EURO TUMBLE CAUSES HEAVY PROFIT-TAKING IN COMMODITIES -- BANK OF AMERICA WEIGHS ON FINANCIAL STOCKS WHILE GOLDMAN SACHS TURNS UP -- OVERBOUGHT STOCKS PULL BACK ON RISING VOLUME AND MAY BE FORMING SHORT-TERM TOP
COMMODITIES FALL WITH THE EURO... This morning's message showed the U.S. Dollar turning up from an oversold condition. When the dollar rallies, foreign currencies fall -- the most important being the Euro. Chart 1 shows the Euro Trust tumbling 1.7% today on rising volume. The Commodity Channel Index (green line) has fallen from overbought territory to the lowest level in more than a month. That shows that the short-term trend of the Euro has turned down. The same is true of commodities which are tracking the Euro very closely (since both move opposite the dollar). Chart 2 shows the DB Commodities ETF (DBC) falling 2.7% today. Its CCI (black line) is also tumbling. Gold has taken one of the hardest hits. Chart 3 shows the Gold Trust (GLD) falling the equivalent of $40 and it has done so on rising volume. The CCI for GLD has turned down as well. Chart 4 shows the United States Oil Fund (USO) tumbling 4.4% on rising volume. The USO is backing off from resistance at its 200-day average. As a result, basic materials (including gold) and energy stocks were the day's weakest groups. Stocks in general suffered profit-taking as well.
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Chart 1
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Chart 2
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Chart 3
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Chart 4
FINANCIALS FAIL AGAIN ... Yesterday's impressive bounce in the financial sector gave way to more selling today (Chart 5). Unfortunately, that selling began right at its 200-day moving average (red arrow). The biggest weight on the XLF came from Bank of America which fell to another low (Chart 6). Downside volume this week has been especially heavy. One financial bright spot was Goldman Sachs. Chart 7 shows that stock breaking through its August high and 200-day average on rising volume. Financials weren't among the day's weakest groups. Today's selling, however, didn't help matters in an over-extended stock market reacting to a rising dollar and tumblng commodities.
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Chart 5
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Chart 6
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Chart 7
NASDAQ LOOKS RIPE FOR A CORRECTION... Since the Nasdaq 100 has risen further than any other index, it's become the most overbought. Chart 8 shows the 14-day RSI line for the Power Shares QQQ Trust "double topping" from overbought territory over 70. That formed a "negative divergence" from the recent price high, and set the stage for today's downturn in the QQQQ. The fact that the QQQQ is also pulling back from its upper Bollinger band and fell today on rising volume aren't good signs either. In other words, the QQQQ was due for a pullback and it appears that one has started. The first line of defense is its 20-day average (middle line). If that doesn't hold, more substantial support likely near its lower band and its early October low just above 48.
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Chart 8
OVERBOUGHT NYSE PULLS BACK ON RISING VOLUME... I applied daily Bollinger bands to the S&P 500 this morning. I'm showing the NYSE Composite Index this afternoon. The fact that the NYSE is selling off from its upper band on rising volume is a warning sign of a short-term downturn. In an uptrend, prices usually fluctuate between the upper band and its 20-day average (middle line). If and when that middle line is broken, prices can then fall all the way back to their lower band. In this case, the lower band coincides roughly with important chart support along the summer highs. It's important that any downside correction stay above those summer highs. The bad news is that the recent uptrends in stocks and commodities are weakening which calls for more caution over the short run. The good news is that may provide better entry points at lower levels.
