EURO DECLINE SLOWS - PICKING THE RIGHT RETRACEMENT - GOLD AND THE EURO STILL POSITIVELY CORRELATED - GOLD BATTLES WEDGE TRENDLINE - OIL, STOCKS AND THE DOLLAR - OIL REMAINS STUCK IN A RUT

EURO DECLINE SLOWS... Link for todays video. The decline in the Euro is slowing over the last few weeks, but we have yet to see a bounce last more than two days since late December. Chart 1 shows weekly candlesticks for the Euro ETF (FXE) Should the ETF close down this week, it will mark the 7th consecutive down week. Going back to its November peak, the Euro has been down 11 of the last 13 weeks. Even though FXE remains weak, the last three candlesticks reflect more indecision than the first four. The first four are long red candlesticks that mark a decline from 145 to 137. The last three are small red candlesticks that mark a decline from 137 to 135, which is much smaller. The two weekly candlestick prior to this week look like spinning tops, which have small bodies and relatively long upper/lower shadows. The small bodies show little change from Mondays open to Fridays close. The upper/lower shadows reflect the weekly high/low. Spinning tops show indecision that can sometimes foreshadow a reversal. This slowing decline is the first step to a bounce so we should continue watching the Euro closely.

Chart 1

SETTING THE FIBONACCI RETRACEMENTS TOOL FOR FXE... Chart 2 shows FXE overshooting the 62% retracement and RSI flirting with oversold levels around 30. The Fibonacci Retracements Tool extends from the April low to the November high.

Chart 2

Chart 3, on the other hand, shows FXE at its 62% retracement. This Fibonacci Retracements Tool extends from the March low to the November high. It is based on the same high but a different low. Will the real 62% retracement please stand up? This is where the subjective nature of technical analysis takes over. Fibonacci retracements do not mark HARD reversal levels. Instead, they mark areas that, when hit, should raise our alert level. The first 62% retracement level did not work, but I would still be vigilant at the second. In addition, the lower trendline of a falling channel marks potential support around 135. I first drew the trendline extending down from the November high and then drew the lower trendline parallel from the December low. The combination of channel support, oversold conditions and the 62% retracement argue for a bounce. These do not, however, guarantee a bounce. It is entirely possible that the ETF remains oversold and continues to support from the 2008-2009 lows around 124-125. Traders must be prepared for all possible outcomes.

Chart 3

GOLD AND EURO STILL POSITIVELY CORRELLATED... Last week I pointed out early signs that gold and the Euro might be diverging. Chart 4 shows the Gold ETF (GLD) and the Euro ETF (FXE) with a largely positive correlation . Both rose from June-July to November and both fell from December to early February. This positive correlation stems from golds negative correlation with the Dollar. The highlighted yellow area shows gold surging and the Euro remaining soft. It was surprising to see gold surge without a corresponding bounce in the Euro. Also note that gold held up much better than the Euro from December to February. If we look back at the December-February decline, FXE broke below its summer lows, but GLD only retraced around 55% of its July-November advance. Despite gold looking healthier than the Euro, I am not quite ready to dismiss the positive correlation. Both gold and the Euro fell from last Friday until Wednesday (four days). This positive correlation simply goes back too far. Therefore, gold may still need help from the Euro.

Chart 4

GOLD BATTLES WEDGE TRENDLINE ... Chart 5 focuses on the Gold ETF (GLD). The December-February decline formed a falling wedge that retraced 50-62% of the prior advance. Also notice that an ABC corrective pattern formed. The wedge, ABC pattern and 50-62% retracement are all typical of a correction. GLD broke above the wedge trendline last week, but fell back this week. After a four day decline, the ETF reversed intraday Thursday with a weak open and strong close. GLD is trying to keep the wedge breakout alive here, but may need a little held from the Euro (or weakness in the Dollar). Chart 6 shows a long-term perspective for the Gold-Continuous Futures ($GOLD). Should the wedge breakout fail on the daily chart, GLD could move back to support around 1000.

Chart 5

Chart 6

OIL, STOCKS AND THE DOLLAR... Strength in the Dollar has yet to affect oil. The US Dollar Index ($USD) is up some 8% from its November low, but the US Oil Fund ETF (USO) and West Texas Intermediate ($WTIC) are virtually unchanged over this same time period. One would expect oil to be down rather sharply given the sharp rise in the greenback. Perhaps other forces are at work. Chart 7 shows oil (black), stocks (red) and the Dollar (green). Both stocks and oil advanced when the Dollar declined from March to November. The Dollar is sharply higher over the last three months, but oil and stocks are relatively flat. It appears that the performance of oil is closely tied to the performance of stocks. Both oil and the S&P 500 zigzagged higher from July to January. Also notice that both peaked in January and bounced in February. This relationship makes perfect sense. Strength in the stock market translates into strength in the economy, which in turn bodes well for oil demand. Conversely, weakness in the stock market would be negative for the economy and this would dampen demand for oil.

Chart 7

OIL REMAINS STUCK IN A RUT... Chart 8 shows the US Oil Fund ETF (USO) trading flat since summer. The ETF first touched 40 in June 2000 and is currently trading just below 40. The ETF has been battling resistance around 40 for over six months. Chart 9 shows USO bouncing off support in the 35-36 area. It looked like USO was going to break support in early February, but stocks rallied and support ultimately held. As with the S&P 500, the February bounce retraced around 62% of the Jan-Feb decline and USO is meeting resistance around 38-39. USO, and the S&P 500 for that matter, appears to be at its make-or-break level.

Chart 8

Chart 9