MARKET SUFFERS SECOND WEEKLY LOSS -- WEEKLY MOMENTUM INDICATORS WEAKEN -- THE DOLLAR IS THREATENING ITS 1998 LOW

WEEKLY MOMENTUM IS WEAKENING... Even with a modest Friday bounce, the market suffered its second losing week in a row. A glance at the weekly bars for the Dow in Chart 1 shows that this is the first consecutive weekly losses since before the bull leg began last Februry. Volume also picked up as prices dropped this week. At the very least, that suggests to me that the market rally is tired and is in need of a period of consolidation or correction. The weekly indicators have also been showing a loss of upside momentum. The 14-day RSI line has been weakening after hitting 70 a couple of months a ago. The loss of momentum is seen more clearly in the 13-week Rate of Change (ROC) indicator along the bottom of the Dow chart. Momentum indicators usually turn before the market. That's why we use them. The ROC line gave bullish divergences last October and and again in March, and correctly anticipated the upside trend in the price of the Dow. The ROC line peaked in June and has been slipping since then. That has created a negative divergence with the price which continued to climb. That doesn't mean that prices have to go down. But it's hard for them to keep going up. Prices may just keep meandering sideways for awhile until the overbought condition is alleviated. Or, the market may enter an intermediate correction. If it does that, the weekly chart shows major support located along the 9,000 level for the Dow. That level marks the highs formed last August and December. That's also where the 40-day average is sitting. As long as prices stay above that level, the cyclical bull market will still be intact. There are a couple of other moving average lines worth keeping an eye on.

Chart 1

DOW BOLLINGER BANDS... Chart 2 plots Bollinger Bands on the weekly Dow chart. The dashed moving average line represents the 20-week moving average which now sits at 9500. It's important that prices stay over that line. If they don't, a decline to the lower line becomes a stronger possibility. Coincidentally, the lower line sits at 9033 -- not too far from the 40-week moving average line. The fact that the Bollinger bands are contracting is also usually a sign that a trend is tiring.

Chart 2

DOW CLOSES BELOW 50-DAY LINE... The daily Dow bars give a closer look at the price erosion over the past three weeks. The volume bars reveal quiet distribution taking place over the past seven trading days. The red volume bars represent down days, while the green volume bars are up days. Notice that the red bars have all been heavier than the green bars. The two biggest volume bars this week were on Tuesday and Thursday when the Dow lost ground. Friday's price bounce took place on the lightest trading of the week. Chart 3 also shows the Dow ending the week beneath the (blue) 50-day average. Even with the recent slippage, the general pattern of rising highs and rising lows is still intact. The Dow would have to fall beneath its late October low at 9497 to disrupt that positive pattern. So far, no serious chart damage has been done. Traders don't seem too anxious to sell. But they do seem to have gotten tired of buying.

Chart 3

ALL EYES ARE ON THE DOLLAR... The dollar has become a focal point in the financial markets. There's a good reason for that. The daily bars show that the dollar undercut its October low this week and remains on the defensive. Chart 5 paints an even more negative picture. The monthly bars show the dollar threatening to fall beneath its 1998 low. That would put the dollar at a seven-year low. There are good and bad results from a falling dollar. One good result is that it pushes gold and other commodity prices higher. The falling dollar has been one of the driving forces behind the major commodity rally. A bad side-effect is that a falling dollar discourages investment in U.S. stocks and bonds. It was reported this week that net foreign purchases of U.S. bonds and stocks fell during September to the lowest level in five years. You may recall that the dollar collapsed during September when the Group of Seven voted for more flexible exchange rates (which pushed the Japanese yen sharply higher). Asking for a weaker dollar is a dangerous game. Continued weakness in the greenback may result in a growing loss of confidence in U.S. assets. With the stock market on the defensive, daily moves in the dollar are being watched much more closely.

Chart 4

Chart 5