INTERMARKET TURMOIL COULD AFFECT STOCKS - DOLLAR FINDS SUPPORT - STRONG DOLLAR HITS GOLD - OIL DECLINES FROM KEY RETRACEMENT - BONDS BOUNCE OFF KEY RETRACEMENT

INTERMARKET CHANGES COULD BE BEARISH FOR STOCKS ... Link for todays video. There has been a noticeable shift in the intermarket arena over the last few days. First, lets back up and look at intermarket relationships during the July rally. The S&P 500 bottomed the second week of July so I will extend the Intermarket PerfChart from 7-July to 28-July. Over this 16 day period, the S&P 500 surged over 11%, the Gold ETF (GLD) was up 1.54% and the US Oil Fund ETF (USO) was up over 5%. On the downside, the 20+ Year Treasury ETF (TLT) fell over 3% and the US Dollar Index ($USD) declined over 2%. There was a positive correlation between stocks, gold and oil, which were negatively correlated with the Dollar and bonds.

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PerfChart 2 shows the same group over the past two days. Stocks, gold and oil are down, while bonds and the Dollar are up. Correlation is not the same as causation, but there is clearly a relationship at work here. By extension, I would view recent weakness in oil and gold as negative for stocks. Similarly, strength in the Dollar and bonds is also negative for stocks. Two days is not enough to fully reverse trends that have been in place since March-April, but small changes can sometimes lead to bigger changes. Therefore, we should keep an eye on the intermarket picture in the coming days and weeks.

DOLLAR SURGES OFF JUNE LOW... After consolidating for six days, chart 3shows the Dollar Bullish ETF (UUP) surging over the last two days. Even though the trend remains down, this surge off the June lows looks impressive enough to warrant our attention. Also notice that RSI formed a positive divergence over the last two months. The July (closing) low was lower than the June (closing) low. Closing prices should be used because RSI is calculated using closing prices. Despite a lower low in the ETF, RSI held above 30 to form a positive divergence. The surge over the last two days pushed RSI towards resistance at 50. Follow through above 50 would turn momentum bullish. It is also worth pointing out that a volatility contraction preceded this move. Notice how the ETF broke below 23.5 eight days ago, but immediately firmed. The range over the next five days was quite narrow, which indicated a volatility contraction. Such volatility contractions often give way to volatility expansions like we saw over the last two days. This is the same principle behind Bollinger Bands.

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Chart 4 shows the Euro ETF (FXE) failing to hold its triangle breakout. There is also a ton of resistance around 144 from the December and June high. FXE broke out with a surge in mid July, but this breakout failed miserably with a sharp decline the last two days. A failed signal is sometimes as valid as an actual signal. RSI formed a lower high, but this is not a negative divergence because FXE also formed a lower high. Nonetheless, RSI broke below 50 and momentum is turning bearish. Technically, the overall trend for FXE is up as long as key support from the June low holds.

STRONG DOLLAR RATTLES GOLD... Unsurprisingly, the surge in the Dollar triggered selling in gold. Chart 5 shows the Gold ETF (GLD) moving sharply lower the last two days. Two weeks ago, I reported on the wedge breakout with a sharp surge above 92. In addition, there was a resistance zone around 91-92 that turns into support. Well, this breakout is getting a massive test today. I also compared the mid July breakout with the late April breakout. Notice the very sharp pullback after the April breakout (green area). That pullback was around 62%. Also notice that CCI firmed near the zero line. With the sharp two day decline, GLD has retraced 62% of its July surge and CCI is back near the zero line. This is the moment of truth.

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Chart 6 shows the Silver ETF (SLV) with the US Oil Fund ETF (USO) overlaid. These two industrial commodities show some positive correlation. Notice how both bottomed in April and surged into early June. Both peaked in early June and declined into July. With the surge in stocks from mid July, both surged again. And finally, both are sharply lower over the last two days. No doubt that strength in the Dollar and weakness in stocks is contributing to weakness in silver and oil.

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OIL FAILS AT KEY RETRACEMENT... Chart 7 shows the US Oil Fund ETF (USO) hitting resistance on Friday-Monday and falling sharply on Tuesday-Wednesday. There are many reasons for resistance. First, broken support around 36 turns into resistance. Second, the 200-day moving average and 50-day moving average both mark resistance in this area. And finally, the bounce back to 36 retraced 62% of the prior decline. 62% stems from the golden ratio, .618, which is closely connected to the Fibonacci sequence. After a move, the SharpCharts Fibonacci Retracements Tool can be applied to estimate the retracement. This tool shows the 38.2%, 50% and 61.8% retracement levels. After the mid July bounce, I applied the Fibonacci Retracements Tool to estimate resistance. The prior decline extends from 40 to 31.57 (early June to mid July). As you can see, a 50-62% retracement of this decline would extend to the 36-37 area. I would not use this tool on its own. Instead, I would combine it with other aspects of technical analysis, such as broken support and moving averages.

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BONDS BOUNCE OFF KEY RETRACEMENT... Chart 8 shows the 20+ Year Treasury ETF (TLT) also getting a bounce near its 62% retracement mark. Instead of marking resistance (USO), this retracement marks a potential support or reversal area. Even though I used the Fibonacci Retracements Tool to estimate potential turning points, I am the first to admit that one needs to give it a little wiggle room. In other words, dont expect a reversal at an exact retracement. Here is how it works with TLT. First, notice that TLT surged from mid June to mid July. This was the biggest surge since December, which means it might be significant. Therefore, I would be more inclined to look for a corrective pullback that retraces a portion of this advance. Enter the Fibonacci Retracements Tool. As you can see, TLT overshot the 62% retracement with a dip below 90 on Monday. However, the decline formed a falling wedge and the ETF rebounded the last two days. As such, I am still inclined to think that bonds could be tracing out a bottom here.

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When it comes to bonds, we can also look at the 7-10 Year Treasury ETF (TLT) and the 10-Year Treasury Yield ($TNX) to confirm or refute a setup. Chart 9 shows the 7-10 Year Treasury ETF (IEF) firming in the 50-62% retracement zone. There was not overshoot here. Chart 10 shows the 10-Year Treasury Yield ($TNX) stalling in the 50-62% retracement zone. This chart is a mirror image of the 7-10 Year Treasury ETF because rates move counter to bonds. Rates rise as bonds fall. Rates fall as bonds rise. A break below wedge support would signal a continuation of the June-July decline in rates. This bearish signal for rates would be a bullish signal for bonds.