ENERGY STOCKS LEAD - BASE METALS SURGE - OIL CONTINUES ITS ADVANCE - GOLD MEETS RESISTANCE - DOLLAR ATTEMPTS TO FIRM AT SUPPORT - CONSUMER DISCRETIONARY SECTOR LAGS BROADER MARKET
ENERGY STOCKS LEAD THE MARKET... The Energy SPDR (XLE) led the market higher with a surge above resistance on Thursday. Chart 1 shows XLE breaking above resistance from the November-January highs. Prior to this breakout, XLE broke triangle resistance in late April and again in late May. The energy SPDR now joins the Materials SPDR (XLB), Technology SPDR (XLK) and Consumer Discretionary SPDR (XLY) as the only sector SPDRs to break above their November highs. Chart 2 shows weekly candlesticks over the last two years. The next resistance zone is in the low 60s from broken support and the 50% retracement. Chart 3 shows the Oil Service HOLDRs (OIH) also breaking above its November highs over the last three weeks. Broken support and the 50% retracement mark the next resistance area around 140.
Chart 1
Chart 2
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METALS GO BERSERK... The Base Metals ETF (DBB) is at it again with another big surge on Thursday. Chart 4 shows the ETF surging above 16 to extend its uptrend. According to the PowerShares website, current index weightings are 40.18% for Zinc, 37.27% for copper and 22.55% for aluminum. Chart 5 shows Aluminum ($ALUM) surging to a new high for 2009 with a move above .75 this week. Chart 6 shows Copper ($COPPER) breaking triangle resistance with a surge above 220 on June 1st. The breakout is holding as copper moved above 230 this week. These are continuous futures prices, which are good to ascertain general direction and trend.
Chart 4
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Chart 7 shows the Base Metals ETF with weekly candlesticks over the last two years. The ETF was slammed as the stock market fell apart from September to December. DBB found support around 11 from December to February and surged with the stock market over the last 15 weeks. The next resistance zone is around 19-21 from broken support and the 50-62% retracement. It looks like some of last years sellers are piling back in.
Chart 7
OIL EXTENDS ITS RALLY... Metals were not alone in the commodity advance as oil surged again on Thursday. Chart 8 shows West Texas Intermediate ($WTIC) moving back above $70 a barrel this week. Oil exceeded the symmetrical triangle target put forth in the 2-April market message. Chart 9 shows USO hitting 40 during the day on Thursday, which is a new high for 2009. Why are commodities so strong? Here are a few theories. First, the Dollar has been weak since early March and got slammed again today. Second, stock markets around the world are up sharply since early March and this bodes well for the economy. A buoyant economy means increased demand for commodities. Third, the steep decline (sell-off) in commodities from September to December left many investors underweight. Just like stocks, there is now a movement underway to increase exposure to both stocks and commodities. There is a fourth reason out there as well: demand from non-OECD countries. The Daily Telegraph of London reports that 2008 energy demand from non-OECD countries exceeded demand from OECD countries - for the first time ever. This means that China, India, Russia, Brazil and the other non-OECD countries are now consuming more energy than the US, Europe, Japan and other OECD countries. Whats more, this is a permanent shift and the gap is expected to widen over the years. You can read the full article by clicking here.
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GOLD MEETS RESISTANCE ... The Gold ETF (GLD) surged in April-May, but pulled back in June as neckline resistance came in sight. Chart 10 shows weekly candlesticks over the last two years. A large inverse head-and-shoulders is taking shape with neckline resistance around 98-100 (980-1000 for spot gold). A break above the neckline resistance would confirm this bullish continuation pattern. Based on traditional technical analysis, the height of the pattern (head to neckline) would be added to the breakout for an upside target, which would project a move to around 130. Such a move would likely correspond with rising inflation and a falling Dollar. Chart 11 covers the advance from November until June, which is the right half of the head-and-shoulders pattern. GLD broke wedge resistance in early May and this breakout held. Broken resistance and the November trendline combine to mark a support zone around 90. The uptrend looks to be in good shape as long as this support zone holds.
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Chart 11
GOLD VERSUS THE DOLLAR... The Dollar still holds influence over gold. Chart 12 shows spot gold with the US Dollar Index over the last two years. Except for January-February this year, gold and the Dollar have largely enjoyed an inverse relationship. That is why the two charts form mirror images most of the time. Gold rises as the Dollar falls, while the Dollar rises as gold falls. Most recently, the US Dollar Index ($USD) fell sharply (~9%) from April 20th until June 2nd and gold rose from 875 to 975. As a related aside, gold failed to move higher in the face of Dollar weakness today. It is just one day, but should be monitored.
Chart 12
DOLLAR FIRMS AT SUPPORT... Chart 13 shows the US Dollar Index ($USD) in a downtrend, but trying to find support from broken resistance. The index broke resistance at 78 with a big advance from July until October. This coincided with a sharp decline in the stock market. Trading has been extremely choppy since November with three rather sharp moves. The index dipped to 78, surged above 88 and then declined below 80. Broken resistance around 78 turns into support, which is confirmed with daily prices on chart 14. After RSI became oversold in late May and early June, the index bounced with a surge above 80 last week. At this point, I would still consider it just an oversold bounce because RSI is trending lower. Yes, you can sometimes draw trendlines on momentum oscillators. A trendline break and cross above/below 50 acts as a signal. Look for RSI to break the down trendline and exceed 50 to turn momentum bullish. As long as both hold, momentum is bearish for the Dollar overall and I would expect lower prices.
Chart 13
Chart 14
NOTABLE LAGGARDS ON THURSDAY... Even though the market was up on Thursday afternoon, there were some notable laggards out there. As of 3PM ET all the major indices were up 1-2%. However, the Consumer Discretionary SPDR (XLY) was lagging on the day with a relatively small gain (up around .29% at 3PM ET). Digging a little deeper, I discovered that the Retail SPDR (XRT) and the Homebuilders SPDR (XHB) were both down as well. Yesterday, I showed the 10-Year Treasury Yield ($TNX) reaching 4% and the US Gasoline Fund ETF (UGA) doubling since late December. Perhaps high (and rising) energy costs and interest rates are weighing on these economically sensitive groups. Chart 15 shows XLY consolidating near its May high. This small consolidation (8-days) looks like a flag and a break above the highs would be bullish. However, with its inability to break the May highs, XLY is showing relative weakness by underperforming the broader market. Notice that the price relative peaked in late April and then formed a lower high in June. Even though the broader market remains in an uptrend, relative weakness in this key sector is negative and should be monitored closely.
Chart 15
Retail stocks form a big part of the consumer discretionary sector, and retail spending makes up a big part of the economy. The Retail SPDR led the market higher from late November until early May. Notice how the price relative moved consistently higher during this time frame. Relative strength has now changed to relative weakness over the last 6-7 weeks. The price relative peaked in early May and formed a lower high in early June. On the price chart, a falling flag is taking shape. This could be just a bullish consolidation, but a break above 29 is needed to reverse the fall. Right now, the flag is falling for a short-term downtrend.
Chart 16
The Homebuilders SPDR is also showing relative weakness as the price relative sank below its May low this week. Rising interest rates are not friendly to homebuilders. On the price chart, XHB surged above wedge resistance at the beginning of June, but did not follow through and met resistance just below 13. There is a little support at 12 and a break below this level would be bearish for this underperformer.
Chart 17
