BEARISH DOLLAR TREND IS HELPING GLOBAL STOCKS AND COMMODITIES BOUNCE OFF THEIR 200-DAY AVERAGES -- TREASURY PRICES ARE BACKING OFF SHARPLY FROM OVERHEAD RESISTANCE -- IT'S TIME FOR SUMMER RALLY WHICH ARGUES FOR A STRONGER JULY

DOLLAR WEAKENS IN BEARISH CONSOLIDATION PATTERN... The U.S. Dollar Index continues to move sideways in what appears to be a bearish consolidation pattern. Chart 1 shows the June rally in the DB Bullish Dollar ETF (UUP) falling well short of its May peak. That increases the odds that the UUP is in a potentially "triangular" formation which, in this case, would eventually result in a new bear market low. At the same time, foreign currencies are doing just the opposite. Chart 2 shows the Euro marking time between its May peak and trough. The rising 200-day average (red line) shows the Euro to still be in major uptrend. That increases the odds that the Euro is in a bullish consolidation pattern. A stronger Euro/weaker dollar would have important intermarket implication in other currencies and commodities.

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Chart 1

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Chart 2

CANADIAN DOLLAR AND COMMODITIES MAY BE BOTTOMING ... One of the foreign currencies hit the hardest since May has been the Canadian Dollar. I suspect that's the result of its close correlation to commodity prices which have also been correcting. Chart 3 shows that the May peak in the CAD coincided exactly with the peak in commodities (upper line). After peaking together in May, there's now a good chance that both are now bottoming together. Chart 3 shows that the CAD has reached potential major support at its 200-day moving average. That suggests to me a couple of things. One that the correction in the CAD is probably over (which would be bearish for the U.S. Dollar). The other is the correction in commodity prices may be over as well. Chart 4 shows the DB Commodities Tracking ETF (DBC) also bouncing off its 200-day line. The possibility of a bottom is enhanced by the oversold condition in the Commodity Channel Index (CCI) which is below Chart 4 and also shows positive divergence. A rebound in commodities (and foreign currencies) would also be positive for global stocks, most of which are also finding support near their 200-day averages.

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Chart 3

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Chart 4

US STOCK INDEXES ARE ALL BACK OVER 200-DAY LINE... The 200-day moving average continues to act as a major support level for U.S. stock indexes. Chart 5 shows the S&P 500 having bounced twice off that (red) support line over the last week. A close above last week's intra-day peak at 1298 would confirm a short-term bottom. Daily MACD lines (below chart) have turned positive for the first in nearly two months. The Nasdaq Composite and NYSE Composite Indexes had slipped slightly below their 200-day lines last week. Both, however, found support at their March lows and are back over their 200-day averages. It's also encouraging to see the Nasdaq actually leading the current bounce. The Nasdaq/S&P 500 relative strength ratio (below Chart 6) has been rising over the last week after leading the SPX lower since the start of May. The ability of the NYSE Composite Index in Chart 7 to start rallying suggests that basic material stocks are also bottoming.

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Chart 5

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Chart 6

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Chart 7

ENERGY AND MATERIALS ARE BOUNCING... Material and energy stocks are closely tied to commodity trends. Chart 8 shows the Materials Select SPDR (XLB) rallying off its March low/200-day average. The XLB/SPX ratio (below chart) is starting to rise again as well. Chart 9 shows Oil Service Holders (OIH) bouncing off their 200-day average. The CCI line (below chart) shows an oversold market condition. A bottom in these two stock sectors would imply a bottom in commodities and stocks as well. Both would imply a weaker dollar.

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Chart 8

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Chart 9

FOREIGN STOCKS REGAIN 200-DAY LINES... Foreign stock ETFs are also regaining their 200-day lines. Chart 10 and 11 show EAFE iShares (EFA) and Emerging Markets IShares (EEM) trading back over those lines today. They're gaining some strength from the weaker dollar. I've explained before that a rising dollar (since the start of May) has hurt foreign ETFs more than the U.S. That can be seen in their falling relative strength lines versus the S&P 500 (below both charts). That being the case, a weaker greenback would lend even more support to foreign shares.

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Chart 10

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Chart 11

TREASURIES WEAKEN FROM RESISTANCE... A couple of weeks ago (June 16), I showed the 7-10 Year T-bond iShares (IEF) nearing overhead resistance at last October's high near 98, and warned that Treasuries could stall at that barrier and maybe even weaken. I suggested that bond prices were even more vulnerable if and when stocks started to rally. Well, stocks are rallying again. And Chart 12 shows the IEF falling sharply from that overhead resistance barrrier. The CCI line (top of chart) has fallen below the zero line for the first time since mid-April. Falling bond prices are consistent with higher stock and commodity prices.

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Chart 12

IT'S TIME FOR THE SUMMER BOUNCE... According to the Stock Trader's Almanac, the so-called "summer rally" normally starts between late June and early July (like right now) and normally makes July the strongest month in the third quarter. Unfortunately, the summer rally is normally the smallest of the seasonal rallies and is often followed by another downturn in the autumn. So while the short-term trend in stocks is stronger, and a summer bounce appears likely, some caution is still warranted until the more dangerous autumn season has passed.