DOLLAR INDEX HITS FIVE MONTH HIGH ($USD,$XEU) - GOLD FINDS SUPPORT ($GOLD,GLD) - OIL HITS POTENTIAL SUPPORT ($WTIC) - BONDS HIT RESISTANCE ZONE ($USB)
US DOLLAR INDEX HITS FIVE MONTH HIGH... Link for todays video. The US Dollar Index ($USD) reversed course in December and continued strong in January. Weakness in the Euro is the main catalyst for this move. Currencies, and other securities for that matter, can decline simply from a lack of buyers. The Euro clearly attracted buying interest from March to November 2009, but recent turmoil in Greece, Ireland and other European countries caused buyers to withdraw. George Soros was recently quoted as saying that there was no attractive alternative to the Dollar.
Chart 1 shows a weekly bar chart with a higher low around 74 and a wedge breakout over the last two months. In contrast, chart 2 shows the Euro ETF (FXE) with a lower high and wedge support break over the last two months. It certainly looks like a long-term downtrend for the Euro and long-term uptrend for the Dollar.
Chart 1
Chart 2
Chart 3 shows daily bars for the US Dollar Index. After a falling flag correction, the index broke resistance with a surge above 78 and continued above 79 last week. Strength in the Dollar is especially impressive because short-term interest rates moved lower over the last four weeks. There was a positive correlation between the Dollar and short-term interest rates from March to mid December. Notice that both moved higher from late November to mid December. Even though short-term rates moved sharply lower the last four weeks, the Dollar continued its advance with a surge the last two weeks. Dollar bulls can thank the Euro for this one. In the indicator window, RSI moved above 70 to become overbought for the second time in two months. Prior to these two readings, October 2008 was the last time 14-period RSI became overbought. While overbought conditions suggest that the short-term trend is getting overextended, it is bullish for the long-term trend. The ability to reach overbought levels is a sign of strength, not weakness.
Chart 3
GOLD FINDS SUPPORT ... Despite a rather sharp rise in the US Dollar Index, gold managed to firm and find support in the 1080-1100 area over the last six days. There could be two reasons for this. First, the stock market fell sharply the last six days and gold may have attracted money as a relative safe-haven. Second, gold is still viewed as one of the few alternatives to currencies. Chart 4 shows the Gold-Continuous Futures ($GOLD) within a long-term uptrend. After breaking resistance around 1000 and surging above 1200 in November, gold corrected with a decline back below 1100 over the last few months. Broken resistance around 1000 turns into a long-term support zone.
Chart 4
Chart 5 shows gold finding support around 1075. This support area stems from broken resistance, the late December low and the 50% retracement mark. Even though there is potential support here, it looks like an ABC correction is unfolding. Wave A extends down from the early December high, Wave B marks the bounce back to 1150 and the Wave C decline is currently underway. Typical ABC corrections retrace 62% of the prior advance and Wave C moves below the low of Wave B. This would project further weakness towards 1025. A lot is dependent on the Dollar. Further strength in the Dollar would likely keep commodities and gold under downward pressure. Weakness in the Dollar would be positive for gold and we could then see a bounce off support at 1075. Chart 6 shows the Gold ETF (GLD) forming a doji at support.
Chart 5
Chart 6
OIL HITS POTENTIAL SUPPORT ... Oil was hit with a triple whammy in January. First, the Dollar surged and this put downward pressure on commodities. Second, the S&P 500 fell sharply and this dampened the prospects for energy demand. Third, the Chinese government is trying to slow growth and this would dampen the demand for oil in this emerging market. Chart 7 shows the West Texas Intermediate ($WTIC) hitting resistance in the mid 80s over the last few months. This resistance zone stems from broken support, the 38-50% retracement zone and the October high. Despite resistance, crude remains above its December reaction low and has yet to fully reverse the uptrend that has been in place since March.
Chart 7
Chart 8 focuses on the advance since late May. West Texas Intermediate managed to record higher highs and higher lows over the last eight months. The most recent higher high formed in early January and crude remains above its prior low (70). There are two trendlines extending up from the July and September lows. These converge on the 72-75 area to mark potential support just above the December low. With these trendlines and the December low, crude is currently trading in an important make-or-break support zone. A break below 70 would fully reverse the uptrend.
Chart 8
BONDS HIT RESISTANCE ZONE... Bonds caught a January bid with weakness in the stock market and weakness in commodities. First, the sharp decline in stocks made bonds attractive as a safe-haven. Second, the decline in commodity prices puts downward pressure on inflation and this benefits bonds. Despite the January advance, the 30-year Treasury Bond ($USB) is trading in a resistance zone that could stymie further gains. Chart 9 shows the 30-year Treasury Bond breaking channel support at the end of December and bouncing back above 117.5 in January. Despite this rebound, the channel break still looks bearish. Bonds became oversold around 115 and this could be just an oversold bounce.
Chart 9
Chart 10 shows the 30-year Treasury Bond retracing 50% of the prior decline and hitting resistance from broken support. After the decline from 123 to 115, bonds were quite oversold and ripe for a bounce. Weakness in stocks and commodities fueled this bounce, but resistance is nigh and bonds deserve a close watch.
Chart 10
