FRENCH AND GERMAN STOCKS SUCCUMB TO HEAVY SELLING IN SPAIN AND ITALY -- GERMAN DAX GAPS LOWER AND BREAKS 50-DAY LINE -- IT'S IMPORTANT THAT THE DAX STAY ABOVE ITS JUNE LOW -- S&P 500 RETESTS 50-DAY AVERAGE -- GOLD AND TREASURIES ATTRACT SAFE HAVEN BUYING
SPAIN AND ITALY PULL REST OF EUROPE LOWER... European debt problems have spread to Spain and Italy which are pulling the rest of Europe (and global stocks) lower today. The four lines in Chart 1 the two of the day's weakest European stock markets (Italy and Spain) starting to weigh on two of the strongest (Germany and France). We showed Spain and Italy this morning. Let's take a look at France and Germany this afternoon.
Chart 1
FRENCH AND GERMAN STOCKS WEAKEN... French and German stocks finally succumbed to sharply lower prices in the rest of Europe. Of those two, France was the weaker performer. Chart 2 shows the French CAC 40 Index tumbling 2.7% to break its 200-day moving average. The CAC is also bearing down on its June intra-day reaction low at 3742. A drop below that level would be very negative. Germany has been the relative pillar of European strength. Chart 4, however, shows the German DAX Composite gapping 2.3% lower today to break its 50-day moving average. The inability of the DAX to overcome its May peak may also be a dangerous warning signal of a deeper correction. So far, the DAX remains well above its June lows and its 200-day moving average. From a chart standpoint, it's very important that the DAX not break its June low (and 200-day line) near 7000. Chart 4 shows why. The weekly bars in Chart 4 show that the 40-week (200-day) average (red line) has contained every downside correction since spring 2009. The DAX has also maintained a cointinual pattern of "higher highs and higher lows" during those two years. A decisive violation of the June low would be the first serious interruption of that bullish trend. The relative strength ratio above Chart 4 measures the DAX against the Dow Jones World Stock Index (DJW), and shows that Germany has been strong global performer during 2011. The world can't afford to lost that leadership.
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Chart 2
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Chart 3
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Chart 4
DOLLAR RALLIES ON EURO SELLING... Chart 5 shows the Euro Trust (FXE) tumbling 1.6% today and closing just below its mid-June low at 140.55. Trading was heavy. The FXE is trading dangerously close to its 200-day average. As a result, the U.S. Dollar had a good chart day. Chart 6 shows the U.S Bullish Dollar Fund (UUP) closing just above its June intra-day peak at 21.68. Volume also expanded. Unfortunately, that combination pushed most stocks and commodities lower. Gold rallied because of its safe haven status. Treasuries did the same.
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Chart 5
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Chart 6
GOOD AND BAD NEWS... The bad news today was the 1.8% drop in the S&P 500 Index. Chart 7 shows the SPX closing right on its 50-day moving average. Stock selling produced bond buying. Chart 8 shows the 7-10 Year Treasury Bond ETF (IEF) climbing on the day. [High yield corporates which track the stock market were the only bond losers]. Chart 9 shows Gold Trust Shares (GLD) climbing as well. Gold stocks sold off however.
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Chart 7
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Chart 8
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Chart 9
ITALIAN STOCKS LOST 6%... Italy was Europe's worst performing market today (Spain wasn't far behind). Chart 10 shows Italy iShares (EWI) tumbling to the lowest level in seven months in very heavy trading. It's pretty tough for any region (like Europe) or other global stocks to withstand that big a drop. I hope the folks in Washington are paying attention to what can happen to a country's stock market when debt problems get out of control.
