GLOBAL STOCKS AND COMMODITIES SLIDE AS DOLLAR REBOUNDS -- RAILS LEAD TRANSPORTS LOWER -- MAJOR INDEXES MAY RETEST 200-DAY MOVING AVERAGE LINES

DOLLAR CONTINUES BOUNCE OFF DECEMBER LOW ... On Friday June 5, I showed the U.S. Dollar Index starting to bounce off chart support at its December low. I also showed the Euro pulling back from resistance at its December peak. I wrote that a drop in the Euro (dollar rally) could put some short-term downside pressure on stocks and commodities. We're seeing those intermarket trends playing themselves out today. After pulling back last week, the Dollar Index (Chart 1) is rallying strongly again today. The Euro (Chart 2) has fallen to the lowest level in two weeks. Both may be headed for a test of their respective moving average lines. The rallying dollar is putting downside pressure on commodity markets. Chart 3 shows the DB Commodities Tracking ETF (DBC) threatening to fall back below its 200-day moving average. Virtually all commodities are in the red today. The DBC's 14-day RSI line is also falling from overbought territory over 70 (see arrow). An RSI drop below 50 would signal a deeper commodity correction. Global stocks are correcting along with commodities. Energy and commodity producers (basic materials) are among the biggest stock losers. So are transportation companies that move those commodities, and rails in particular.

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RAILS LEAD TRANSPORTS LOWER... On Friday, I wrote about the inability of the Dow Transports to clear their May high and 200-day average, and the short-term term "Dow Theory" negative divergence that created with the Dow Industrials. That divergence is even worse today. Chart 4 shows the Dow Transports falling -4.5% to make it one of the day's weakest groups in a falling market. The biggest percentage losers are in the rails. Chart 5 shows the Dow Jones US Railroad Index falling 6% and backing off from its 200-day moving average. The biggest percentage loser is CSX which is down more than 7% (Chart 6). The rail stock is also backing off from its 200-day average. The two other biggest percentage losers among the transports are UNP (-6%) and BNI (-5%).

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INITIAL SUPPORTS ARE BROKEN ... I also suggested on Friday that the Nasdaq appeared to have completed a five-wave advance off its March bottom which increased the odds for a downside correction. That's true of the rest of the market as well. The hourly bars in Chart 7 show the Nasdaq Composite Index breaking initial chart support along its June low and headed for a test of its May peak at 1768. The S&P 500 in Chart 8 has already slipped below its May peaks at 930 and 924. That increase the odds for a pullback all the way to its May low near 880 and a retest of moving average lines.

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200-DAY AVERAGES MAY BE RETESTED ... A lot has been made recently about major market indexes exceeding their 200-day moving averages. Although that's an encouraging sign, its also important that stock indexes "stay" above those lines. Chart 9 shows the Dow Industrials in danger of slipping back below its 200-day line today. Chart 10 shows the S&P 500 slipping back to retest its 200-day line at 910. A close below that line would put the recent upside breakout in jeopardy. A number of short-term negative divergences have been warning that the 40% spring rally is vulnerable to some profit-taking. Today's intermarket action suggests that profit-taking has probably started.

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