RISING DOLLAR PUSHES FOREIGN CURRENCIES AND COMMODITIES LOWER -- THAT ALSO CAUSES PROFIT-TAKING IN STOCKS AS THEY TEST MAJOR RESISTANCE LINES -- EMERGING MARKETS LOOK RIPE FOR PROFIT-TAKING
DOLLAR RALLY PUSHES FOREIGN CURRENCIES BELOW 50-DAY LINES... Last Friday's jump in the U.S. Dollar (following a strong jobs report) pushed the Euro below its 50-day moving average. When a support line that has contained pullbacks for eight months is broken, that signals a change in a market's direction. Chart 1 shows the Euro moving down to test its early November low near 146. The situation will look even worse if that support level is broken. The Euro isn't the only foreign currency to break its 50-day line. Other currencies that have also done so include the British Pound, Swiss franc, Brazilian Real, Canadian and Australian Dollars. Chart 2 shows the Aussie Dollar closing below its 50-day line for the first time since July. Its chart pattern since mid-October has the look of a potential "head and shoulders" top. A close below the "neckline" near 90 would signal a deeper correction and would confirm at least a short-term bottom in the dollar. That would have negative implications for stocks and commodities.
Chart 1
Chart 2
GOLD AND OIL LEAD COMMODITIES LOWER ... Commodity prices have come under selling pressure since last Friday. Chart 3 shows the DB Commodity ETF (DBC) moving down toward its 50-day average after failing a test of the 25 resistance level. Chart 4 shows the Gold ETF (GLD) falling in heavy trading. Chart 5 shows the United States Oil ETF (USO) having already broken its 50-day line. Commodity-related stocks are among the stock market's weakest groups. All of the ETFs tied to gold and energy stocks have broken their 50-day averages. Chart 6 shows the Energy SPDR (XLE) threatening to break its early November low near 54.
Chart 3
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Chart 6
STOCKS WEAKEN NEAR MAJOR RESISTANCE LINE ... I keep showing the following chart because it's so important. The weekly bars show that the S&P 500 rally has reached a major down trendline drawn over its 2007 and 2008 peaks. In addition, the S&P has regained 50% of its 2007-2009 bear market which is another potential resistance barrer. [Major Nasdaq resistance is at 2200]. That puts the stock rally up against major resistance (and vulnerable to profit-taking) just as the dollar is starting to rally and commodities are starting to roll over. The daily bars in Chart 8 show the S&P 500 having trouble staying above 1100. Although its major trend is still up, notice that the daily RSI and MACD lines have been dropping. That suggests loss of upside momentum. The hourly bars in Chart 9 show a trading range that has lasted for three weeks. A drop below that range would signal that the market's short-term trend is weakening. I wrote yesterday that the recent upturn in the relative strength of defensive stock groups like healthcare, telecom, and utilities also suggests that investors are turning more cautious than they've been since the March bottom. The charts shown herein appear to support that more cautious view.
Chart 7
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Chart 9
EMERGING MARKETS ALSO VULNERABLE... The biggest beneficiaries of the weaker dollar and stronger commodties have been emerging markets. Chart 10 shows the Claymore/BNY BRIC ETF (EEB) up against resistance along its early 2008 low after having retraced 62% of its bear market. [BRIC stands for Brazil, Russia, India, and China]. That certainly looks like a group ripe for some profit-taking. Bear in mind also that a lot of the buying of emerging markets, foreign currencies, and commodities has been based on the "dollar carry trade". In other words, traders have been borrowing cheap dollars (selling it short) and investing in riskier global assets. Any upturn in the dollar (which has already started) will cause some unwinding of that trade. In other words, they'll have to sell some of those risker assets and cover some dollar shorts.
Chart 10
