RYDEX URSA BEAR FUND TESTS JANUARY HIGH -- SO DOES THE VIX -- OEX BOUNCES OFF JANUARY LOW AS OIL PULLS BACK -- DOLLAR NEARS TEST OF FEBRUARY HIGH -- GOLD STILL ON THE DEFENSIVE
RYDEX URSA TESTING JANUARY HIGH ... On Friday I repeated an earlier idea of buying a bear market mutual fund to actually benefit from a falling stock market. The chart of a bear market fund is just the inverse of a chart of the market. With the Dow and the S&P 500 still testing chart support at their January lows, that means that a bear market fund that is based on either of those two indexes should be testing its January high. And that's exactly what Chart 1 shows. The Rydex URSA Bear fund is plotted through Friday's close and is nearing a test of its January high at 8.80. It's 200-day moving average is trading near 8.90. The RYURX would have to clear both barriers to achieve a bullish breakout. For that to happen, however, the blue chip averages would have to break their January support levels. Today's modest rebound in the market probably led to a slight pullback in the bear fund. Although no major buy signal in this fund has been given yet, I'd be inclined to do some buying on any pullback -- possibly to its 50-day moving average. Since I expect the stock market to fall to lower levels eventually, I also expect the Rydex URSA fund to eventually break out to the upside. You can find several other bear funds in the ProFunds Carpet under the "inverse" heading. We'll take a look at one or two of them tomorrow.
Chart 1
VIX UPDATE ... Bear funds aren't the only things that move inversely to the market. So does the CBOE Volatility (VIX) Index. And, not surprisingly, it too is testing its January high. I recently wrote an article that a rising VIX was a threat to the market's uptrend, and that a VIX breakout over its January high at 14.75 would be bearish for the market. Chart 2 shows that the VIX has tested the 14.75 barrier three times over the last two weeks, but hasn't been able to break through. Today's pullback coincided with an afternoon market bounce. No major sell signal in stocks will take place until the VIX achieves a clear bullish breakout. As I recently wrote in another article, the VIX needs to be monitored closely at this point.
Chart 2
S&P 100 BOUNCES OFF SUPPORT... Since the VIX is based on the S&P 100 Index, we'll take a look at that index today. Chart 3 shows the OEX bouncing off chart support at its late-January low at 555 and just above its 200-day moving average. The afternoon rebound prevented a chart breakdown (and a major sell signal). As I suggested on Friday, an April rebound (possibly to its 50-day moving average) wouldn't be surprising. It's what happens after April that has me worried. For today at least, the market did what it had to do to keep things from turning a whole lot worse. A late pullback in crude oil gave a market a little lift as well. Chart 4 shows crude pulling back from its recent high at 58, but still well above chart support at 52.50.
Chart 3
Chart 4
DOLLAR NEARS TOP OF TRADING RANGE -- PRESSURES GOLD ... The U.S. Dollar Index gained more ground today (on reports of a slowing European economy) and is nearing the top of its 2005 trading range (and its 200-day moving average) at 85.50 (Chart 5). The recent rise in the dollar has been partially based on expectation for higher U.S. interest rates. That's one reason why it hasn't been especially good for the stock market. The rising dollar, however, continues to pressure the gold market which dropped more than $2 today. Gold stocks were also down. As is usually the case, the fate of the gold market rests with the dollar. That's why a dollar test of its February high will be an important event for both markets.
Chart 5
Chart 6
