DOLLAR INDEX REACHES CHART SUPPORT AT ITS DECEMBER LOW -- DROP IN EURO MAY PUT SOME SHORT-TERM DOWNSIDE PRESSURE ON STOCKS AND COMMODITIES -- TWO-THIRDS OF NYSE STOCKS ARE ABOVE 200-DAY AVERAGES WHICH IS BULLISH

DOLLAR INDEX BOUNCES OFF DECEMBER LOW... The US Dollar Index peaked in March and has since fallen to the lowest level in six months. The falling dollar has coincided with rallies in stocks and commodities over the last three months. That's why it's worth noting that the Dollar Index has reached potential chart support at its December low as shown in Chart 1. That chart shows the USD having dropped from 90 in March to its December low near 78 where potential chart support is visible. And it's bouncing today. The general chart pattern for the greenback still looks bearish. Within that negative context, however, there's plenty of room for a bounce to occur. Chart 2 shows the Euro Index which is a mirror image of the USD (they trend in opposite directions). Chart 2 shows the Euro falling more than 1% today after coming close to resistance at its December high near 145. Chart 3 shows that the spring rally in the S&P 500 (green line) and the CRB Index (orange line) have coincided with the Euro rally. Assuming that close correlations holds, any setback in the Euro (bounce in the dollar) could provoke some short-term profit-taking in stocks and commodities.

Chart 1

Chart 2

Chart 3

200-DAY AVERAGE IS STILL DROPPING ... Virtually all major market indexes (including the Dow) have now exceeded their 200-day moving averages. That's a positive sign for the stock market, and adds more weight to the view that a major bottom has been seen. As I wrote a couple of weeks ago, however, the "direction" of the moving average line itself is also important. Legitimate bull markets usually require that the 200-day average also turn higher. For that to happen, stock indexes have to first clear the 200-day line (which they've done). Then, stock indexes have to reach the price level formed 200 days ago. In other words, the latest closing price has to exceed a closing price 200-day days ago. The solid line on top of Chart 4 shows the 200-day "price channel" currently at 1303. It's doubtful that prices will reach that level in the near future. The S&P has yet to even clear the middle (dotted line) which currently sits at 985. [The dotted line sits midway between the upper and lower channels and often acts as resistance in a downtrend]. As good as the spring rally has been (with most indexes having also cleared their January highs), I believe that the market is still in need of some corrective action (or consolidation) before moving substantially higher. V bottoms are extremely rare. W bottoms are a lot more common. So are head and shoulder bottoms. It seems unlikely that the market will continue to rally in a straight line. More basing activity is most likely needed. And that's going to require more time.

Chart 4

NYSE % ABOVE 200 MA IS BULLISH... Two-thirds of NYSE stocks are now trading above their 200-day moving average. That's normally bull market territory. On April 28, I showed the NYSE % Above 200 MA indicator (NYA200R) breaking a two-year down trendline, and wrote that a move over its mid-2008 high at 53% would signal a new bull market. The black line in Chart 5 has now reached the 65% level, which is the highest level in two years. Chart 5 compares the NYA200R (black line) to the NYSE Composite Index (green line) since 2003. A move above 60% signals a new bull market (as in mid-2003), while a drop below 40% signals a new bear market (as in mid-2007). That's why the current value of 65% is very encouraging for the market's major trend.

Chart 5

NYSE % ABOVE 50 MA IS OVERBOUGHT ... In that same April 28 message, I also wrote that the number of NYSE stocks trading over their 50-day averages had reached overbought territory. That's still the case. Chart 6 shows the NYSE % Above 50 MA (NYA50R) trading at 88% (black line) after reaching 93% in early May. Normally, that high a reading is a sign of an overextended market. I wrote back in April that a drop below 80% would be the first sign of a short-term top. So far that hasn't happened. Chart 6 shows the late May pullback bouncing off 80% making that a short-term support level. That being the case, a drop below 80% is still needed to signal a short-term market top.

Chart 6

DAILY EMA UPTREND STILL INTACT ... Moving average lines help remove some of the uncertainty about market direction. That's especially true of the daily 13-34 EMA combination that I've written about many times before. ""Short-term" buy and sell signals are given when the two lines cross. Chart 7 shows the 13-day EMA (blue line) crossing above the 34-day (red line) in late March (circle) which triggered a buy signal. The two daily EMA lines are still in an uptrend. For a short-term sell signal to occur, the 13-day EMA must cross below the 34-day. Chart 8 plots the "difference" between the two daily EMAs (black line) and compares it to S&P 500 daily price bars. [You can draw that line by inserting 13,34,1 into the daily MACD indicator]. Moves above the zero line signal a bullish crossing by the two EMA lines. The last bullish crossing took place in late March (circle). The real value of the difference (black) line is in spotting positive and negative divergences which often anticipate market turns. The March low in the black line was much higher than the November low which was a big positive divergence. To the upper right, a minor negative divergence is visible. Although the S&P 500 has reached a new recovery high, the black line has yet to do so. That may be suggesting that the latest move into new high ground is a little shaky. As Arthur Hill wrote during the week, initial chart support on any pullback resides near the May low. A drop below that initial support level is needed to signal a deeper correction. In either case, I'd be inclined to view any market setbacks as part of a bottoming process and additional buying opportunities.

Chart 7

Chart 8