DOLLAR BOUNCE CAUSES SELLING OF GOLD -- CCE AND PG LEAD STRONG CONSUMER STAPLES -- ALTRIA HITS NEW RECORD -- EARLY SIGNS OF ROTATION OUT OF CYCLICALS

DOLLAR IS AT BOTTOM OF TRADING CHANNEL AND OVERSOLD... Chart 1 shows a clearly defined trend channel, which are parallel trendlines drawn over the peaks and troughs of the Dollar's weekly bars. The Dollar Index is touching the lower trendline for only the third time in the last two years. The two previous touches were followed by a short-term bounce that lasted for almost three months. The two previous bounces also started with a 14-week RSI line in oversold territory under 30. We have the same situation today. That simply means that the dollar is due for a rebound. It could rally to the upper trendline without disturbing its long-term downtrend. The dollar chart is usually a mirror image of the gold market. Chart 2 shows that the 14-week RSI line for bullion is in overbought territory over 70. That makes gold ripe for a downside correction. Gold dropped $16 today and closed just below psychological support at $400. The weekly bars, however, show that the major uptrend is still firmly intact. The next level of support is along the peak formed a year ago near $390. There's also major trendline support near $375 if the correction drops that far. Chart 3 plots weekly bars for the XAU Index. It too is correcting from an overbought condition. The next level of major support is just below 90, which is a 50% retracement of the rally that started last spring. That level matches the peak formed during the spring of 2002.

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CONSUMER STAPLE LEADERS... Money is rotating toward the more defensive consumer staples. That was the worst performing sector last year and is starting to play some catch-up. It's no coincidence that last year's leaders -- like small caps and techs -- are losing the most ground while last year's laggards like consumer staples and healthcare are starting to attract some new money. Two of the day's consumer staple leaders are shown below. Coca Cola Enterprises broke out to a new 52-week high on impressive volume. Notice the jump in the CCE/S&P 500 ratio. Chart 5 shows Procter & Gamble also climbing to a new high for the year on strong volume. Its relative strength has turned up as well.

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ALTRIA HITS RECORD HIGH... As part of the consumer staple sector, tobacco stocks are also showing relative strength. Altria Group has been a leader in the group over the past week. The monthly bars shows the stock moving to an all-time high over 55.

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CYCLICALS STARTING TO WEAKEN... The prospect of higher rates earlier than expected is also causing some rotation out of economically-sensitive cyclical stocks into consumer staples. While the Morgan Stanley Consumer Index hit a new recovery high today, the Cyclical Index fell. Chart 9 plots a ratio of the two. Consumer staples have been underperforming cyclicals since October 2002 on expectations of an economic recovery and low interest rates. Chart 9 shows the ratio starting to bounce. So far, it's not a big bounce. But it could be the start of another rotation. That makes sense if the market is starting to factor in higher rates.

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