SELLING IN OVERBOUGHT DOLLAR BOOSTS GOLD AND FOREIGN MARKETS -- SOX STRENGTH HELPS SOUTH KOREA AND TAIWAN

OVERSOLD EURO BOUNCES OFF CHART SUPPORT... Last week I showed the U.S. Dollar Index having reached an overhead resistance zone along the 2004 highs (90-92) while in an overbought condition. The Euro is a mirror image of the Dollar Index. The weekly bars in Chart 1 show the Euro starting to bounce from chart support along its 2004 lows ranging from 118-120. The 9-week RSI has formed a small "double bottom" in oversold territory under 30. That makes it more likely that the Euro is due for a rebound while the dollar is due for a pullback. [The Dollar sold off against all major foreign currencies today]. There should be two major beneficiaries of dollar selling. One is basic material stocks -- and gold in particular. The other is foreign stock ETFs. Some Asian ETFs -- like South Korea and Taiwan -- also benefited from today's strong buying in semiconductor stocks.

Chart 1

GOLD INDEX BOUNCES 2% ... Any hint of dollar selling usually translates into higher gold stocks and that was the case today. Gold stocks gained more than 2% and were among the day's top gainers. [Basic materials were the day's top sector]. Chart 2 shows the Gold & Silver (XAU) Index in the process of challenging a major down trendline and its 200-day moving average near 95. The XAU/SPX relative strength ratio is doing the same. That puts gold stocks at a crucial chart juncture. Since I do believe that the dollar is probably peaking, I remain optimistic on gold stocks and gold. Chart 3 shows the Gold ETF (GLD) gaining the equivalent of $2.50 today on rising volume. Bullion has been underperforming gold stocks of late. But GLD is in a short-term oversold condition and near its lower Bollinger band. The key to gold here is gold stocks. If the XAU is able to break through overhead resistance, GLD will probably follow it higher.

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FOREIGN ETFS GAIN MORE GROUND ... Last Friday I did a story on how the dollar impacts foreign stock market ETFS. I made the case that foreign ETFs had been hurt by a rising dollar. However, I also showed that some of them were starting to bounce off chart support at their 200-day moving average and suggested that might be hinting at a dollar peak. The two ETFs shown below had strong days. The Europe 350 iShares (IEV) bounced impressively off last week's lows and is close to a three-month high. The EAFE Index iShares (EFA), which measures Europe Australia and the Far East, had similar upside action. If the dollar does start to weaken from current levels, foreign ETFs should start to do better. Two that did especially well today were South Korea and Taiwan. That was mainly due to strong semiconductors.

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SOX RALLY PULLS UP SOUTH KOREAN AND TAIWAN ... Earlier today I showed the Semiconductor (SOX) Index challenging major overhead resistance near 52-week highs. Semiconductor Holders (SMH) had already achieved a bullish breakout. The fact that South Korea and Taiwan are so closely tied to chip stocks explains their strong gains today among foreign ETFS. The two Asian ETFs have the highest chip weightings (South Korea at 21% and and Taiwan at 23%). Both also have a double-digit weighting in material stocks. Taiwan has a heavy technology weighting (26%) in addition to chip stocks. Charts 6 and 7 show the two Asian ETFs bouncing strongly off moving average support. They gained 2.85% and 2.58% respectively. Chart 8 shows part of the reason why. The Semiconductor (SOX) Index broke through its late February high to record a new 2005 high.

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MORE ON THE SUMMER RALLY ... Last Friday I mentioned that most of the summer rally usually takes place during July. I received a number of requests for more information on the summer rally. I get most of my seasonal information from the Stock Traders Almanac (published by the Hirsch Organization). According to the Almanac, July is usually the strongest month of the third quarter for the S&P 500. It's also one of the strongest months of the year. The three strongest months last from November through January (December is usually the strongest). After those three, April is the next strongest. After April comes July. August usually shows a modest gain (but is one of the year's smallest). September is the year's weakest month and usually loses ground. There's no guarantee that those seasonal trends will repeat themselves, but history does support a summer rally being concentrated during July. Chart 10 shows the last S&P 500 rally starting during April. It's getting another one in July.

Chart 9