NASDAQ BOUNCES ON LOW VOLUME AN OUTSIDE REVERSAL DAY FOR RETAIL HOLDRS DOLLAR AND VIX FALL TOGETHER INFLATION PROTECTED BONDS HINT AT INFLATION GOLD ETF TRACES OUT LARGE INVERSE HEAD-AND-SHOULDERS PATTERN
LOW VOLUME BOUNCE ... Stocks surged on Monday and recorded small gains on Tuesday to start the week with two up days. Despite these gains, Charts 1 and 2 show Nasdaq and NYSE volume below average on both days. Keep in mind that this weeks bounce was in response to the sharpest decline since early March. Low volume suggests that the bulls are losing some of their mo-jo, especially on Monday. A small gain on low volume is one thing, but Mondays big surge on low volume is another. The size of the move does not match up with the amount of volume. Moreover, these broad index gave up early gains and closed down on high volume today. The NY Composite met resistance at the falling 200-day moving average for the second time in two weeks. The Nasdaq surged above 1760 in early trading, but gave it all back and closed lower on Wednesday. Evidence of a correction continues to build.
Chart 1
Chart 2
RETAILERS DRAG CONSUMER DISCRETIONARY SECTOR DOWN... Retail stocks started out on a high note after Target beat estimates for the first quarter. Chart 3 shows the Retail HOLDRs opening strong and surging above 80 during the day. However, the ETF failed to hold its gains and closed below 78. Wednesday was both an outside day and a reversal day. It was an outside day because todays high was above yesterdays high and todays low was below yesterdays low. It was a reversal day because the ETF opened strong, but reversed course and closed weak. Candlestick aficionados will also notice that a bearish engulfing pattern formed. Chart 4 shows the Consumer Discretionary SPDR (XLY) breaking channel support last week and bouncing with low volume on Monday. More over, the ETF declined over the last two days with heavy volume. With last weeks channel break, this Mondays low volume bounce and todays high volume decline, a correction appears to be unfolding in this key sector. Broken resistance turns into the first support zone to watch.
Chart 3
Chart 4
DOLLAR AND VOLATILITY FALL ... The US Dollar Index ($USD) and the S&P 500 Volatility Index ($VIX) are falling as investors embrace risk again. Notice how the US Dollar Index and the VIX surged as stock markets around the world plummeted in September-October. Chart 5 shows the US Dollar Index with the VIX over the last 12 months. Both surged in Sep-Oct (yellow area) and plunged from March to May (orange area). This positive correlation is not perfect, but there is clearly a positive relationship. Lower volatility signals reduced risk in the stock market and hence the economy. This in turn reduces the appetite for safe havens like the Dollar. Chart 6 shows the Euro ETF (FXE) breaking its 200-day moving average in early May and moving above its March high today. Chart 7 shows the British Pound ETF (FXB) breaking double bottom resistance in early May and challenging its 200-day moving average today. The Pound was especially hard hit from August to January. With todays big move, the ETF is challenging its 200-day for the first time since July.
Chart 5
Chart 6
Chart 7
WHIFFS OF INFLATION... The threat of inflation could also be pushing the Dollar lower. We already know about the Feds plan to purchase some $300 billion of Treasuries this year. In addition, we have last years bailout money and this years government spending plans. With all this money sloshing around, inflation is just itching to rear its ugly head. Chart 8 shows the TIPS ETF (TIP)bouncing off two key moving averages in early May and challenging its March highs with a big move today. The two indicators show TIP relative to the 20+ Year Treasury ETF (TLT) and the 7-10 Year Treasury ETF (TLT). Notice that both price relatives are falling, which indicates that inflation-protected Treasuries are outperforming normal Treasuries. Hmm. Relative strength in inflation-protected Treasures increases the prospects for inflation down the road.
Chart 8
GOLD EXTENDS ITS ADVANCE... With the Dollar moving sharply lower and inflation-protected bonds moving higher, it is little surprise that gold moved higher on Wednesday. In addition to having an inverse relationship to the Dollar, gold is also viewed as an inflation hedge. Chart 9 shows the Gold ETF (GLD) breaking wedge resistance in early May and closing above 92 today. With this wedge breakout signaling a continuation of the prior advance, GLD is projected to move above its February high. This corresponds to a move above 1000 in gold. Chart 11 shows weekly candlesticks with a large inverted head-and-shoulders pattern working. This pattern was first proposed in the 20 April market message. With a bounce over the last 4-5 weeks, this bullish head-and-shoulders pattern is shaping up nicely. Neckline resistance resides around 98-100 and a break above this level would be very bullish.
Chart 9
Chart 10
