we are not far from another rally in the dollar.

Gold Futures Daily Chart

Gold moves inversely to the dollar, so if we get a higher dollar then look for gold to have a stair-step pattern lower.

Silver Futures Daily Chart

Silver looks about ready to do the same thing as gold.

Precious Metals and Dollar Trading Conclusion

In short, we could see a major shift in momentum from up to down in both precious metals and the equities market. Keep in mind the market has a way of dragging out patterns/moves. Thus, although the chart looks bearish and I think a reversal is near, things could just chop around for another month or so before a definitive breakout is made. This is why you don't want to anticipate moves (pick a top). Currently I am neutral on metals and the dollar and am waiting for a setup that has clear risk/reward characteristics.

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--Written by Chris Vermeulen in Collingwood, Ontario, Canada

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This commentary comes from an independent investor or market observer as part of TheStreet guest contributor program. The views expressed are those of the author and do not necessarily represent the views of TheStreet or its management.

Chris Vermeulen is founder of the popular trading sites www.thegoldandoilguy.com and www.ActiveTradingPartners.com. There he shares his highly successful, low-risk trading method. Since 2001, Chris has been a leader in teaching others to skillfully trade in gold, silver, oil and stocks in both bull and bear markets.

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