BULLS RING IN THE NEW YEAR - DOLLAR HITS RESISTANCE - RISING RATES BOOST THE DOLLAR - GOLD HITS SUPPORT ZONE - OIL SURGES - XLE AND OIH BREAK WEDGE TRENDLINES

BULLS RING IN THE NEW YEAR... Link for todays video. The New Year started the same way the old year ended: bullish. The bulls were out in force early on the first trading day of the year. In early afternoon trading, the broad market indices were all up over 1% with small-caps leading the way higher. All sectors were higher with energy and materials leading the charge. Chart 1 shows the S&P 500 ETF (SPY) recording another new 52-week high today. Since the July surge, the ETF has been working its way higher within a rising price channel of sorts. This channel defines the five month uptrend that has been in place since August. Channel support is marked around 107-108. A move below 107 would break channel support and call for a re-evaluation of the uptrend. The indicator window shows Aroon Up (green) and Aroon Down (red). While traders mostly look to Aroon crossovers for signals, the absolute levels are important as well. Aroon Up surged above 70 in late July and has been above 30 ever since. A move below 30 would warrant a re-evaluation of upward momentum.

Chart 1

Chart 2 shows the Russell 2000 ETF (IWM) breaking above its Sep-Oct highs in late December and recording a new 52-week high on Monday. This small-cap ETF is up over 10% since early December. The bottom indicator window shows the IWM:SPY ratio, which is also known as the price relative or relative strength comparative. This ratio shows IWM performance relative to SPY. IWM underperformed SPY in October-November, but the price relative turned up in December as IWM outperformed. The January effect is alive and kicking with small-caps outperforming large-caps.

Chart 2

DOLLAR HITS RESISTANCE... After a big run in December, the DB Dollar Bullish ETF (UUP) hit resistance just above 23 and stalled the last two weeks. Chart 3 shows the ETF breaking the channel trendline and November high with a move above 23. The orange area shows broken support turning into resistance in the 23-23.25 area. Taking a closer look at recent price action, the slight decline over the last two weeks looks like a falling flag. These are potentially bullish consolidation patterns. Look for a break above last weeks high to signal a continuation higher. A breakout in the Dollar would likely weigh on gold.

Chart 3

The indicator window shows RSI becoming overbought for the first time since October 2008. While overbought conditions increase the odds of short-term pullback, such conditions are potentially bullish over the medium-term (1-6 months). With RSI surging above 70, UUP showed the most upside momentum since October 2008. It takes strong buying pressure to produce overbought readings in momentum oscillators. In general, overbought readings occur in uptrends and oversold readings occur in downtrends. RSI became oversold at least three times from March to September.

RISING RATES BOOST THE DOLLAR... Rising rates are underpinning the Dollar rally. Chart 4 shows the US Dollar Index ($USD) with the 10-Year Treasury Yield ($TNX) and the 1-Year Treasury Yield ($UST1Y). Before looking at current conditions, lets backtrack to April-May 2009 (yellow area). The red line shows the 10-Year Treasury Yield moving sharply higher, but the gray line shows the 1-Year Treasury Yield moving sharply lower. The green line shows the Dollar taking its cue from short-term rates with a decline in May-June. In fact, both short-term rates and the Dollar declined from March to November. Looking at December, we can see a sharp rise in both long-term rates and short-term rates. While the rise in long-term rates helped the Dollar, the main Dollar catalyst appears to be the sharp rise in short-term rates. The December surge is the sharpest since January-February 2009. As with the Dollar Index, some sort of correction can be expected after such a big move. However, it looks like the 1-Year Treasury Yield reversed its downtrend in December and rates could be moving higher in 2010. This could further underpin strength in the greenback.

Chart 4

GOLD HITS SUPPORT ZONE... With the Dollar overbought and at resistance, it is little surprise that the Gold ETF (GLD) is oversold and near support. Gold was ripe for some sort of pullback after an extremely sharp advance from July to November (33% in 5 months). Broken resistance and the Fibonacci Retracements Tool can be used to identify some support targets for the December decline. First, chart 5 shows broken resistance around 105 turning into support (green dotted line). Second, the Fibonacci Retracements Tool shows the 50% retracement around 105. The combination of broken resistance and a key retracement reinforce support at 105. In addition, notice that the Commodity Channel Index (CCI) became oversold for the first time since August. This momentum oscillator has been hovering around -100 the last few weeks. With todays early gains in GLD, CCI is making a bid to break back into positive territory. This is positive, but be careful for a double dip, which occurred in June-July.

Chart 5

Chart 6

OIL SURGES ... Cold weather, a strong stock market and weakness in the Dollar combined to lift oil on Monday. In addition, last week John Murphy noted that sector seasonality favors energy. This bullish combination pushed oil futures above $80 and the US Oil Fund ETF (USO) above 40. Chart 7 shows West Texas Intermediate Futures ($WTIC) for reference. It is an end-of-day (EOD) data series that is not updated until after the close. Todays surge above 80 puts oil close to potential resistance from the October-November highs. Overall, the trend is clearly up with higher lows since July and a higher high in October. Chart 8 shows USO surging above 40 today. Potential Resistance is in the low 40s and stems from the June-October highs. More importantly, the overall trend is up with higher lows from July to December.

Chart 7

Chart 8

XLE AND OIH BREAK WEDGE TRENDLINES... With oil moving sharply higher, it is little surprise that the Energy SPDR (XLE) is one of the leading sector ETFs and the Oil Service HOLDRs (OIH) is one of the leading industry group ETFs. Chart 9 shows XLE breaking wedge resistance at the end of December and surging over 2% today. Also notice that broken resistance around 54 turned into support in early December. Chart 10 shows OIH also breaking the wedge trendline with a surge above 120.

Chart 9

Chart 10