FINANCE ETF AND REGIONAL BANK SPDR EXTEND ON BREAKOUTS -- BOND VIGILANTES HIT US TREASURIES -- RISING INTEREST RATES ARE DOLLAR POSITIVE -- BUT DOLLAR GAINS ARE LIMITED -- US DOLLAR INDEX VERSUS US DOLLAR FUND
FINANCE ETF AND REGIONAL BANK SPDR EXTEND ON BREAKOUTS... Link for todays video. The Finance SPDR (XLF) and the Regional Bank SPDR (KRE) both broke resistance last week and continued higher on Wednesday. These two were featured with daily charts in the December 1st Market Message as they gapped through resistance. Today we will look at weekly charts for a longer perspective. Chart 1 shows XLF holding support just above 14 and surging above 15 the last two weeks. It is now possible to draw a trendline connecting the August-November lows. I drew another trendline parallel to this trendline and it extends to 17 in mid February. The next resistance area around 17 is confirmed by the April highs. The November lows mark key support and a break below this level would fully reverse the uptrend on the weekly chart. Also notice that CCI bounced off the zero line and this level marks support for momentum.
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Chart 1
Chart 2 shows the Regional Bank SPDR (KRE) exceeding its November high today. In this regard, regional banks are leading the big money center banks. KRE broke falling wedge resistance way back in September and this breakout largely held. The surge over the last two weeks shows a renewed increase in upside momentum that is bullish. The late November lows mark key support. The indicator window shows CCI bouncing near the zero line twice and ultimately holding (green arrows). A move below these reaction lows would turn momentum bearish.
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Chart 2
BOND VIGILANTES HIT US TREASURIES... The bond vigilantes made it known that they are not impressed with recent events. While proposed legislation will surely stimulate the economy, it comes at the expense of the deficit. Stocks are interested in the economy. Bonds are interested in the deficit and the ability to pay for it. The market realizes that debt will increase when spending increases and revenues decrease. More debt means more bonds and bonds will come under pressure should supply increase. John Murphy noted weakness in bonds on Tuesday and the decline extended on Wednesday. Even though bonds are getting oversold, long-term support levels are still a ways of and there could be further room to fall. Chart 3 shows the 20+ year Bond ETF (TLT) breaking support at 100 in late October and moving below 93 today. CCI broke into negative territory in late October and has been oversold throughout November. This is a classic case of becoming oversold and remaining oversold. Broken resistance around 89-90 marks the next support zone. Chart 4 shows the 7-10 year Bond ETF (IEF) breaking support in early November and plunging the last two weeks. Even though the ETF is oversold, the next support zone is around 92. This stems from the 62% retracement and the May-June consolidation.
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Chart 3
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Chart 4
RISING INTEREST RATES ARE DOLLAR POSITIVE ... The Dollar got a bounce on Tuesday as bonds fell sharply and interest rates moved sharply higher. Chart 5 shows the 10-year Treasury Yield ($TNX) with the US Dollar Index ($USD) over the last 16 months. Notice how the 10-year Treasury Yield (red) bottomed two months ahead of the Dollar (green) in October 2009, peaked two months ahead of the Dollar in April 2010 and has now bottomed ahead of the Dollar in October 2010. This time the Dollar bottomed a month afterwards with a low in early November. Both have been moving higher the last five weeks.
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Chart 5
BUT DOLLAR GAINS ARE LIMITED... Even though rising interest rates and economic stimulus are Dollar positive, todays move in the Dollar was not that impressive, especially with rates moving sharply higher. The US Dollar Fund (UUP) was trading near unchanged in afternoon trading. Perhaps the vigilantes are preparing for a move from the Euro to the Dollar. The Euro was hit hard in November because of debt concerns with peripheral Europe. Tax cuts and extended benefits are counter-productive when it comes to the deficit and US debt. As with the Euro and its debt issues in November, debt issues may come to the forefront for the Dollar. Chart 6 shows the Dollar breaking resistance in mid November and broken resistance turning into support around 22.75. RSI also broke above its 50-60 resistance zone and the 40-50 zone becomes support. Failure to hold the November breakout would be negative for the greenback. A move below 22.75 in UUP and 40 in RSI would be bearish. Chart 7 shows the Euro Currency Trust (FXE) for reference. The Euro makes up over 50% of the US Dollar Index and Dollar ETF.
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Chart 6
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Chart 7
US DOLLAR INDEX VERSUS US DOLLAR FUND ... Which is better for analysis? The US Dollar Index ($USD) or the US Dollar Fund (UUP)? Sometimes it is better to analyze the actual underlying security instead of the ETF. This is true for oil and natural gas. Other times, the underlying security and the ETF closely matches and chartist can use the ETF for analysis. This true for the US Dollar Fund (UUP) and the Gold SPDR (GLD). The components of the US Dollar Fund match those of the US Dollar Index. As chart 8 shows, these two trade step-for-step. Chartists just need to overlay the two price plots to see if there is a good match or not.
