STOCKS BOUNCE WHILE GOLD AND THE DOLLAR SELLOFF -- DOLLAR SELLING BOOSTS FOREIGN ETFS -- AN IMPORTANT MOVING AVERAGE TEST IS TAKING PLACE
GOLD AND DOLLAR DROP TOGETHER... I pointed out last Thursday the simultaneous drop in gold and the dollar, and the fact that both markets had fallen below their 50-day moving averages. I suggested that since both had risen together, it made sense that they should correct together. And they continue to do so. Chart 1 shows the Gold Trust (GLD) down the equivalent of $16 today and heading toward potential chart support near 114. That support is marked by the mid-May low, the January peak, and a five-month rising trendline. Chart 2 shows the Bullish Dollar ETF (UUP) falling again today and nearing a test of a rising seven-month support line. So far, both of these pullbacks appear to be corrective in nature. Put into a wider intermarket picture, it now appears that their drop last Thursday set the stage for today's bounce in global stocks and commodities.
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Chart 1
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Chart 2
DOLLAR PULLBACK BOOSTS COMMODITIES... The pullback in the dollar is giving a boost to commodities (outside of gold). Chart 3 shows the rebound in the DB Commodities Tracking Fund (DBC) from potential support along its May low. Chart patterns for crude oil (USO) and Copper (JJC) look very similar. At this point, the bounce appears to be short-term in nature and well within the confines of a downtrend. To reverse that downtrend, the DBC would have to exceed its 50-day average and June high. It's a long ways from doing that. Stocks are rebounding as well.
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Chart 3
FOREIGN ETFS LEAD REBOUND... Another side-effect of the falling dollar is that foreign stock markets are leading the global bounce. Chart 4 shows EAFE iShares (EFA) gapping higher and remaining above their May/June lows (unlike the U.S. market which broke those lows). That sets up a short-term positive divergence between foreign ETFs and U.S. stocks. The main reason for that can be seen below the chart. The blue line is a relative strength ratio of the EFA divided by the S&P 500. After underperforming during the first half of the year, foreign stocks are doing a bit better than the U.S. That's because of the dollar (green line). A rising dollar (first half of the year) weakens foreign ETFs relative to the U.S. A falling dollar (July) has the opposite effect. Here again, today's bounce appears corrective in nature. The EFA would have to exceed its June peak to change that.
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Chart 4
S&P 500 BOUNCES FROM OVERSOLD CONDITION... A short-term bounce in U.S. isn't too surprising at this point. Daily stochastics in Chart 6 show the S&P 500 to be in a short-term oversold condition below 20. The pattern of "lower highs and lows", however, remains intact. It's also worth noting that the (blue) 50-day average is testing the (red) 200-day average. That's an important test which has provoked a lot of media talk about a "dead cross". That negative sign takes place when the 50-day line crosses below the 200-day. That puts the market at an important juncture.
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Chart 5
50 AND 200-DAY EMA LINES... Although most observers compare the simple (arithmetic) 50- and 200-day averages, the EMA combination appears to give more reliable signals. The two lines in Chart 6 show the 50- and 200-day EMA combination since 1998. Only four major signals have been given in the last decade, which include a 2000 sell, a 2003 buy, a late 2007 sell, and a summer 2009 buy (see circles). The 50-200 day EMA trend is still up, but just barely.
