STOCKS RALLY AS DOLLAR FALLS - NEXT SUPPORT FOR THE DOLLAR INDEX - SPY EXCEEDS AUGUST HIGHS - BONDS SURGE AND RATES FALL - XLU SHOWS RELATIVE WEAKNESS IN SEPTEMBER
NEGATIVE CORRELLATION FOR STOCKS AND DOLLAR... Link for todays video.
The S&P 500 and the US Dollar Index continue to move in opposite directions. Chart 1 shows the S&P 500 in red and the US Dollar Index in green. This inverse relationship started to assert itself in August 2008 when the greenback surged and stocks fell sharply (blue arrows). When the stock market bounced in late 2008, the Dollar fell rather sharply (first yellow area). When the stock market resumed its decline, the Dollar surged at the beginning of 2009. This brings us to the current stock market advance. The S&P 500 bottomed in March and advanced into early September. SPX is currently up over 50% from its March low. During this same timeframe, the US Dollar Index ($USD) peaked in March and declined into early September. The greenback is down over 13%, which is a lot for a currency. While I would not suggest that correlation is the same as causation, the correlation is too strong to ignore right now. A bearish Dollar is currently bullish for the stock market.
Chart 1
DOLLAR CHANNELS LOWER... Even though the decline in the US Dollar Index slowed in August, there was never an actual trend reversal or breakout. This is an important concept to remember. Slowing downside momentum is not necessarily bullish - just as slowing upside momentum is not necessarily bearish. Slowing momentum means the rate of ascent (descent) is simply less than before. Chart 2 shows the US Dollar Index within a falling price channel with parallel trendlines. The lower channel trendline extends to the lows 70s by yearend. There is also a support zone around 71-74 from the 2008 lows. Until the Dollar reverses its downtrend, the target zone is the low 70s and this is bullish for stocks.
Chart 2
The bottom indicator window shows the 10-week Rate-of-Change. This indicator dipped below -8% in May when the decline accelerated (red arrow). With the decline slowing recently, the indicator has held above -5%. However, the decline still continues. It is just declining slower. In fact, the index has not had a positive 10-week period since early April (green arrow).
RSI FAILS AT 50... Chart 3 shows daily candlesticks for a medium-term view of the US Dollar Index ($USD). Despite a sizable positive divergence in RSI and slowing downside momentum, the index never managed to fully turn the corner with a breakout. For the second time in three months, the index broke triangle support to affirm the downtrend. I am marking key resistance at 80. RSI failed near 50 at least six times in the last three months. RSI needs to break above the August highs to turn momentum bullish on this daily chart. In contrast to the Dollar, chart 4 shows SPY with key support from the August-September lows. As the Dollar further weakened today, SPY closed above its August highs.
Chart 3
Chart 4
BONDS SURGE ... After a three day slide, the 20+ Year Treasury ETF (TLT) found its footing and surged over 1.5% on Thursday. The bond market took heart that todays $12 billion auction attracted the most demand since November. This is based on a bid-to-cover ratio of 2.92. According to Bloomberg [[https://www.bloomberg.com/apps/news?pid=20601087&sid=a4Yn8o7cyFZ0|(click here), the average of the past 10 auctions was 2.31. Chart 5 shows TLT breaking triangle resistance in mid August and holding this breakout. There was a resistance zone around 92.5-95 that now turns into a support zone. Todays surge further reinforces this support zone to keep the triangle breakout in play. The next resistance zone resides around 102.5.
Chart 5
Chart 6
Chart 7 shows weekly candlesticks for a long-term picture. Bond traders went on a wild ride with the surge from 90 to 120 and back down to 90. TLT found support near the Sep-Oct lows around 90 over the summer. I am concerned that the 3-4 month advance looks like a bearish rising wedge. However, the actual trend is up as long as the wedge rises. A break below the lower wedge trendline would provide the first sign of weakness. I will also be watching the Aroon Oscillator, which is simply Aroon(up) less Aroon(down). Like many momentum oscillators, it has a bullish bias when above the centerline and a bearish bias when below. The oscillator surged into positive territory the second week of August and remains in bull mode as long as it stays positive.
Chart 7
Education note: Many readers may be wondering why I chose the Aroon oscillator and why 12 periods. First, I use different oscillators in the commentary to highlight the different tools available at StockCharts.com. Second, it is still a momentum oscillator. In other words, it is not really any different than MACD, RSI or the Stochastic Oscillator. All measure momentum is some way, shape or form. I chose 12 periods because this look-back period produced the fewest whipsaws. Yes, that is a bit of curve fitting, but I would not use this indicator, or any indicator for that matter, as a stand-alone trading system. You can read more on the Aroon Oscillator in the chart school. (click here)
UTILITIES LAGGING ... While the S&P 500 ETF moved above its August highs this month, the Utilities SPDR (XLU) failed to participate in the September rally. Chart 8 shows XLU working its way higher within a rising price channel since April. The percentage gains pale relative to SPY over the same timeframe, but XLU worked its way higher nonetheless. Utilities just dont have the same octane level. As with SPY, XLU established support with the August-September lows. Also notice that broken resistance turned into support around 28.4. With the ETF trading just above 28.5, an important support test is at hand. A break below support and the channel trendline would be negative. Even though relative weakness over the last two weeks is a concern, keep in mind that XLU has yet to actually break support and reverse the uptrend.
Chart 8
