DOLLAR RISE HURTS STOCKS AND COMMODITIES -- STOCK VOLUME PATTERN TURNS NEGATIVE -- NASDAQ AND S&P 500 NEAR POINT & FIGURE SELL SIGNALS -- BEAR FUND TURNS UP
DOLLAR BOUNCE HURTS COMMODITIES ... I wrote a week ago about the U.S. Dollar Index starting to bounce from major support formed in the spring of 2008 near 22 and an oversold condition. I warned that a dollar rally could unsettle stocks and commodities. Chart 1 shows this week's upturn in the PowerShares Bullish Dollar Index (UUP). What's especially impressive is the surge in upside volume as the dollar advanced. The UUP still needs to clear its 50-day average to confirm an a more significant upturn. Commodities fell as they usually do when the dollar is bouncing. Chart 2 shows the DB Commodities Tracking Index (DBC) having a down week. Although no serious chart damage has been done as yet. this week's noticeable pickup in downside trading suggests more selling to come in the commodity pits. The slide in commodities explains this week's heavy selling of the Materials Sector SPDR in Chart 3. It too fell on heavy volume and appears on the verge of completing a short-term "double top". Material stocks were among the day's biggest losers.
Chart 1
Chart 2
Chart 3
VOLUME PATTERN REMAINS BEARISH ... All the major stock indexes (except for the Dow) ended well below their 50-day averages. What's also disturbing is their negative volume pattern. Charts 4 and 5 show the two heaviest trading days of the week for the NYSE and Nasdaq Composite Indexes on Wednesday and Friday as prices dropped. Thursday's price bounce had lighter volume. That means that sellers are more aggressive than buyers. Breadth figures were negative by a six to one margin on the big board on Friday and four to one negative on the Nasdaq. That's going to weaken market breadth figures even more. This week's price drop represents the market's second losing week in row. Weekly volume picked up on both down weeks. This week's volume was the heaviest in seven weeks. It's usually not a good sign when the market starts dropping in heavier trading. Charts 4 and 5 show both market indexes bearing down on their early October lows.
Chart 4
Chart 5
NASDAQ DANGEROUSLY CLOSE TO SELL SIGNAL... I"ve written before about the precision and simplicity of point & figure charts. Charts 6 and 7 show why. The two p&f charts show alternating X and O columns. Each X column shows rising prices, while each O column shows them falling. The last buy signals were given during July at much lower levels. In order for a p&f sell signal to be triggered, the last O column must fall below a previous O column. Chart 6 shows the Nasdaq Composite sitting on chart support. A close at 2040 or lower would trigger its first sell signal since July (it closed at 2045 today). Chart 7 shows that the S&P 500 needs to close at 1010 or lower to trigger its own sell signal.
Chart 6
Chart 7
PROSHARES ULTRA SHORT QQQ TURNS UP ... Let's finish up with a chart that's rising. It's the ProShares Ultra Short QQQ ETF (QID). This inverse (bear) fund is designed to rise as the Nasdaq 100 falls. Chart 8 shows it crossing over its 50-day average today on very strong volume. It still needs to clear its early October high at 24.71, but it appears headed in that direction. There are lots of inverse ETFs that can help you ride out any downside market correction. You can use them to profit from a market drop or to hedge existing portfolio positions. They're especially useful during market downturns.
Chart 8
