MARKETS MOVING BACK TOWARDS RISK-OFF TRADE -- US GETS DOWNGRADE AND EURO DECLINES -- BOND ETFS EXTEND RALLY AS MONEY MOVES OUT OF STOCKS -- QQQQ FORMS A BIG HAMMER AT KEY RETRACEMENT -- DOW BACKS OFF HIGHS WITH MACD DIVERGENCE

MARKETS MOVING BACK TOWARDS RISK-OFF TRADE... Link for todays video. The risk-off trade is making a comeback. A risk-on environment favors stocks, commodities (economic growth) and the Euro (debt stability). Conversely, a risk-off environment favors Treasuries (weak economy) and the Dollar (safety). Stocks and commodities perform poorly in a risk-off environment. Gold seems to thrive in either environment. Chartists can use John Murphys intermarket PerfChart to assess the current environment. PerfChart 1 shows a clear risk-on environment from late August to mid February. Stocks (S&P 500) and commodities ($CRB) were up sharply, while the US Dollar Index ($USD) and US Treasuries ($USB) were down.

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Chart 1

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Chart 2

To see how the environment changed, chartists can look at this same PerfChart from mid February to the present. Use the slider at the bottom of the PerfChart to adjust the date range. PerfChart 2 shows that stocks are down and commodities are up, while the Dollar is down and Treasuries are up. The risk on-off evidence is mixed at this point. Weakness in stocks and strength in bonds favors risk-aversion. However, we are still seeing strength in commodities and weakness in the Dollar. Therefore, the risk-off trade is not completely here just yet. Today marked another move in the direction of the risk-off trade as money moved into Bonds and the Dollar, but out of Stocks and Commodities. Strength in the Dollar could be the big news here.

US GETS DOWNGRADE AND DOLLAR ADVANCES... Now theres a rather peculiar headline. Standard & Poors downgrade of US debt was supposedly the big news today. However, rating agencies are really not known for their forecasting prowess so I would not read too much into this. Stocks were already heading into a weak open before the announcement. Moreover, it is quite interesting that the Dollar advanced today and Treasuries moved into positive territory after a weak open. While I am not ready to call for an end to the Dollar downtrend just yet, todays Dollar advance in the face of negative news is worth noting. Chart 3 shows the US Dollar Fund (UUP) stalling last week and surging above 21.50 today. This bounce is occurring well below the June trendline and broken support. These two combine to mark resistance in the 22-22.25 area. Follow through above this level is needed before taking todays bounce as more than just an oversold bounce. Chart 4 shows the Euro Currency Trust (FXE) failing to hold the recent break above 142 and falling over 1% today. The Euro makes up over 55% of the US Dollar Index and the US Dollar Fund so we best watch this one closely for clues on the greenback.

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Chart 3

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Chart 4

BOND ETFS EXTEND RALLY AS MONEY MOVES OUT OF STOCKS... As noted above, the Dollar and the Treasuries are benefitting from a flight to safety or a move to the risk-off trade. Standard & Poors put the risk burden on US debt, but currency and bond markets voted otherwise. At least for today. We all know that currencies are traded in pairs. The Dollar is quoted against other currencies or as the US Dollar Index, which is based on a basket of currencies. In a similar vein, debt is viewed in relative terms. US debt is compared to other sovereign debt (Germany, Belgium, Greece, Spain, France, Japan, Canada). Bloomberg reported today at the yield on 2-year Greek bonds surged to 20% and Portuguese default insurance traded at record levels today. These concerns appear to be overriding the US downgrade. Chart 5 shows the 7-10 year Bond ETF (IEF) continuing its run with a move above 93.5 today. Chart 6 shows the 20+ year Bond ETF (TLT) moving higher after a weak open to form a white candlestick.

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Chart 5

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Chart 6

QQQQ FORMS A BIG HAMMER AT KEY RETRACEMENT ... Despite a move towards the risk-off trade, one could not help but notice the recovery in stocks and the strong close in the Nasdaq 100 ETF (QQQQ). After a weak open and deep intraday decline, chart 7 shows QQQ rally back to close near the high for the day and forming a hammer. These are bullish candlestick reversals that form in a short-term downtrend. Hammers have small bodies, white or black, that form at the top of the days high-low range. Todays white body is even more positive because it shows the ETF closing above the open. Also notice that QQQ firmed for three days at the end of last week. For now, the short-term trend remains down though and some follow through is required to confirm the hammer. A move above Wednesdays high would do the trick. Chartists can also watch short-term momentum. StochRSI moved below .50 to turn short-term momentum bearish. A break above this centerline would be positive for momentum.

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Chart 7

DOW BACKS OFF FEBRUARY HIGHS WITH MACD DIVERGENCE ... The Dow Industrials made a valiant run back to its February highs at the end of March, but could not forge a breakout and pulled back sharply today. Chart 8 shows the Dow with a potential double top in the works. Keep in mind that it is still very early in the double top process. The March low marks double top support and it would take a break below this level to fully confirm the double top. At this point, the Dow remains around 250 points from its prior highs and well above the late August trendline. The big trend remains up and this double top is just potential.

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Chart 8

The indicator windows show MACD and RSI with some old-school bearish divergences. We really dont need two momentum oscillators because these show basically the same information (momentum). A bearish divergence forms when the security moves to a higher high (closing) and the indicator fails to confirm by forming a lower high. This lower high shows less upside momentum on the second advance. The subsequent decline and move below the signal line confirmed the bearish divergence in MACD. An upturn in MACD and move back above the signal line would negate this bearish divergence signal. Before getting too bearish on this signal, keep in mind that the divergence simply shows less UPside momentum, not actual DOWNside momentum. A move into negative territory is needed to show real downside momentum.