BOUNCE IN OVERSOLD DOLLAR CAUSES PROFIT-TAKING IN STOCKS AND COMMODITIES -- GOLD TUMBLES -- STOCKS APPEAR DUE FOR SOME PROFIT-TAKING BUT REMAIN IN AN UPTREND
DOLLAR RSI STARTS TO RISE... My October 7 message showed the 14-day RSI for the U.S. Dollar Index trading below 14 which put it in oversold territory. I also warned that a short-term positive divergence was being formed. That positive divergence was confirmed by today's RSI move back over the 14 level as shown in Chart 1. The last time that happened was in early August and signalled a rebound in the dollar (see circles). Since stocks and commodities have been rallying on the falling dollar, both asset classes are falling today. Not surprisingly, gold is one of the biggest casualties. Chart 2 shows the 14-day RSI for the Gold Trust (GLD) falling below 70 for the first time in two months. GLD has gapped sharply lower and is now threatening its 20-day moving average (green line) and last week's intra-day low. I suggested last Thursday that a drop below either level would warrant some profit-taking. Chart 3 shows the Gold Miners Index (GDX) having already broken last week's low. A more important test of GDX support is its 50-day moving average (blue line) and its May/July highs near 54.
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Chart 1
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Chart 2
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Chart 3
OVERBOUGHT QQQQ PULLS BACK ... Short-term technical readings also suggest that the stock market is due for some profit-taking. The 14-day RSI line for the Power Shares QQQ Trust in Chart 4 is forming a "double top" which is usually a warning of an over-extended market. The QQQQ, however, is in no danger at this point of breaking its two-month uptrend. On any pullback, initial support is likely along its early October low near 48. The same is true of the S&P 500. Chart 5 applies Bollinger bands to the SPX. It still remains above its 20-day moving average (middle line) which is its first line of support. Even if that were broken, more substantial support is likely near its lower band and its summer highs. Most technical readings remain positive on stocks. As a result, I'd be inclined to view any short-term pullback in stocks as another buying opportunity.
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Chart 4
