GOLD AND EURO RESUME NEGATIVE CORRELATION -- GOLD BREAKS WEDGE RESISTANCE -- TECHS AND SMALL-CAPS UNDERPERFORMING BROADER MARKET -- NDX PERCENT ABOVE 200-DAY SMA BREAKS 50% -- S&P 500 PERCENT ABOVE 50-DAY SMA BREAKS 50%
GOLD AND EURO RESUME NEGATIVE CORRELATION... Link for todays video. For the most part, Gold and the Euro have been negatively correlated throughout 2010. Negative correlation means one rises when the other one falls and visa versa. Positive correlation means both rise or fall together. Chart 1 shows the Gold ETF (GLD) falling and the Euro ETF (FXE) rising from February to June. The then Euro surged in June-July and gold moved sharply lower. Chart 2 shows the Gold ETF and the Euro ETF since late July. Both rose from late July until the first week of August, which shows sudden positive correlation. This newfound kinship did not last as they resumed their negative correlation this week. Notice that gold surged as the Euro fell sharply.
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Chart 1
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Chart 2
Why the negative correlation? The Euro is at the center of the risk-on risk-off trade. A rising Euro favors stability in Europe and the risk-on trade. As noted last Friday, the risk-on trade is bullish for stocks and oil, but bearish for the Dollar, gold and bonds. A sharply falling Euro increases the chances of another crisis in Europe and favors the risk-off trade. This trade is bearish for stocks and oil, but bullish for the Dollar, bonds and gold. The Euro fell over 3% the last five days, which is a big move for a currency. On the flipside, the Dollar is the go-to currency during a flight to safety. Chart 3 shows FXE with a sharp decline from resistance over the last five days.
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Chart 3
GOLD BREAKS WEDGE RESISTANCE ... Chart 4 shows the Gold ETF breaking above the wedge trendline and exceeding resistance around 118 this week. This weeks low around 116 becomes the first support level to watch for a failed breakout. Chart 5 shows weekly prices with a long-term uptrend since late 2008. Notice that RSI moved above 50 in December 2008 and has traded between 47 and 80 ever sine. This is the definition of a strong uptrend. GLD is no stranger to the falling wedge correction either. Falling wedges formed in February-April 2009 and November-February. Each lasted 2-3 months. Looking at these wedges, notice that the first bounce attempt failed (red arrows) and the wedges extended a few more weeks. The current wedge looks rather small, but the breakout is holding so far. Watch the first support level on the daily chart for signs of failure.
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Chart 4
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Chart 5
TECHS AND SMALL-CAPS UNDERPERFORMING BROADER MARKET... Relative performance of techs and small-caps is another way to measure the appetite for risk. Traders/investors are embracing risk when techs and small-caps outperform. Conversely, they are shunning risk when techs and small-caps underperform. John Murphy wrote about relative strength in the defensive groups on Thursday. Relative weakness in techs and small-caps confirms this message. Chart 6 shows the price relative comparing the Nasdaq with the NY Composite. There is very little overlap in these two indices. The Nasdaq outperformed from February to early June as the price relative rose. The indicator turned down in June and moved sharply lower the last two months. Even when stocks turned up in July, the Nasdaq continued to lag as the price relative fell to new lows in early August. Chart 7 shows a similar situation when comparing the Russell 2000 to the S&P 100. Small-caps outperformed from early February to mid May and then underperformed from mid May to now. The $RUT:$OEX ratio (price relative) hit a new low for the move this week.
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Chart 6
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Chart 7
NDX PERCENT ABOVE 200-DAY SMA BREAKS 50%... The percentage of stocks above a specific moving average is a breadth indicator with three versions available at Stockcharts.com. Sharpcharts users can track the percentage of stocks above the 50-day SMA, 150-day SMA or 200-day SMA. These indicators are available for the Dow, Nasdaq, Nasdaq 100, NYSE, S&P 100, S&P 500 and TSX Composite. A full list of available symbols can be found at the end of this article.
The NYSE are Nasdaq are broad indices with lots of small-stocks, preferred stocks and other non-common issues. As such, narrower indices shift focus to the most important stocks. Enter the Nasdaq 100 and S&P 500. The Nasdaq 100 represents large-cap tech stocks, while the S&P 500 represents large-caps. Even though both indices are weighted by market capitalization, this breadth statistic treats all components equally. Apple (AAPL), with a market capitalization of some $230 billion, counts the same as Cintas (CTAS), which has a market cap of around $4 billion. The same is true for the S&P 500 components. Equal weighting is what makes this breadth indicator a true breadth indicator.
Now lets hit the charts. Chart 8 shows the S&P 500 %Above 200MA ($SPXA200R). Something changed in May-June as the indicator plunged from above 90% to below 30% - its lowest level since April 2009. Notice that this indicator held above 50% from June 2009 until June 2010 (one year). This plunge broke the bull market range that was in effect for a year. With the July surge in stocks, the indicator moved back above 50%, but could not exceed its prior high and move above 65%. In fact, a small bearish divergence formed from July to early August. Notice that the indicator formed a lower high as the index forged a higher high. The indicator moved back below 50% this week and it looks like the bears have gained the upper hand again. Look for a break above 65% to turn this indicator bullish again. Chart 9 shows the Nasdaq 100 %Above 200MA ($NDXA200R). This indicator moved above 50% in mid May 2009 and remained above 50% until late May 2010. Since plunging below 30% in early July, the indicator has yet to move back above 60%.
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Chart 8
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Chart 9
S&P 500 PERCENT ABOVE 50-DAY SMA BREAKS 50%... While the 200-day moving average can be used for long-term breadth analysis, the 50-day moving average is better suited for medium-term breadth analysis. Roughly speaking, 200 days represents 9-10 months. 50 days represents 9-10 weeks. Chart 10 shows the S&P 500 %Above 50MA ($SPXA50R) forming a lower high and plunging below 50% this week. Like momentum oscillators, this indicator also has bullish and bearish ranges. Notice how the indicator bottomed in the 20-40% range during the bull market. The indicator plunged below bull market support with the move below 10% in May, June and July. With bull market support broken, it is time to start thinking about a bear market resistance. Corresponding bear market resistance would be 60 to 80. Notice how the indicator moved into this zone and then back below 50% this week. Chart 11 shows the Nasdaq 100 %Above 50MA ($NDXA50R) with similar characteristics.
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Chart 10
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Chart 11
Click here for a full list of breadth indicators based on the percentage of stocks above a specific moving average.
