EURO FALLS AFTER RATE CUT -- GOLD HITS SUPPORT ZONE -- TOP 10 DOW COMPONENTS - BIG BLUE BREAKS WEDGE SUPPORT
EURO FALLS AFTER ECB DECISION... Today's Market Message was written by Arthur Hill. - Editor
On Thursday, the European Central Bank (ECB) cuts its key rate by 50 basis points (bps) to 1.5%. Even though their key rate is at its lowest level ever, analysts expect further rate cuts because of economic weakness and the current financial crisis. Keep in mind that the ECB has only been around since 1998, which is when the Euro came into being. In contrast to ECB's key rate, the Fed Funds rate stands at .5% and there is little room for further rate cuts in the US. Among other things, the prospect of further rate cuts from the ECB is putting downward pressure on the Euro. A sharp decline in the stock market could also be putting downward pressure the Euro as the Dollar remains the safe-haven currency of late. As John Murphy noted on Tuesday, currencies trade in pairs. While things are certainly bad in the US, currency traders are betting that things could be worse in Europe and Japan. The Dollar has become the lesser of two evils. Chart 1 shows the Euro Trust ETF (FXE) testing support in early trading on Thursday. It is possible that a head-and-shoulders pattern is taking shape. Because the prior move was down (160 to 125), this would be a continuation head-and-shoulders pattern. It is not a perfectly symmetrical pattern, but support around 125 is clear. A break below this level would signal a continuation lower. Chart 2 shows weekly bars with lots from the 2006 lows around 115-118.
Chart 1
Chart 2
GOLD HITS SUPPORT ... The Gold SPDR (GLD) fell sharply over the last two weeks, but the ETF is nearing a support zone and could stabilize soon. Chart 3 shows daily candlesticks with support around 87-88. This support zone stems from the November trendline, the rising 50-day moving average and broken resistance, which turns into support. The bottom windows show two versions of RSI. 14-day RSI moved to the 40-50 zone, which should offer support in an uptrend. 3-period RSI moved below 30 six days ago. Such an extended period below 30 reflects a short-term oversold condition. I showed this same chart on 12-February. Notice that GLD resumed its rally when RSI(3) moved back above 50 (green arrows). With GLD at support, I will be watching to see if it can get a bounce that would signal a continuation of the bigger uptrend. Chart 4 shows weekly prices for the Gold SPDR. GLD broke channel resistance with a big surge. After a move from 80 to 98 earlier this year, GLD became overextended and ripe for a pullback. We are seeing this pullback now and support from broken resistance is at hand.
Chart 3
Chart 4
BIG BLUE LESSENS THE PAIN ... IBM is the only Dow stock that is up for the year. The table below shows the top ten components and their weighting percent in the Dow Industrials. This information comes from the Dow Jones web site (djaverages.com). As a price-weighted Average, IBM carries the most weight because it is the highest priced component within the Dow. Citigroup, which is the lowest priced component, carries the least weight. The Dow is already down sharply this year, but it would be down even more if it weren't for IBM. That may change as chart 6 shows IBM with a potentially bearish pattern at work. The stock retraced 50% of the prior decline with a rising wedge advance. After a sharp decline in February, IBM broke the lower wedge trendline and pierced the 50-day moving average. There was a bounce back above the 50-day at the end of February, but stock is meeting resistance around 90. The bottom indicator window shows MACD slipping into negative territory. Even though big blue (IBM) is a great company, it may not be able to buck the bear market much longer. Incidentally, Wal-Mart was the only Dow component to post a gain in 2008.
Chart 5
Chart 6
