DOLLAR WEAKNESS GIVES BOOST TO COMMODITIES AND THEIR SHARES -- GDX RETESTS 200-DAY LINE -- HIGH YIELD BONDS ARE CLOSELY TIED TO STOCKS -- NASDAQ 100 AND S&P 500 ATTEMPT REBOUND FROM CHART SUPPORT AND OVERSOLD LEVELS
DOLLAR INDEX DROPS TO THREE-YEAR LOW... Traders continue to sell the U.S. Dollar. In yesterday's trading, the dollar fell to a 20-year low against the Japanese yen. Today, it's falling against everything else. More importantly, the greenback is breaking important support levels. Chart 1 shows the PS Bullish Dollar Index (UUP) falling to the lowest level in three years. One of the side-effects of a falling dollar is stronger commodities and shares tied to them. Right on cue, both are bouncing. Chart 2 shows the DB Commodities Tracking Index Fund (DBC) bouncing off its 50-day moving average (blue line) and gaining 2%. Virtually all individual commodities are bouncing today. As are shares related to them. Chart 3 shows the Energy Sector SPDR (XLE) bouncing off its 50-day line. Precious metal shares are also rebounding.
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Chart 1
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Chart 2
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Chart 3
PRECIOUS METAL SHARES BOUNCE OFF MOVING AVERAGE LINES... Chart 4 shows the Global X Silver Miners ETF (SIL) starting to bounce off its 50-day line. Silver stocks have acted much stronger than gold shares since mid-January. Gold shares, however, may present a bargain at current levels. Chart 5 shows the Market Vectors Gold Miners ETF (GDX) bouncing for the second time this year from its 200-day moving average line. For those investors who've been waiting for a cheaper entry point for gold shares, this may be it.
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Chart 4
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Chart 5
HIGH YIELD BONDS SELLOFF WITH STOCKS ... While it's true that most bond categories (especially Treasuries) bounced sharply this week on the global stock selloff, high yield bonds dropped. That's because high yield bonds are more closely tied to stocks than bonds. Chart 6 shows the iShares High Yield Bond ETF (HYG) falling below its 50-day moving average on Tuesday which turned its short-term trend lower. The chart also shows, however, that the HYG is trying to rebound from potential chart support along its November high (see line). [A prior peak (like November) often acts as support on subsequent downside corrections. In other words, prior resistance becomes new support (see arrows)]. In addition, the 14-day RSI (below chart) has reached oversold territory at 30. Stocks are attempting a rebound as well.
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Chart 6
NASDAQ 100 AND S&P 500 BOUNCE OFF SUPPORT... Major U.S. stock indexes are also trying to bounce off chart support levels. Chart 7 shows the PowerShares QQQ Trust (QQQQ) trying to bounce off its November low (just like the high-yield bond ETF). In addition, the 14-day RSI (top of chart) and the Commodity Channel (CCI) Index (bottom of chart) have reached oversold levels. The QQQQ has been the weakest of the major U.S. stock indexes (because of its heavy technology weighting) and is the first to reach potential chart support at its November high). Chart 8 shows the S&P 500 finding some chart support at its 100-day moving average (green line). The oscillator lines also show a short-term oversold condition. That doesn't necessarily mean that the downside correction is over. It does suggest, however, that the market (and junk bonds) have reached the first level of support where a bottom is possible. Prices would have to rise back above their 50-day lines to signal that the downside correction has ended. In case you're wondering where the 100-day line comes from, it's derived from weekly Bollinger bands which employ a 20-week moving average as chart support. The bars in Chart 9 show Bollinger bands superimposed on weekly bars of the S&P 500. The dashed middle line is the 20-week moving average. During uptrends, stocks usually find support at that line. Significant drops below that support line (as happened last spring) usually signal a further drop to the lower band. At the moment, the S&P is testing support at the 20-week line (blue arrow). The 20-week average translates to 100 days which is the green line in Chart 8. What all this means to me is that the near-panic wave of selling resulting from events in Japan has probably ended. Stocks and commodities have now reached levels of support from which a rally attempt may be starting. We'll need more time, however, to determine if the worst is over.
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Chart 7
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Chart 8
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Chart 9
JAPAN ETF BOUNCES OFF SUPPORT... I hesitate to even attempt a chart analysis of the Japanese market. But here goes. Chart 10 shows the collapse in Japan iShares (EWJ) this week which unsettled global market everywhere. The chart shows, however, that the EWJ may have experienced a short-term "selling climax" on Tuesday when it plunged early in the day and closed near the top of its price range on huge volume. In addition, it is trying to bounce from potential chart support along last summer's low. And the 14-day RSI line (top of chart) is in deeply oversold territory. Chartists will feel a better if it's able to climb back above its (red) 200-day line. It's certainly going to take some time to repair the severe technical damage done to the chart this week. The good news, however, is this week's panic selling may have run its course. If I'm correct on that, that should help stabilize global stock and commodity markets. The surging yen (owing mainly to repatriation of Japanese funds to rebuild that country) will only serve to weaken the dollar even further.
