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Time to Buy Both US Dollar and Gold, Says Chartist

Has the sharp rally in the U.S. dollar come to an end, and what does this mean for gold prices? The answers are essential for traders who are long on one of the two and short on the other. Is this a stop-and-reverse situation, meaning it's time to switch to shorting dollar and longing gold?

The rally in the greenback developed the characteristics of a significant trend change. It moved above long-term downtrend pattern and a new tentative uptrend line was calculated using the pivot point low and a major retreat and rebound point neat $0.78.The Guppy Multiple Moving Averagerelationships showed the classic trend change signals. The long-term GMMA has compressed and turned upwards.

Resistance was expected near $0.815 and a retreat from this level was expected to find support near $0.795. This is near the value of the new uptrend line and also a historical support level. The drop to $0.79 with the close near $0.795 remains in trend rebound territory with the potential to retest $0.815. The dollar index rally is shaken, but the uptrend has not yet been invalidated.

A mirror of this reaction is seen in the gold chart. A weakening U.S. dollar propels gold higher. The long-term gold trend, as defined by the long term group of averages in the GMMA, remains intact. The price retreat, which mirrored the initial rally in the U.S. dollar, found support inside the long-term GMMA.

However, the gold price rallied and moved above $1,380. This gold rally developed at the same time that the U.S. dollar was extending its upwards rally. The fall in the U.S. dollar has not accelerated the rise in gold. This is clear divergence of behavior in these linked typically markets. We can speculate on the reason for the divergences, but our purpose is to consider the chart analysis.

The gold price trend remains bullish. The long term GMMA is well separated and absorbed the sell-off from $1420 without developing any compression. The gold bugs remained long-term buyers.

The trend line that has defined the rising trend starting July 2010 has acted as a resistance level. The move to $1,410 takes price above the trend line. The key test is a price retreat that confirms the trend line as a support level. This is bullish and sets initial upside targets near $1,440. This resistance target is also confirmed with the upper parallel trend line. This line is used for guidance only, but it defined the upper limits of the early trend behavior after July.

The technical upside target is $1,460. This is calculated using the width of the wider consolidation trading band. The gold price remains bullish while the price remains above the value of the uptrend line. A fall to support near $1,380 shows a weaker bullish trend with the up trend line again acting as a resistance level.

The linkage between the U.S. dollar and gold has been weakened. Dollar down, gold up is not longer a simple relationship equation so traders need to trade each of these based on the trend analysis of the individual instruments – gold or the dollar. The only constant is that trend volatility is king so traders must watch this behavior in each market. Do this and it’s a good Christmas present just like thefree Christmas hamperwe have on offer for all readers of this column.

Daryl Guppy is a trader and author of Trend Trading, The 36 Strategies of the Chinese for Financial Traders –www.guppytraders.com. He is a regular guest on CNBC's Asia Squawk Box. He is a speaker at trading conferences in China, Asia, Australia and Europe.

If you would like Daryl to chart a specific stock, commodity or currency, please write to us at ChartingAsia@cnbc.com. We welcome all questions, comments and requests.

CNBC assumes no responsibility for any losses, damages or liability whatsoever suffered or incurred by any person, resulting from or attributable to the use of the information published on this site. User is using this information at his/her sole risk.

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  • Daryl Guppy is an independent technical analyst who appears frequently on CNBC Asia.

Asia Economy