FALLING EURO PUSHES DOLLAR ABOVE 50-DAY AVERAGE -- DOLLAR INDEX BOUNCES OFF LONG-TERM SUPPORT -- COMMODITIES FALL TOWARD OCTOBER LOWS -- CHINA LEADS EMERGING MARKET RETREAT -- US STOCK INDEXES HEAD TOWARD TEST OF 50-DAY LINES
FALLING EURO SUPPORTS DOLLAR UPTURN... Stocks and commodities are in retreat today and a lot of the reason has to do with trends in currency markets -- especially the Euro and the dollar. Chart 1 shows the Euro slipping below its 50-day moving average for the first time in two months. Euro weakness translates into dollar strength (because the Euro accounts for half of the value of the US Dollar Index). Not surprisingly, Chart 2 shows the Power Shares Dollar Bullish Fund (UUP) trading above its 50-day line and exceeding the highs formed during October. While that in itself doesn't indicate a major upturn in the dollar, Chart 3 is also supportive to the greenback. The weekly bars in Chart 3 show that the UUP is bouncing off potential long-term chart support formed durng 2008 and 2009 near 22. That doesn't suggest a major bottom either. But it is reason enough to suspect that the dollar slide since the spring has ended for the time being.
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Chart 1
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Chart 2
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Chart 3
COMMODITIES ARE UNDER PRESSURE... Commodities are usually the first casualty of a rising dollar. And that's certainly the case today. Chart 4 shows the DB Commodities Tracking Fund (DBC) falling into a test of its 50-day line and October low. Chart 5 shows the Gold Trust Shares (GLD) testing their 50-day line as well. Crude oil is suffering more serious chart damage. Chart 6 shows the United States Oil Fund (USO) falling below its 200-day moving average. Copper prices (not shown) are also in retreat. That explains why commodity-related stocks (basic materials, metals, and energy) are leading the stock market lower today. Weakess in foreign shares (especially in China) are also weighing on global stocks and commodities.
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Chart 4
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Chart 5
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Chart 6
CHINA PULLS EMERGING MARKETS LOWER... Emerging markets have led the global rally that started five months ago. Today, they're leading it lower. Chart 7 shows Emerging Market iShares (EEM) testing their 50-day average and October lows. The EEM, however, remains above its April high near 43. That previous peak may, however, be retested. A lot of EEM selling is coming from China. Chart 8 shows China iShares (FXI) threatening to close below its 50-day line and October low. The FXI is also in danger of slipping below its April high near 44. Needless to say, any downturn in the Chinese market is bad for global stocks and commodities. One can't help but be struck at the similarity of all of the chart patterns shown thus far and the number of 50-day lines that are being broken or tested. The U.S. market appears headed for a test of that same support line.
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Chart 7
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Chart 8
S&P 500 BREAKS 20-DAY LINE... My message yesterday morning warned that a break of the 20-day moving average by the S&P 500 (and Nasdaq) would turn their short-term trends lower and signal a test of their 50-day lines. The 20-day line is being broken today in pretty decisive fashion in the SPX as shown in Chart 9. That sets up a likely test of its 50-day line (currently at 1165). That would also retrace about a third of its August/November rally which isn't unusual. From a longer-term perspective, a more important support zone is the August high which happens to coincide with the (red) 200-day average. Chart 10 shows why. The recent rally moved slightly above its April high (but not enough to qualify as a major upside breakout). The inability of the SPX to hold that gain is worrisome, but not necessarily fatal to the ongoing bull market. A retracement of the rally off the July low is not unexpected given the market's short-term overbought condition (see RSI line on top of Chart 10). The autumn uptrend was initiated when the market broke through its August high to complete a "head and shoulders" bottom. For the market uptrend to be maintained, however, it's essential that it remain above the "neckline" drawn over the June/August highs (which would retrace half of the September/November rally). As long as the neckline holds, the current downturn will qualify as a correction in an uptrend. I lean toward that view. Let's hope that the neckline holds.
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Chart 9
