We’ll be leaving for home sometime tomorrow afternoon so I won’t be able to do a Wednesday Report. By the movements in the markets, today is actually a better day to do a Wednesday Report.

There are several times a year when the markets gives you an important inflection point.  Today I believe we just witnessed one in regards to the PM complex, the US dollar and the stock markets. Even though the US dollar didn’t have an extremely big up day it did show its hand by breaking out of a downtrend channel while the PM complex had a tougher day breaking down from a small topping pattern we looked at earlier today. Also the stock markets had a very good day to the upside with some completing small double bottoms or falling wedges.

As the US dollar is the key driver going forward lets take a look some charts which are showing it has likely bottomed and is reversing back up. Below is a daily chart which shows the one plus year trading range. We’ve discussed in the past that a false breakout, of an important trendline, can lead to a big move in the opposite direction. Remember the false breakout the HUI and other precious metals stocks had back in January of this year that led to this massive rally we’ve enjoyed up until today? I believe we are seeing the same thing taking place on the US dollar right now. One has to respect the breakout but when the price action trades back above the breakout point the breakout in negated.

This daily chart also shows another reason why I believe the US dollar has bottomed. It just recently broke out above the top rail of its blue downtrend channel and looks like it had a short and sweet backtest. As I explained earlier today on the possible consolidation pattern that maybe forming on the HUI, there has to be four completed reversal points, at a minimum, before we can conclude we have a consolidation pattern. As you can see on the US dollar chart below it has completed three reversal points so far with the possible fourth reversal point just beginning. The fourth reversal point won’t be complete until the price action reaches the top of the trading range, around the 100 area.

This next chart puts the one plus year trading range for the US dollar in perspective. There were nine white candlesticks that formed the massive impulse move up when the US dollar finally broke out above the massive bases. We still have a few more days to trade  for the month of May but it looks like the US dollar will most likely form a white candlestick. In and of itself it’s not a big deal when a consolidation pattern is still building out but it is something to keep an eye on. Also when looking at this chart from 35,000 feet, with the big base in place and the current trading range building out, we have to respect the potential outcome when all is said and done. The potential outcome could still be a double top if the price action begins to fail fairly soon but when I look at the massive base it looks like a  consolidation pattern seems like the probable outcome. Keep in mind we could see several more reversal points build out before the possible consolidation pattern is completed.

Below is a 35 year chart for the US dollar showing the two fractal bases labeled BIG BASE #1 and BIG BASE #2. Back in the mid to late 1990’s the US dollar built out a big blue bullish rising wedge as a halfway pattern that took roughly three years to complete. That major uptrend finished off with a H&S top which was the beginning of the bull market in the precious metals complex. As you can see our current uptrend channel is less steep than the 1990’s which could take several more years to build out. The big question for me is how well will the PM complex do during this consolidation phase in the US dollar? We will most likely get our answer if or when the US dollar trades back up to the top of its trading range. In the meantime as the US dollar consolidates so should the PM complex as both are reversing direction right now.

This next chart is a weekly combo chart with the US dollar on top and gold on the bottom. As the US dollar has been consolidating sideways gold put in a nice low right on top of the 2008 highs at the 1035 area, brown shaded support and resistance zone. You can see gold’s red rising flag that we’ve been following on the daily chart that has formed above the top rail of the multi year falling wedge. Both the US dollar and gold are at critical inflection points right now.

Below is the daily chart for gold we’ve been following which shows the rising flag that had created five reversal points. The breakout below the bottom rail is the main reason I exited half of the mining shares today. Gold still had a chance to bounce off of the bottom rail to start the possible sixth reversal point to the upside but that was not the case. With five reversal points in place gold now has a five point reversal pattern which is a bearish rising flag. Gold also closed below the 50 day ema for the first time since this impulse move up began.The next possible area of support may show up at the previous high at the 1190 area. The bottom line is we now have a reversal pattern in place which has to be respected regardless of what we may think. With the way the US dollar is looking now, there is a good chance I will exit the reaming shares tomorrow now that the dust has settled and we can see more clearly now.

I’m going to post this part of the Wednesday Report now and will do another post after while on what the stock markets are saying. I know most don’t want to trade the stock markets but while the PM complex is consolidating the stock markets may offer us a good trading opportunity for the time being.

PS: So many charts to look at tonight I forgot to post this long term chart for the US dollar I haven’t posted in quite awhile. The US dollar is finding support on the top rail of the 30 year bullish falling wedge and the neckline extension rail taken from the previous H&S top. It’s hard to argue with what this chart is suggesting.

Below is the two hour chart for the HUI which shows the horizontal S&R zone around the 210 area which is being strongly tested this morning. If you look real close you can see a gap below the S&R zone this morning which I didn’t want to see. This is the first time since the bull market began in mid January that the price action is close to trading below a previous low.  The next area of critical support is the 182 to the 187 area.

This next chart is a daily look at the HUI which shows two completed consolidation patterns with the third one testing the critical bottom rail of the flag formation. Today’s price action is trading below the 20 day ema with the 50 day simple moving average coming in at the 200 area. I’ve also added the fib retracements which shows the 38% retrace at 183 or so which is the second area of support on the 2 hour chart above.

So far, since this bull market began in mid January of this year, we have yet to see a real consolidation pattern develop of importance form.. This daily chart below shows you where I would expect a consolidation pattern to form  based on the current information we have. In the bigger picture this would be a healthy development and not hurt the bull market in anyway.

In bigger consolidation patterns you will normally see some type of reversal pattern form at the reversal points. Sometimes they are hard to spot in real time but in hindsight they will usually show up pretty clearly. On the daily chart below  I’ve added the possible new trading range or consolidation area with what now looks like a small double top with a breakout and backtest completed. The double top measures out to the 190 area which would be an area to look for  the second reversal point to show up. Based on the lower brown shaded S&R zone, on the two hour chart above, and the fib 38% retrace down to the 183 area, should offer some solid support. For the time being I’m going to call the top in the possible new trading range or consolidation area at 235 and the bottom at 180 or so. What type of consolidation pattern that may build out is still not known yet as the HUI has just started to consolidate the first impulse move up. The consolidation pattern could be a triangle, rectangle, flag or wedge.

Bigger trading ranges like this can be traded if one doesn’t get too greedy. We should see some type of reversal pattern develop at the lower boundaries of the trading range between 180 and 190 or so.

Below is the daily line chart we’ve been following which shows the current S&R line being strongly tested today at the 205 area. If this area gives way then the lower S&R line at the 182 area comes into play which is also the 38% fib retrace of the bull market.

The weekly chart below shows the three year S&R line going back to April of 2013 which comes into play at the 205 area.

For the time being I’m going to hang on and see what happens if this possible first consolidation pattern begins to build out between 180 and 235. It will be somewhat painful but that is the nature of a consolidation pattern, to inflict as much pain as possible before the next impulse leg up can begin. Some of you who have some decent profits may want to take a few chips off the table and see if you can reenter at a lower price. Normally though it seems like one always pays a higher price up to get back in again.

If this is really the beginning of a bigger consolidation pattern the volatility will be very strong in both directions until the pattern is complete. Also keep in mind in a trading range we’ll have to see a minimum of four reversal points so even if we see a reversal down at the 180 area we’ll have to see another rally followed by one more decline to complete the minimum requirements of a consolidation or continuation pattern.