DOLLAR HOLDS SUPPORT TO KEEP BREAKOUT ALIVE -- GOLD ETF RETRACES 62% WITH FALLING WEDGE -- BOND ETFS HIT POTENTIAL SUPPORT LEVELS -- OVER 50% OF SPX STOCKS REMAIN ABOVE THEIR 50-DAY SMAS -- NASDAQ 100 %ABOVE 50-DAY SMA FORMS DIVERGENCE
DOLLAR HOLDS SUPPORT TO KEEP BREAKOUT ALIVE... Link for todays video. The US Dollar Fund (UUP) took a hard hit at the beginning of December, but ultimately held support and formed a potentially bullish wedge the last few weeks. Before looking at daily price action, lets review the long-term trend with the weekly chart. Chart 1 shows UUP breaking the June trendline with a surge above 23 in mid November. Despite a long red candlestick and sharp decline three weeks ago, the ETF firmed the last two weeks and the breakout is holding. Long-term momentum also remains bullish as the histogram for MACD(5,35,5) remains in positive territory. The histogram is positive when MACD(5,35,5) is above its signal line. I adjusted the normal MACD settings (12,26,9) to make it more sensitive for weekly prices.
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Chart 1
Chart 2 shows a shorter timeframe with UUP bouncing off broken resistance. A falling wedge formed over the last three weeks as the ETF retraced 38-50% of the November surge. Shorter retracements are more bullish than longer retracements because they reflect less selling pressure on the pullback. Even so, the wedge is still falling with last weeks highs marking resistance just above 23.20. UUP is challenging this resistance level today and a break would signal a continuation of the November advance.
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Chart 2
GOLD ETF RETRACES 62% WITH FALLING WEDGE... The Dollar and gold have been moving together since mid November. Both advanced and the declined with falling wedges in December. Keep an eye on this relationship. Chart 4 shows GLD retracing 62% of the prior advance with a falling wedge. Since the surge from late July to mid October, the ETF has started zigzagging higher with higher highs and higher lows the last few months. The most recent pullback retraced around 62% of the advance from mid November to early December. In addition, support from the October trendline is coming into play soon. This could be a bullish setup for bullion. A break above wedge resistance would signal a continuation high.
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Chart 3
There is little doubt that gold remains in a long-term uptrend. Chart 3 shows the Gold SPDR (GLD) moving from the lower left of the chart to the upper right with a steady advance since 2009. A rising price channel is taking shape and the upper trendline extends to the 155 area early next year. This implies a pretty sharp advance though.
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Chart 4
BOND ETFS HIT POTENTIAL SUPPORT LEVELS... Its been one heck of a run in the bond market over the last 3-4 months. The 30-year Treasury Yield surged from 3.5% to 4.5% and the 10-year Treasury Yield advanced from 2.4% to 3.5%. Big advances in treasury yields translate into big declines for bonds. Even though bonds are in a clear downtrend over the last few months, the declines are reaching potential support levels that could give way to a bounce or consolidation. Here are some methods to estimate support levels. First, use the Fibonacci Retracements Tool to see if prices are near any key retracement levels (38%, 50% and 62%). Second, look for prior broken resistance levels that might turn into support. Third, try to draw a trendline connecting the reaction lows and extend down. Chart 5 shows the 7-10 year Bond ETF (IEF) with a support zone around 92. This zone stems from the 50-62% retracement zone, broken resistance and the May-June consolidation (yellow area).
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Chart 5
Chart 6 shows the 20+ year Bond ETF (TLT) hitting potential support around 90. The Fibonacci Retracements Tool shows the 62% retracement around 94. The ETF bounced off this level, but broke below it with the December decline. Looking for another support level, I turned to broken resistance and the trendline extending down from the September-November lows. These two combine to mark support around 90. With bonds oversold and near potential support, we could see an oversold bounce or a consolidation.
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Chart 6
OVER 50% OF SPX STOCKS REMAIN ABOVE THEIR 50-DAY SMAS, ... StockCharts.com provides breadth indicators that show the percentage of stocks in a certain index that are above a certain moving average. Users can plot lines for the percentage of stocks that are above the 50-day, 150-day and 200-day moving averages for seven difference indices. These include the Dow, Nasdaq, Nasdaq 100, NYSE, S&P 100, S&P 500, and S&P/TSX Composite. Search in the symbol catalog for stocks above or click here to see a symbol list.
The percentage of stocks above a certain moving average is a breadth indicator designed to measure the degree of participation. At their most basic, these indicators have a bullish bias when more than 50% of stocks are above a specific moving average. A bearish bias is present when less than 50% of stocks are above a specific moving average. These indicators can also be used to look for overbought/oversold levels or bullish/bearish divergences.
Chart 7 shows the S&P 500 %Above 50-day SMA ($SPXA50R) with a green line at 55%, a blue dotted line at 50% and a red line at 45%. Often there are many crosses above/below the zero line and we need to apply a filter to reduce whipsaws. Raising the bullish threshold to 55% and the bearish threshold to 45% reduces false signals. The signals are a little later though.
As the chart now stands, the indicator is in bull mode overall. However, a bearish divergence is taking shape as the indicator remains below its prior high. This tells us that fewer stocks are above their 50-day SMA now than in mid October, when the S&P 500 was trading around 1180. The index closed above 1240 on Thursday. Even though the S&P 500 is up some 5% the last two months, fewer are participating in the rally. Even though participation is narrowing, around 78% of S&P 500 components are still above their 50-day SMAs, which is enough to stay bullish overall. A break below the bearish threshold at 45% would be the first bearish signal.
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Chart 7
NASDAQ 100 %ABOVE 50-DAY SMA FORMS DIVERGENCE... Chart 8 shows the Nasdaq 100 %Above 50-day SMA ($NDXA50R) with a similar pattern at work. The indicator peaked above 90% in early-mid October and remains well below this high for a bearish divergence. The blue arrows mark prior peaks above 90%. Even though this indicator tends to peak before the market, a decline does not gather steam unless the indicator breaks below 45%. In other words, the cup is still half full when above 50%.
