DOLLAR BOUNCE CAUSES GOLD AND OIL SELLING -- WALGREEN LEADS RETAIL ADVANCE
DOLLAR RALLIES... The first day of trading in the new year is witnessing a bounce in the dollar and selling in foreign currencies. The Euro has been the only major foreign currency to reach a new high during December. But that move to a new high hasn't been confirmed by short-term technical indicators. The daily MACD lines failed to confirm the last upleg in the Euro and are threatening to turn negative today. If the strongest currency gives a short-term sell signal, the other are sure to follow. Chart 2 shows that the last yen bounce has fallen short of its early December peak. That also raises the possibility of a short-term top -- and a corresponding bottom in the dollar. Last week I wrote about the seasonal tendency for the dollar to strengthen during the first quarter of a new year. That may also explain the recent selling in gold and gold shares.
Chart 1
Chart 2
GOLD CONTINUES TO CORRECT... I wrote last week about the downside correction in gold and gold stocks and my belief that their weakness was probably in anticipation of a January rebound in the dollar. The slide started with the XAU Index, which had a bad December. Chart 2 shows the XAU moving closer to its 200-day moving average. Gold broke its 50-day moving average last week and is trading under $430 today. That puts it in a test of initial chart support along its early 2004 highs.
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ENERGY STOCKS BREAKING DOWN... Gold stocks aren't the only commodity-related group that's falling today. With oil falling another $1.75 (below $42) this morning, the Energy Select Sector SPDR is breaking its 50-day average in decisive fashion. In my work, that's usually justification for doing some selling. Notice that its relative strength line peaked during October and has been slipping since then. While that's negative for energy stocks, it's usually good for the stock market. One group that appears to be benefiting are the retailers, which are today's strongest sector.
Chart 5
RETAILERS ARE GAINING ... Even in the face of a down market, Retail Holders are holding up very well today. Chart 6 shows the RTH having recently rebounded off its 50-day moving average to turn its short-term higher. Its relative strength line turned up right around Christmas. That may have to do with a more optimistic view of holiday shopping -- or it may also be tied to the drop in crude oil. The theory is that less money spent on gasoline and heating oil can be spent shopping. The two big retail gainers today are Wal-mart and Walgreen. Wal-Mart is the biggest holding in the RTH and is the Dow's strongest stock. Walgreen is hitting a new 52-week high on strong volume (Chart 7).
Chart 6
Chart 7
