The stock market moved above its short-term resistance line (based on May and June intraday highs) on relatively high volume. The lack of a rally in case of mining stocks is particularly disappointing given this breakout.

The Euro Index moved higher yesterday and closed right at the previously-broken neck level of the head-and-shoulders formation. A lot depends on what happens next with this index. A further decline will mean a confirmation of the breakdown, completion of the head-and-shoulders pattern and very bearish implications. The USD Index closed at 84.41, so the breakout above the May 2013 highs has not been invalidated in terms of daily closing prices so far.

However, gold didn't respond to dollar's rally with a huge decline on Friday - is this a sign of strength? Should it make you open/close a speculative trading position or make changes in your long-term investment capital? 

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Gold didn't decline significantly on Friday despite a big daily rally in the USD Index - is the decline over? While we can reveal that publicly, we can say that there is a suggestion regarding long-term investments in today's Market Alert based on the above...

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Market Alert sent on July 5th, 2013

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If it is possible that China will soak up 1,500 tons out of the 2,500 tons that are mined each year, are we heading towards a shortage? If we add to the Asia demand, central bank purchases and gold buying in the Middle East, we are likely approaching, or even exceeding, global annual physical gold production. If that’s the case, it provides a solid floor for the price of gold and perhaps the stimulus for the next run up.

However, if you've been following our analysis for some time, you know that markets can get from overbought to extremely overbought on a short-term basis and positive fundamental situation will not change that is in the short run markets are emotional, not logical.

To see where is gold heading in the short run, we focus on the following facts:

• The breakout in the US Dollar was not invalidated
• The euro index seems to be completing the head-and-shoulders pattern
• Medium-term situation on the stock market
• Crude oil breakout above the long-term declining resistance line
• Interesting short- and medium-term correlation values between the precious metals and the USD Index
• Gold's move to the upside vs. its most important resistance levels
• Bigger moves are expected in case of gold mining stocks

Want to know when the next big shorting opportunity emerges? Read today's Silver section for description of one of the key things to watch for.

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The current gold-USD link is particularly interesting and important at the same time. The USD had rallied sharply recently, so it could correct - bullish for gold. Then again, it's in a medium, and short-term uptrend, so it doesn't have to correct - neutral to bearish for gold. However, gold stopped reacting to the dollar's strength - bullish for gold. Then again, it's not confirmed - neutral for gold. The USD Index can rally up to 84.5 before it pauses and up to 86.4 before it stops for longer. This means that gold can stop underperforming the dollar but at the same time keep declining - obviously bearish for gold.

How should you position yourself in such a tricky environment? What prices are key to monitor?

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