S&P 500 ETFS BREAK SUPPORT WITH SHARP DECLINE -- STRONG DOLLAR IS NEGATIVE FOR STOCKS AND POSITIVE FOR TREASURIES -- GOLD REVERSES AT KEY RETRACEMENT -- STRONG DOLLAR WEIGHS ON SILVER
S&P 500 ETFS BREAK SUPPORT WITH SHARP DECLINE... Link for todays video. The S&P 500 ETF (SPY) and the Rydex S&P Equal Weight ETF (RSP) both broke support with sharp declines early Monday. SPY is based on the traditional S&P 500, which is weighted by market capitalization. RSP, on the other hand, is based on an equal weight S&P 500, which means each stock is weighted the same. The market-cap based SPY favors large-caps, while the equal-weight RSP favors small and mid-caps. Chart 1 shows SPY breaking below its early November low with a gap down. This means the October breakout failed to hold. In addition, note that a lower high now formed in October because SPY fell well short of its summer highs. Combined with the big support break in August, this lower high suggests that a long-term downtrend is in play. The August-October lows mark the next support zone in the 108-110 area. The indicator window confirms the recent trend reversal as Aroon Down (red) surged above Aroon Up (green) and reached 100. See our ChartSchool Article for more on Aroon.
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Chart 1
Chart 2 shows the Rydex S&P Equal Weight ETF forming a lower high around 48 and moving back below its October breakout. Also notice that broken support turned into resistance in this area. The indicator window shows the Rydex S&P Equal Weight ETF relative to the S&P 500 ETF. RSP underperformed from July to September, but outperformed during the October surge. The Price Relative turned down again in November and it looks like RSP could be heading for another round of underperformance. With small and mid-caps more sensitive to the domestic economy, relative weakness in these stocks is a negative for the market overall.
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Chart 2
STRONG DOLLAR IS NEGATIVE FOR STOCKS AND POSITIVE FOR TREASURIES... The US Dollar Fund (UUP) extended its advance with another gain early Monday. Chart 3 shows UUP suddenly reversing course at the end of October and breaking channel resistance in early November. Even though this decline was steep, the ETF formed a higher low by remaining above the August lows. Also note the big breakout in September. The combination of a breakout in September and higher low in October indicates that an uptrend is currently underway in the greenback. A move above the October high is expected in the coming weeks or months.
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Chart 3
How would a strong Dollar affect other markets? The indicator windows show the Correlation Coefficient for the Dollar and three other assets (stocks, gold and treasuries). I added a 20-day SMA to this indicator for further smoothing. The Dollar is negatively correlated with stocks and gold. This means strength in the Dollar is bearish for stocks and gold. We can also infer that stocks and gold are positively correlated. In contrast, the Dollar is positively correlated with Treasuries, which means strength in the Dollar is bullish for Treasuries.
Chart 4 shows weekly candlesticks for the US Dollar Fund. This long-term perspective allows chartists to see targets that are further out. The next big resistance zone on the weekly chart resides in the 23.25-23.50 area. This zone stems from the November 2010 and January 2011 highs as well as the 50% retracement. The indicator window shows RSI breaking resistance in September and holding the 40-50 zone on the October decline. RSI remains bullish as long as it holds above 40.
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Chart 4
GOLD REVERSES AT KEY RETRACEMENT... The Gold SPDR (GLD) is following the stock market with a sharp decline and support break over the last few days. Chart 5 shows GLD hitting resistance around 175 from the 61.80% retracement. The ETF broke below support with a sharp decline on Thursday and then consolidated on Friday. Further weakness today is keeping the support break alive. The indicator window shows the Commodity Channel Index (CCI) breaking the trendline extending up from mid September and moving into negative territory. This momentum oscillator is now in bear mode.
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Chart 5
Despite a negative outlook on the daily chart, the weekly chart shows gold still in an uptrend. Chart 6 shows Spot Gold ($GOLD) still within a long rising channel. There is a lot of support in the 1600 area from the lower trendline and the October lows. On the GLD chart above, the October lows mark support in the 155 area. These October lows mark the next big test for bullion.
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Chart 6
STRONG DOLLAR WEIGHS ON SILVER... Chart 7 shows the Silver Trust (SLV) breaking channel support with a sharp decline below 31. Even though the ETF rebounded on Friday, further weakness on Monday kept the support break alive. Overall, the trend since May is down with lower highs in August and now in November. The recent channel breakdown signals a continuation of the September decline and targets a move to the next support zone around 26.
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Chart 7
Silver is part industrial metal and part precious metal. The industrial side has been weighed down by recent weakness in the stock market, while the precious metal side has been weighed down by recent weakness in gold. Strength in the Dollar can also be blamed for weakness in Silver. Notice that Silver and the Dollar have been negatively correlated since early March. There were a few blips into positive territory, but the Correlation Coefficient has spent most of its time in negative territory. The blue line is the 20-day SMA of the Correlation Coefficient. This average has been in negative territory since early March.
Chart 8 shows weekly prices for Spot Silver ($SILVER). The pink trendlines capture the current falling channel and the lower trendline extends to the 26 area by yearend. Further down, broken resistance turns into support around 20. In the indicator window, Aroon Down crossed above Aroon Up in mid July. The Aroon indicators have been bearish for four months, and will remain bearish until Aroon Up crosses above Aroon Down.
