BONDS FALL AS FED CONSIDERS ASSET SALES - EURO GETS HIT AGAIN - XLF TESTS SUPPORT AROUND 14 - GOLD AND EURO DECOUPLE FOR A FEW DAYS - LOOK AT 2003-2004 SPX FOR CLUES TO CURRENT SITUATION
BONDS FALL AS FED CONSIDERS ASSET SALES... Link for todays video. The Fed released the minutes of its January meeting this afternoon. Shrinking the balance sheet proved a top priority among Fed officials. Among other things, this would involve sales of Treasury bonds the Fed bought during its quantitative easing phase. Chart 1 shows the 20+ Year Treasury ETF (TLT) hitting resistance around 92 in late January and early February. The ETF moved sharply lower last week, stalled for a few days and moved lower again today. TLT has been trending lower since early October with a falling channel taking shape. The lower trendline extends to the mid 80s over the next several weeks. A break above resistance at 92.5 is needed to reverse this downtrend. Before leaving this chart, also notice the uptick in the DB Commodity Index Tracking ETF (DBC) over the last six days coincided with a downtick in bonds (yellow area). Bonds do not like it when commodity prices rise. Note: Users can click any of these charts to see the settings and save them to their SharpCharts favorites.
Chart 1
A decline in bonds corresponds to a rise in rates. Chart 2 shows the 10-Year Treasury Yield ($TNX) breaking wedge resistance with a move higher over the last two weeks. Taking a step back, also notice that $TNX broke the trendline of a bigger wedge with the December surge. It looks like the trend for rates is up and this means a downtrend for bonds.
Chart 2
EURO GETS HIT AGAIN... The Euro gave back the gains from Tuesdays bounce with a rather sharp decline on Wednesday. Tuesdays bounce came on the heels of an EU announcement concerning the situation with Greece. Currency traders appear to be having second thoughts on the EUs 30 day ultimatum for Greece to get its finances in order. On Tuesday, John Murphy featured the Euro Index ($XEU) bouncing near its 62% retracement with oversold RSI. The combination of oversold conditions and Fibonacci support increased the odds of an oversold bounce. John also noted that the bigger trend was down as $XEU trades below its 200-day moving average. With todays decline, it appears that the bigger downtrend pulled out a trump card here. Chart 3 shows the Euro ETF (FXE) falling back below 136 on Wednesday. Yesterdays failed bounce established the first resistance level at 137.5. As with $XEU, oversold RSI and the 62% retracement are also coming into play to improve the odds for an oversold bounce. Look for a move above this weeks high to get that bounce going. Chart 4 shows the DB Dollar Bullish ETF (UUP) as the main beneficiary of todays Euro weakness.
Chart 3
Chart 4
XLF TESTS SUPPORT AROUND 14... With European banks holding most of the Greek debt, the global financial system could come into play once again, especially if renewed weakness in the Euro signals a new round of risk aversion. From a US perspective, this means we should keep an eye on the big banks. Even though the Financials SPDR (XLF) bounced off support this week, the finance sector has been performing poorly since October. Chart 5 shows XLF breaking a triangle trendline, finding support in the 13.5-14 area and bouncing back above 14 this week. Support is holding for now, but relative weakness remains a concern. First, XLF underperformed from October to December and the price relative has yet to turn up. Second, the ETF formed a lower high in January and broke below its October-December lows this year. Relative weakness, a lower high and a lower low bode bearish for this ETF. Chart 6 shows weekly candlesticks for some perspective. XLF surged from 6 to 14 and then began a consolidation in August. The ETF has been trading flat for 7-8 months. For now, support in the 14 area is holding. A break below the consolidation lows would be quite bearish and argue for a move lower.
Chart 5
Chart 6
GOLD AND EURO DECOUPLE FOR A FEW DAYS... Even though it is just a few days, the gold and the Euro could be decoupling from their positive correlation. Chart 7 shows the Gold ETF (GLD) moving in tandem over the last eight months. Both advanced from June-July to late November and both declined from early December to early February. Despite moving together, it is clear that gold did not suffer as much as the Euro over the last two months. Notice that FXE broke below its summer lows, but GLD held well above its summer lows. Money was moving out of the Euro a lot faster than it was moving out of gold.
Chart 7
Chart 8 shows the Gold ETF and Euro ETF over the last 20 days. Both bottomed on February 5th and bounced for a few days. The Euro resumed its decline last week with a move back below 136, but GLD kept moving higher, sharply higher. In fact, GLD surged over $6 (5.8%) with a big move over the last two weeks. This is especially impressive considering that the Euro is again testing its lows.
Chart 8
Chart 9 shows the Gold ETF (GLD) hitting the 50-62% retracement zone in early February and surging above the wedge trendline with a big surge on Tuesday. GLD gapped up because gold was already trading up in London and in the futures markets early Tuesday. Nevertheless, the surge and trendline break are quite positive.
Chart 9
A 2003-2004 REDUX FOR SPX?... There could be some parallels developing between now and 2004. First, lets look at 2003-2004 in detail. Chart 10 shows the S&P 500 from January 2003 until December 2004. $SPX surged from around 800 to 1150 with a 2-3 month consolidation in between. After hitting the 1150 area in January 2004, the index leveled out for a few weeks and then embarked on a 5-6 month correction. This correction formed a falling price channel that ended with a breakout in early November 2004. The bottom indicator window shows the MACD Histogram (10,50,10). The histogram is the difference between MACD (10-week EMA less 50-week EMA) and the MACD signal line (10-week EMA of MACD). In general, this histogram is positive when the 10-week EMA turns up and continues higher. It is negative when the 10-week EMA turns down and continues lower. Negative/positive crosses are highlighted with the red/green dotted lines. This indicator is prone to whipsaw, but can also catch some good trends. I use it as a guideline for overall directional bias.
Chart 10
Chart 11 shows the S&P 500 over the last 11 months with another 30 weeks added to the chart. This can be done with the extra bars box to the right of the other time boxes (years, months and days). The current 11 month advance is about the same timeframe as in 2003. There is also a small 2-3 month consolidation in the middle. Also notice the sharp decline in January and the MACD histogram turning negative for the first time since mid March. Should a 2004 style correction unfold from current levels, we could see the S&P 500 work its way lower until late summer.
Chart 11
