EMPLOYMENT REPORT WEIGHS ON STOCKS AND LIFTS BONDS -- EURO AND EUROPEAN STOCKS FALL SHARPLY -- MACD FORMS DIVERGENCE ON WEEKLY GOLD CHART -- INVERSE GOLD EURO CORRELATION UNDER THREAT -- GOLD MINERS ETF HITS RESISTANCE AT GAP
EMPLOYMENT REPORT WEIGHS ON STOCKS AND LIFTS BONDS... Link for todays video. A negative reaction to todays employment report sent stocks sharply lower on the open. In early trading, the major indices were down around 2% and all sectors were down. Elsewhere, the Dollar was up because of weakness in the Euro, oil was down, gold was down slightly and bonds were up sharply. These numbers are early and a lot can change in the course of the trading day. Overall, the inverse relationship between stocks and bonds remains in play. Chart 1 shows the S&P 500 ETF (SPY), Euro ETF (FXE) and 20+ Year Treasury ETF (TLT). Stocks and the Euro declined sharply since mid-late April and bonds rose sharply since early April. Bonds remain a safe haven when stocks and the Euro decline.
(click to view a live version of this chart)
Chart 1
Chart 2 shows the S&P 500 ETF (SPY) gapping down below 109, which keeps it in the range of the prior six trading days. This range extends from about 107 to around 111. Since the two big recovery days in late May, the ETF has been locked in this range. A break from this range will provide the next directional clue. A break below 107 would increase the chances of a bigger break below the February-May lows. Should SPY hold above 107, a break above 111 would show bullish resilience and keep the major support level intact. The indicator window shows RSI with yellow shading for levels below 50. Dips below 50 marked the prior two corrections. Obviously, the current decline is deeper than the previous two, but RSI shows the same characteristics. Momentum remains in corrective mode as long as RSI remains below 50. Look for a break above 50 to turn momentum bullish and confirm a breakout at 111 in SPY.
(click to view a live version of this chart)
Chart 2
EURO AND EUROPEAN STOCKS FALL SHARPLY ... The Euro moved to a four year low versus the Dollar and this put pressure on European stocks. This weakness also weighed on the US stock market before the employment report. US stocks moved further down after the employment numbers. News suggesting that the Swiss central bank would not intervene to stem the rise in the Swiss Franc weighed on the Euro. In addition, there was news that some Chinese manufacturers were now asking for payment in Dollars. Nobody wants to hold Euros. Chart 3 shows the Euro ETF (FXE) with a downtrend that began with the breakdown in December. There have been a few consolidations, but no real counter trend rallies. The ETF became oversold below 122.5 in May and surged above 125 with a three day move. That was it. 3 and out. The Euro resumed its decline the next day and traded at a new 52-week low near 120 today. European stocks followed suite with the German DAX ($DAX), French CAC 40 ($CAC) and London FTSE ($FTSE) were all down over 1.5% in afternoon trading (EU time). Chart 4 shows the Euro Stoxx 50 SPDR (FEZ) hitting resistance at 33 this week and opening around 31 today. FEZ surged late last week, but has yet to follow through on this surge and has been consolidating below 33 the last five days. A break above 33 is needed to argue for a corrective bounce towards broken support around 35-36.
(click to view a live version of this chart)
Chart 3
(click to view a live version of this chart)
Chart 4
MACD FORMS BEARISH DIVERGENCE ON WEEKLY GOLD CHART... I featured the Gold ETF (GLD) last Friday with a weekly bearish engulfing in mid May. Even though the overall trend for GLD remains up, the yellow metal came under pressure this week with a sharp decline on Thursday and early weakness on Friday. Moreover, this decline occurred despite weakness in the Euro on Thursday and Friday. Chart 5 shows GLD with weekly candlesticks and MACD (5,35,5). I am using MACD(5,35,5) instead of MACD(12,26,9) because I want to increase the sensitivity of the indicator on the weekly chart. The overall trend remains up as GLD forged a higher high above 120 in May, but MACD has a bearish divergence working as it remains below its prior high. A bearish divergence forms when the underlying security records a higher high, but the indicator does not confirm and forms a lower high. MACD remains above its signal line for now, but it would not take much to produce a bearish signal line crossover. A move below the bearish engulfing low would confirm this candlestick pattern. Should these two signals materialize, a move towards the next support zone around 104-105 would be possible.
(click to view a live version of this chart)
Chart 5
Turning to the daily chart, the Gold ETF (GLD) surged above 120 on Tuesday, but fell back rather sharply over the last two days. Chart 6 shows a lower high taking shape near the 62% retracement area. The next support zone on the daily chart stems from broken resistance and the February trendline.
(click to view a live version of this chart)
Chart 6
INVERSE GOLD-EURO CORRELATION UNDER THREAT... The Gold ETF (GLD) and the Euro ETF (FXE) have been inversely correlated since early February, which is when GLD bottomed around 104 and FXE topped around 116. Chart 7 shows this inverse relationship moving into high gear in mid April as the Euro plunged from 114 to 105 and GLD surged from 111 to 121 (blue dotted line). While the overall inverse correlation remains in place, there are some signs of change developing over the last few weeks. First, notice that GLD formed a lower high from mid May to early June. Second, the Euro moved to new lows over this timeframe. Third, notice that the GLD:FXE ratio has yet to exceed its mid May high. Gold appears to have benefitted from the sharp decline in the Euro. The yellow metal was viewed as an alternative to the embattled currency. Golds inability to exceed its May high in the face of Euro weakness suggest that this relationship may be changing. Perhaps gold is turning its attention elsewhere. It should also be pointed out that gold sentiment and Dollar sentiment are overwhelmingly bullish. Such one-sided sentiment can lead to a humbling correction.
(click to view a live version of this chart)
Chart 7
GOLD MINERS ETF (GDX) HITS RESISTANCE AT GAP... The Gold Miners ETF (GDX) formed an island reversal in mid May and met resistance near the mid May gap down. Chart 8 shows GDX with a gap up on 11-May and a gap down on 19-May. These gaps created a space around 50.80 without any trades. The gap up, consolidation and gap down form an island reversal. After testing the April low, GDX rebounded with a move back to 51. Notice that the gap down turned into resistance this week. The move to 51 also represents a 62% retracement of the May decline. Such resistance makes this a critical area for GDX. A break below this weeks lows could foreshadow a deeper decline towards the April-May lows. The indicator window shows the GDX:GLD ratio. Gold traditionally performs best when the gold stocks outperform, which was the case from February to mid May. The price relative broke below the February trendline with a sharp decline three weeks ago and moved below the prior low. The Gold Miners ETF is now showing relative weakness and this is negative for gold.
(click to view a live version of this chart)
Chart 8
SENIOR MINERS LAG JUNIOR MINERS... The Junior Gold Miners ETF (GDXJ) can be used for stand alone analysis and to measure the appetite for risk in gold stocks. GDXJ represents a group of second and third tier miners, mostly from Canada, the US and Australia. GDX, on the other hand, is dominated by the big miners such as Barrick (ABX), Goldcorp(G.TO), Newmont (NEM). See www.vaneck.com for details on these ETFs. GDX Junior shows weakness relative to GDX Senior. Chart 9 shows the Junior Gold Miners ETF (GDXJ) breaking below the February trendline and early May low with a sharp decline below 26. The ETF rebounded the last two weeks, but is currently meeting resistance near the 50% retracement. A small consolidation is taking shape with support based on this weeks low. The indicator window shows the GDXJ:GDX ratio. Junior outperforms when this ratio rises and underperforms when it falls. This ratio peaked in late April, a few weeks before the ETFs actually peaked. A lower high formed in mid May and the ratio moved to new lows in late May. The Junior miners are underperforming the Senior miners.
