DOLLAR BECOMES OVERBOUGHT AGAIN - GOLD REMAINS TIED TO THE DOLLAR - AN ABC CORRECTION FOR GLD - OIL FLIRTS WITH SUPPORT - LONG-TERM RATES RISING
DOLLAR BECOMES OVERBOUGHT AGAIN... Link for todays video. For the second time in two weeks, the US Dollar Index ($USD) surged and became overbought. Chart 1 shows the index with 14-day RSI moving back above 70. This is also the third overbought reading since December 21st. While overbought readings increase the odds of a short-term pullback, they also show medium-term strength. Securities in strong uptrends become overbought. Securities in strong downtrends become oversold. From April to September, the US Dollar Index became oversold numerous times as RSI dipped below 30. Also notice that the 50-60 zone acted as RSI resistance during the downtrend. I would now expect the 40-50 zone to act as RSI support in an uptrend. On the price chart, broken resistance around 78-78.5 turns into the first support zone.
Chart 1
Chart 2 shows weekly bars over the last three years. The index formed a higher low late last year and broke wedge resistance with a powerful surge. This surge looks just as strong as the July-August 2008 surge. Longer-term, the next resistance level is around 82-83. Why is the Dollar index so strong? It is a combination of Euro weakness and Dollar strength. First, the Euro is the single biggest component of the Dollar Index and DB Dollar Bullish ETF (over 50%). Second, a lot of bad news was already priced into the Dollar with last years decline. With US GDP growing at a healthy clip in the fourth quarter, we could see a hiatus from the bad news. Second, the Euro remains under enormous pressure. Buying dried up with recent concerns over debt levels in Greece, Portugal and Spain. The strain on the Euro could curtail Euro zone growth and diminish demand for the Euro. The tables are now turned for currency traders. The US now looks stable relative to Euro and the currency markets are making their adjustments. Chart 3 shows that the Euro Index ($XEU) breaking down over the last two months. The index could conceivably return to support from the 2008-2009 lows.
Chart 2
Chart 3
GOLD REMAINS TIED TO THE DOLLAR... The fortunes of gold are still tied to the Dollar. Chart 4 shows the Gold ETF (GLD) and the DB Dollar Bullish ETF (UUP) as mirror images. Except for a brief couple weeks in June, gold and the Dollar have been negatively correlated. Both reversed course around two weeks ago with the Dollar moving sharply higher at golds expense. Even though gold is down more on percentage terms, the chart shows gold holding up relatively well. The blue dotted line marks the late October reaction low for GLD and the red dotted line marks the early November reaction high for UUP. UUP broke above this reaction high, but GLD remains well above this corresponding reaction low. Given such strength in the Dollar, I would have expected GLD to break this reaction low. The ability to hold above shows some relative chart strength. Perhaps some Euro money is finding its way into the gold market.
Chart 4
AN ABC CORRECTION FOR GLD... The long-term trend remains up for gold with an ABC correction taking shape over the last two months. First, lets review the long-term chart for the Gold-Continuous Futures ($GOLD). Chart 5 shows $GOLD breaking resistance around 1000 and surging above 1200. Neckline resistance turns into support and there is often a throw-back after a breakout. Will gold correct all the way back to the 1000 area or will the correction be shallower? Lets look at the daily chart.
Chart 5
Chart 6 shows Gold ETF (GLD) with an ABC correction underway over the last two months. Also notice that the decline formed falling wedge and retraced 50-62% of the prior advance. The ABC pattern, a falling wedge and retracement are all typical for corrections within a bigger uptrend. GLD also took inspiration from Fridays intraday reversal in the stock market. GLD opened around 103.76, dipped to 102.28 during the day and closed at 104.68. Not a bad reversal day. In fact, Fridays GLD reversal was strong than thsoe seen in the major index ETFs. Although the two month trend remains down, gold is showing some resilience and merits a close watch as it attempts to firm in this key retracement zone.
Chart 6
OIL FLIRTS WITH SUPPORT... The fortunes of oil are tied to the Dollar and the stock market. After moving above 80 in early January, chart 7 shows West Texas Intermediate ($WTIC) falling back to 70 over the last four weeks. Blame strength in the Dollar and weakness in global stock markets. First, commodities in general weaken when the Dollar strengthens. Second, a sharp four week decline in global equity indices could foreshadow weakness in the global economy, which would dampen demand for oil related products. Technically, the trend for crude remains up as long as support around 70 holds. Below 70, the next support zone is in the 59-60 area. Chart 8 shows US Oil Fund ETF (USO) battling support in the 35-36 area. The ETF plunged to 34.07 on Friday afternoon, but recovered with the stock market to close above 35.
Chart 7
Chart 8
LONG-TERM RATES RISING... Today I am going to show the 10-Year Treasury Yield ($TNX) weekly chart for a long-term perspective on rates and bonds. Chart 9 shows the 10-Year Treasury Yield breaking channel resistance in December and pulling back the last five weeks. Despite this pullback, it looks like the long-term trend for rates is up. $TNX is trading above its 200-day moving average and the 200-day moving average is rising. A pullback after a breakout is quite common. Broken resistance around 35-36 (3.5-3.6%) turns into support for the first test. Combined with the rising 200-day moving average, an important test is ahead for the bond market. This pullback looks like a falling flag and a break above last weeks high would be bullish for rates. Remember, bonds fall as rates rise. Therefore, an upside breakout in rates would translate into a downside break for bonds.
Chart 9
There are many reasons to expect long-term rates to rise and bonds to fall, but it is not happening so far this year. Fiscal deficits, Treasury financing needs, a strengthening economy all favor rising rates. However, the fundamental backdrop doesnt always match the technical realities. Keep the fundamentals in the back of your mind and the chart at the front. Chart 10 shows the 7-10 Year Treasury ETF (IEF) breaking support with a sharp decline in December. Even though this looked like a significant long-term break down for bonds, IEF came roaring back with a surge back above 90.5 last week. Weakness in stocks and a flight to safety prompted the sharp bond rally last week. In fact, bonds could remain buoyant should these circumstances continue. IEF sports a rising wedge this year with support at 89.8. A break below this level would end the 2010 rally and call for a continuation of the December plunge.
Chart 10
