YEN SURGES - EURO FAILS TO HOLD BREAKOUT - DOLLAR REMAINS IN DOWNTREND - GOLD PLUNGES ALONG WITH OIL - SPY STALLS NEAR NECKLINE BREAK - SECTOR ROTATIONS REFLECT DEFENSIVE POSTURING

YEN GETS A BIG MOVE... Link for todays video. The Yen ETF (FXY) surged over 2% as money moved into relative safety. According to Bloomberg, the Yen advanced against its 16 biggest trading partners (other currencies). The biggest gains came against the South African Rand and the Australian Dollar, two big gold producers. Weakness in global stock markets and gold is putting double pressure on Australia and South Africa. The Yen is viewed as a safety net because Japan has a current account surplus, which means it does not need to finance new deficits. Chart 1 shows the Yen ETF surging above 107 with a big move today. Also notice that both the 50-day and 200-day averages are rising. Chart 2 shows the Yen firming at the 62% retracement mark for 3-4 months (late Feb- early June) and then breaking triangle resistance with a big move this week.

Chart 1

Chart 2

EURO FAILS TO HOLD BREAKOUT... The on-again off-again breakout in the Euro is off, again. This is the third break identified in the last few weeks. Think I will get myself a neck brace. Chart 3 shows the Euro ETF (FXE) breaking flag resistance last week and failing to hold the breakout this week. Some technical analysts consider a failed signal to be a signal itself. In this case, the flag breakout failed miserably as FXE dove below 140 this week. This is short-term bearish with the next support around 138 (broken resistance and the June low). Chart 4 shows why the Euro is having trouble. It is because of a big resistance zone around 142.5-145. First, broken support turned into resistance around 142.5-145. Second, this resistance zone was confirmed with reaction highs in December and May. Despite the April-May surge, this resistance zone is proving its mettle.

Chart 3

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DOLLAR STALLS... The Dollar offset a small gain against the Euro with a big loss against the Yen. The Dollar Bullish ETF (UUP) is based on the Dollars exchange rate against a basket of currencies (Euro, Yen, British Pound, Canadian Dollar, Swedish Krona and Swiss Franc). According to PowerShares, the Euro accounts for 57.6% and the Yen accounts for 13.6%. Chart 5 shows the Dollar Bullish ETF (UUP) stalling just above 24 on Wednesday. The ETF has been firming since early June, but remains just short of a breakout that could trigger a trend reversal. The bottom indicator window shows 14-period RSI trending lower. With RSI trading just above 50 today, a momentum breakout is in the making. Chart 6 shows weekly candlesticks with the ETF firming near the 62% retracement mark. There is also support around 24 from the December lows. The combination of support and a key retracement make this a good spot for a reversal. Now lets see if the Dollar can follow through on last weeks surge.

Chart 5

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GOLD CONTINUES LOWER... With the US Dollar firming and oil plunging, the Gold ETF (GLD) fell sharply the last five days. I showed a falling channel breakout last week (gray trendlines), but this breakout failed with the decline below 90 today. An upside breakout in the Dollar would likely exasperate selling pressure in bullion. While this weeks break below 90 resumes the downtrend, the Commodity Channel Index (CCI) is back below -100, which makes it both oversold and bearish. A move back above -100 would alleviate oversold conditions, but this would not signal a trend reversal. A break above the blue trendline and a move into positive territory are needed to trigger a bullish signal. CCI gave a similar signal in late April (green dotted line). Chart 9 shows weekly candlesticks with the large inverse head-and-shoulders pattern. The sharp decline over the last several weeks reinforces resistance in the 97.5-100 area and weakens this pattern. At this point, a breakout on the daily chart is needed to revive the head-and-shoulders pattern on the weekly chart.

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SPY STALLS NEAR NECKLINE BREAK... Chart 9 shows the S&P 500 ETF (SPY) closing lower for the fourth day in a row on Wednesday. SPY is now down over 5% from last weeks highs and down over 7% from the June highs. After a 5% decline in four days, the ETF is short-term oversold. In addition, the ETF is still trading near broken support from the May lows. Technically, SPY broke below the May lows and lower lows signify a downtrend. Nevertheless, the combination of short-term oversold conditions and nearby support may give way to a consolidation or an oversold bounce. The bottom indicator shows 10-period RSI. Notice how the 40-50 zone acted as support during the uptrend. With a clear break below 40 in June, momentum has shifted in favor of the bears. Now, the 50-60 zone should act as resistance, which it already did in late June. Keep an eye on this area during oversold bounces.

Chart 9

MARKET REMAINS DEFENSIVE... Defensive sectors are holding up the best. Chart 10 shows the three major indices: the Nasdaq, the S&P 100 ($OEX) and the Russell 2000 ($RUT). These three represent techs, large-caps and small-caps, respectively. Although there is some overlap, these three cover the broad bases quite well. As this chart shows, the Russell 2000 peaked on 4-June, the Nasdaq peaked on 11-June and the S&P 100 peaked on 12-June. It is interesting to note that small-caps peaked a week before large-caps. Knowing when the market peaked will allow us to determine sector participation using the PerfCharts.

Chart 10

Armed with peak identification, I can now configure the Sector Perfchart to capture participation during the decline. Taking the middle ground, I am choosing 10-June for the peak date. The slider at the bottom is configured to cover the period from 10-June to 7-July. Over the last 19 days, five sectors declined more than the benchmark (S&P 500). These sectors are leading the way lower: consumer discretionary, industrials, materials, energy and finance. This is not a pretty picture. On the other hand, the defensive sectors are holding up quite well. These include consumer staples, utilities and healthcare. Of the nine sector SPDRs, only the healthcare sector sports a gain since the June peak in the market. The market dynamics have changed from offense to defense over the last few weeks. As long as this new dynamic holds, we should expect further weakness. In a related note, the technology sector was holding up quite well until the Nasdaq declined over 5% in the last three days. Further weakness would push the technology in the relative weakness category.

Chart 11