COMMODITIES AND THEIR STOCKS BOUNCE OFF SUPPORT AS THE DOLLAR INDEX BACKS OFF FROM 200-DAY AVERAGE -- A LONGER-RANGE LOOK AT THE DOLLAR, CRB, AND BOND YIELDS -- COMMODITY BOUNCE BOOSTS CANADA

ENERGY SPDR BOUNCES OFF 2006 LOWS ... With oil prices starting to bounce, money is flowing back into the energy sector. Earlier in the week I showed the Energy Select SPDR (XLE) stabilizing above chart support formed along its 2006 lows. I suggested that the group looked oversold. Chart 1 shows an updated version of the chart. It shows the XLE bouncing for the third time since March off chart support along the 50 level. The XLE needs a close over its late-September high to turn its short-term trend higher. It's interesting to see that the (blue) 50-day average is testing the (red) 200-day line. That's usually an important test for any market. Chart 2 shows the 25% decline in crude oil since July. It also shows crude in an area of potential support ranging from $59 to $56. It's deeply oversold and appears to be stabilizing. Precious metals are rebounding as well.

Chart 1

Chart 2

GOLD AND XAU BOUNCE OFF JUNE LOWS... Energy and precious metals have shown a tight correlation of late. With oil rebounding, it's no surprise to see precious metals (and their stocks) doing the same. Chart 3 shows the PHLX Gold & Silver (XAU) Index bouncing off its June low near 120. Chart 4 ahows the streetTracks Gold Trust Shares (GLD) doing the same. Silver is doing a little better than gold. Chart 5 shows the Silver ETF (SLV) trading well above its June bottom and closer to its late September peak. That suggests that silver will probably outperform gold in any rally attempt. Part of the reason why commodities are bouncing is the presence of support levels and an oversold condition. Part may also be the chart position of the dollar.

Chart 3

Chart 4

Chart 5

DOLLAR INDEX IS UP AGAINST 200-DAY LINE ... Part of the recent downside pressure on commodities has come from a rising dollar. The dollar, however, has reached an important chart juncture. Yesterday's record trade deficit caused some dollar selling. Chart 6 (plotted through yesterday) shows a couple of technical reasons for some profit-taking in the U.S. Dollar Index. The USD is right up against its 200-day moving average. It's also up against its July peak. The direction of the USD from this level should have some bearing on the direction of commodities. That's because they usually trend in opposite directions.

Chart 6

MORE ON LONGER-TERM BOLLINGER BANDS ... On Wednesday, I applied long-term Bollinger bands to the S&P 500 to show that its uptrend had moved into overbought territory. One of our readers asked how the other asset classes would look on the same chart. But first a quick review of what the lines on the charts are. Bollinger bands are plotted two standard deviations around a moving average line. Traders use a 20-day average to measure short-term trends. Intermediate trends are measured by a 100-day average (the equivalent of a 20-week average). To measure long-term trends, I use a 400-day average (the equivalent of a 40-month average). The upper and lower bands identitify long-term support and resistance levels. Chart 7 shows the U.S. Dollar Index in the middle of a major trading range. [Notice the major turns at the outer bands]. It has to cross over its 400-day average to turn its trend upward. Chart 8 shows the CRB Index having reached its lower band. That puts it in a potential support area. Chart 8 shows the 10-year T-note yield bouncing off its 400-day average. That makes sense since bond yields and commodities have been falling together and are now bouncing together. Notice on the three charts how often major turns took place at the long-term bands. Most price moves outside the bands proved temporary for the most part. That's because 96% of the price action is supposed to take place within the two Bollinger bands.

Chart 7

Chart 8

Chart 9

COMMODITY BOUNCE BOOSTS CANADA ... I've written about the close correlation between the Canadian stock market and commodity prices. Canada benefited strongly from the four-year commodity binge. That's because it's a big producer of natural resources. Since the commodity slide started during August, Canada has been one of the world's weakest markets. To see how badly it's done versus the U.S. market since August, study the TSE/SPX ratio at the bottom of Chart 10. The good news is that Canada is one of today's strongest global performers. The daily bars in Chart 10 show the Toronto Index hitting a one-month high. I suspect Canada is benefiting from the rebound in commodities.

Chart 10