DOLLAR IS IN LONG-TERM DECLINE -- GOLD PULLS BACK FROM SHORT-TERM OVERBOUGHT CONDITION -- FALLING BOND YIELDS BOOST TWO HOUSING ETFS -- USING POINT & FIGURE CHARTS FOR SHORT-TERM SELL SIGNALS
LONG-TERM DOLLAR TREND IS DOWN... One of our readers asked to see a long-term chart of the US Dollar Index. Chart 1 shows the Dollar Index from 1984 to the present. The USD lost half of its value from 1985 to 1990 (falling from 160 to 80). It bounced off the 80 level three times -- in 1990, 1992, and 1995. In the seven years from 1995 to 2001, it regained half of its 1985-1990 losses (a 50% retracement of its previous decline). An aggressive easing compaign by the Fed starting in early 2001 pushed the USD back to its major support at 80 where it bounced modestly during 2005. The greenback now appears headed down for another test of its record low along the 80 level. The two trendlines suggest which way the major dollar trend is moving. The upper (red) trendline is declining, while the lower (green) trendline is flat. That type of pattern carries a potentially negative message and suggests that the dollar is in a secular decline. That being the case, I strongly suspect that the lower line will probably be broken before the upper line is. Over the short-run, however, an oversold dollar bounce is causing a short-term pullback in precious metals.
Chart 1
GOLD ETF PULLS BACK FROM SEPTEMBER PEAK ... With the dollar experiencing a short-term bounce, precious metals are experiencing a short-term pullback. The daily bars in Chart 2 show the Market Vectors Gold Miners ETF (GDX) pulling back from chart resistance just above 42 (the early September peak). The 9-day RSI line is also pulling back from overbought territory over 70. In my view, this is normal corrective behavior in an emerging uptrend. Chart 3 is a point & figure version of the GDX. It shows a downside three-box reversal taking place today from chart resistance near 42. That's not enough to negate the buy signals given during October and November. Chart 4 shows that the sell signals in the U.S. Dollar Index are also still in effect.
Chart 2
Chart 3
Chart 4
FALLING RATES BOOST HOMEBUILDERS ... I've written a couple of recent articles about how falling bond yields were starting to boost homebuilding stocks. Just last week I showed the PHLX Housing Index (HGX) closing above its 200-day moving average for the first time in six months. The rally in homebuilders is continuing this week. The main catalyst for today's rally is the news that mortgage rates fell to the lowest level in ten months. That news shouldn't have come as news to anyone since bond yields fell to the lowest level in ten months last week. Chart 1 shows how closely the two markets are linked. The weekly bars are the PHLX Housing Index (composed of homebuilders). The green line is the 10-year T-note yield (on which most mortgage rates are based). The homebuilding peak took place during July of 2005 just as bond yields were troughing (see arrows). This year's July housing bottom coincided with a peak in rates. One of our readers asked if there were any Exchange Traded Funds based on this group. Actually, there are two. And both are trending higher.
Chart 5
HOUSING ETFS TURN UP ... Two Exhange Traded Funds that specialize in homebuilding stocks have exceeded their 200-day moving average. Chart 6 shows the Homebuilders SPDR (XHB) doing so last week. Chart 7 shows the Dow Jones US Home Construction ETF (ITB) doing so this week. Both are attracting heavier volume, although the XHB appears to be the more liquid of the two (it also has a slightly longer price history). As I showed last week, housing stocks are also starting to show upside leadership for the first time in a year. That can be seen by their rising relative strength (solid) lines. That may be an early sign that the housing slowdown is ending or at least leveling off.
Chart 6
Chart 7
USING POINT & FIGURE SELL SIGNALS ... Last week I showed several technical indicators that suggested the stock market was due for a pullback or consolidation. I suggested some partial profit-taking for traders with a short time horizon. With some market indexes (like the S&P 500) hitting new highs, the idea of a short-term top is in some doubt (although the Dow and the Nasdaq haven't hit new highs yet). When in doubt about whether to take some money off the table, another time-honored technique is to use trailing stoploss orders. These can be actual sell orders below the market (or mental stops). One of the best ways to do that is with point & figure charts. That's because buy and sell signals are more precise than on bar charts. Chart 8, for example, is a p&f chart for the S&P 500 (using a box size of 5 points). No less than five buy signals have been given since July (the first taking place at 1265). [A buy signal takes place when an x column exceeds a previous x column]. Notice that each o column (down column) is higher than the one before. That's a textbook uptrend. For a sell signal to occur right now, the S&P 500 would have to fall to 1385. That's 30 points (or -2%) from the recent high.
Chart 8
Chart 9
Chart 10
P&F SIGNALS FOR THE DOW AND NASDAQ ... Charts 9 and 10 show that the Dow and the Nasdaq Composite Index have yet to hit new highs (both are trading lower today). Until both indexes do hit new highs, the credibility of this week's rally will remain in doubt. Even so, their p&f charts are helpful in spotting short-term sell signals. Chart 9 shows the first level of support for the Dow Industrials at 12100 (each box is worth 50 Dow points). That means that the Dow would have to fall to 12050 to give a short-term sell signal. That's 250 points (or -2%) from this week's high. [Although p&f charts use intra-day highs and lows, I require an actual closing below a support level to give a sell signal]. Chart 10 shows the first level of support for the Nasdaq Composite at 2400. The Nasdaq would have to close at 2390 to justify some selling. That's 60 points (or -2.4%) from this week's high. Some of the technical indicators that I use are anticipatory in nature. Others are more reactive. P&F charts are the reactionary ones. That means that action is taken after a support level is broken and not before. My advice to take some profits last week was based on some anticipatory indicators (like RSI, MACD, and ADX) and was short term in nature. An alternative course is to wait until p&f support levels are broken before doing some selling.
