DOLLAR PULLBACK BOOSTS COMMODITY-RELATED ASSETS -- GOLD AND ENERGY PRICES ARE BOUNCING ALONG WITH RELATED SHARES

DOLLAR PULLS BACK FROM RESISTANCE... On September 12, I wrote about how an overbought U.S. dollar was up against chart resistance. Chart 1 is an updated version of that earlier chart. It shows the U.S. Dollar Index backing off from chart resistance at 80 which was the low formed at the start of 2005. [Broken support levels act as resistance on subsequent bounces]. I also noted that the 9-week RSI line was in overbought territory over 70 for the first time in years. That combination suggested that the dollar was due for a pullback. The earlier message also suggested that a dollar pullback would lead to rallies in oversold commodities and foreign currencies. That's what we're getting at the moment.

Chart 1

EURO RALLIES WITH GOLD ... Commodities usually trend in the same direction of foreign currencies. That's especially true of gold. Chart 2 compares the trend of the Euro with the streetTracks Gold ETF (GLD) over the past year. The peaks and troughs show a strong similarity. Chart 2 shows the Euro surging over the past week from an oversold condition. It still needs to contend with chart resistance at its moving average lines. Chart 3 shows GLD surging from a similar oversold condition. It is close to clearing its moving average lines. Gold is getting a double boost from financial turmoil and a weaker dollar. Gold shares are rallying as well -- although not as strongly as the commodity. Chart 3 shows the Market Vectors Gold Miners ETF (GDX) climbing 9% from an oversold condition. It still has a lot of overhead resistance to deal with. The weaker dollar is pushing some money back into most commodities.

Chart 2

Chart 3

Chart 4

COMMODITIES ARE BOUNCING ... Charts 5 and 6 show similar chart patterns for the DB Commodities Tracking Fund (DBC) and the United States Oil Fund (USO). Both have retraced 62% of their previous advances, and are rallying from an oversold condition. Both still have to rise further, however, to clear their moving average lines. The bounce in energy prices is giving a boost to energy shares.

Chart 5

Chart 6

ENERGY ETFS BOUNCE OFF 2008 LOWS ... Chart 7 shows the Energy Sector SPDR (XLE) rebounding from potential chart support near its January low. Chart 8 shows the Oil Service Holders (OIH) doing the same. Both ETFs have been sliding since July when the dollar bottomed (see arrows). The current pullback in the greenback is attracting some money back into commodity assets. Stocks meanwhile are retracing a portion of last week's strong gains. That's not too surprising. We'll give them another day to settle down before taking another look. Bonds are also under pressure as yields continue to jump. One of the possibilities both markets may have to contend with is rising bond yields resulting from the government's huge borrowing costs from its massive rescue program. It's going to have to sell a lot of bonds to raise all of that money.

Chart 7

Chart 8