DOWNTRENDS IN DOLLAR AND BOND YIELDS ARE NEAR SUPPORT AND OVERSOLD -- THAT CALLS FOR SOME CAUTION -- SO DOES THE PRESENCE OF THE SPRING HIGHS IN DOW INDUSTRIALS AND TRANSPORTS
DOLLAR TESTS 2009 LOW... The falling U.S. Dollar has been the driving force behind rising global stocks and commodities since the spring. And there's no convincing signs of any of those trends reversing (the 10- and 40-week moving averages for the dollar are still in bearish alignment). The point of this message is to simply point out that several existing trends appear have reached overbought or oversold levels. More importantly, many of them are at or near important support levels. The best example of that is the U.S. Dollar. Chart 1 shows the PS Dollar Bullish fund (UUP) trading very close to its fourth quarter 2009 low (and early 2008). At the same time, the 14-week RSI (below chart) has reached oversold territory near 30. We've pointed out over the last two weeks that the short-term dollar trend is deeply oversold and showing some signs of stabilizing. The fact that the weekly chart shows the same condition is a caution sign against being too bearish on the dollar at this juncture. The same is true of bond yields.
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Chart 1
BOND YIELDS ARE OVERSOLD... Falling bond yields since the spring have helped pull the dollar lower and Treasury bond prices higher. The weekly bars in Chart 2, however, argue against being too complacent on the rate front. They show the 10-Year Treasury Note Yield (TNX) having reached the lows of last March. At the same time, the 14-week RSI (green line) has reached oversold territory for the first time since the end of 2008 when bond yields first bottomed (see circles). That's not a convincing sign by itself that bond yields are turning up. But it is a warning against being too complacent in Treasury bonds (which rise when yields fall). Any bounce in bond yields would be negative for Treasury prices, but would be supportive to the dollar.
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Chart 2
DOW INDEXES TEST APRIL HIGHS... Although I remain positive on the direction of U.S. stocks, it should be noted that stocks have been rising in uninterruptesd fashion since August and are nearing some potential chart resistance at their spring high. That's especially true of the two key Dow Averages -- the Industrials and the Transports (Charts 3 and 4). A Dow Theory buy signal was triggered during September when both Dow Averages exceeded their August highs (green circles). Now another test of the uptrend is looming. The two horizontal trendlines on each chart show the potential support and resistance levels. Resistance is visible at the April high (pink trendline). A close above that level by both Dow Averages is needed to push the uptrend into higher gear. On any setback, support below the market is likely along the August highs (green trendline). I expect the spring highs to be broken eventually. That positive view is strengthened by the recent Golden Cross which takes place when the 50-day average crosses back over the 200-day. All I'm warning of here is the possibility of some short-term profit-taking near the spring high. That would be especially true if the dollar started to bounce. I would view any short-term pullback as another buying opportunity.
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Chart 3
