OVERSOLD DOLLAR BOUNCES -- WHILE OVERBOUGHT GOLD REVERSES DOWN IN HEAVY TRADING -- MARKET VECTORS GOLD MINERS INDEX FAILS TO HOLD TUESDAY'S BREAKOUT -- S&P 500 REMAINS WELL ABOVE INITIAL CHART SUPPORT
OVERSOLD DOLLAR BOUNCES... The steep drop in the U.S. Dollar over the past two months has resulted in the inevitable oversold condition. One of the best illustrators of that oversold condition is the 14-day RSI which is the green line in chart 1. An oversold reading exists when the RSI falls below the 30 line. Prior to this occurrence, the last oversold condition in early August led to a dollar bounce. In truth, the UUP has been in oversold territory for the last couple of weeks. What makes this last dollar dip look like it's due for a bounce is the appearance of a second trough in the RSI during October (second green arrow). That creates a short-term positive divergence which often leads to a short-term bounce. A look at the early August bottom shows a similar "double bottom" in the RSI (first green arrow). The Dollar Index remains in a long-term downtrend. All the RSI suggests is that the UUP has fallen too far too fast and is due for a bounce. Chart 2 shows the opposite condition in the Euro. In that case, the XEU is showing a slight "negative divergence" in the 14-day RSI (blue arrow). There again, that simply means that the Euro is due for a pullback. Given the fact that so many other markets (like stocks and commodities) have been feeding off the falling dollar, today's rebound in the dollar is causing some profit-taking in other asset classes -- especially in gold.
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Chart 1
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Chart 2
GOLD ETF SELLS OFF ON HEAVY VOLUME... Today's dollar bounce is causing fairly heavy profit-taking in an overbought gold market. The GLD is in danger of forming a "key reversal" day to the downside. [A key reversal day occurs when prices open higher and close lower on rising volume). Today's downside volume bar is the biggest since the gold rally began two months ago. A close below the price gap formed on Tuesday would be another short-term negative (see box). There again, that doesn't mean that the bull run in gold is over. It does mean, however, that the gold rally has gotten stretched too far and is due for a pullback or consolidation. That may mean different things to different people. Short-term traders are no doubt taking some profits. Long-term investors, however, may have another opportunity to buy gold at lower levels. The first level of potential support to watch is the (green) 20-day average. That line has acted as support throughout the rally.
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Chart 3
GDX PULLS BACK FROM 2008 PEAK... Another short-term concern for precious metals is the inability of the Market Vectors Gold Miners ETF (GDX) to hold its move into new record highs that took place earlier this week. The daily bars in Chart 4 show the GDX reversing downward today on rising volume. The GDX is also slipping below the orange line which represents its 2008 high (which you can see in Chart 5). The GDX closed above that previous peak on Tueday, but only by a slight margin. Today's selling calls that upside breakout into question. At the very least, that's causing some nervous profit-taking in precious metal shares and other stocks tied to commodities. Basic materials and energy stocks are leading a relatively modest pullback in stocks.
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Chart 4
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Chart 5
S&P 500 REMAINS WELL ABOVE INITIAL SUPPORT... Today's stock selling has been relatively modest and hasn't interrupted its overall uptrend. The daily bars in Chart 6 show the S&P 500 trading well above initial chart support at 1131. In my view, the SPX would have to fall below that level and Its 200-day average to cause any serious damage. Today's dollar bounce, and commodity and stock pullback, shouldn't come as too much of a surprise. All the recent media attention on the plunging dollar and surging gold price was another sign that a correction of some sort was due.
