BROKEN RESISTANCE LEVELS TURN FIRST SUPPORT FOR SPY -- EUROPEAN TOP 100 INDEX TURNS DOWN AT RESISTANCE -- PORTUGUESE STOCK INDEX BREAKS WEDGE SUPPORT -- DOLLAR ETF BOUNCES OF FIBONACCI RETRACEMENT -- EURO ETF HITS RESISTANCE FROM BROKEN SUPPORT
BROKEN RESISTANCE LEVELS TURN FIRST SUPPORT FOR SPY... Link for todays video. It is no secret that stocks became overbought after big moves the last few weeks and months. While overbought conditions do not guarantee a correction, they certainly increase the odds for a correction. Chart 1 shows the S&P 500 ETF (SPY) hitting some resistance just below its 2011 highs. Also note that the ETF was quite overbought after surging from 108 in early October and 116 in late November. In fact, SPY was up over 20% from its early October low and over 13% from its late November low. Last week, 14-day RSI moved above 70 for the first time since February 2011. With resistance from the 2011 highs nearby and overbought conditions present, the ETF was and is ripe for a correction of some sort. Corrections can involve pullbacks that retrace a portion of the prior advance or sideways consolidations that simply digest gains. At this point, I am going to mark first support in the 126-128 area. Support here stems from the steep October trendline and the broken resistance levels.
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Chart 1
Chart 2 shows the Russell 2000 ETF (IWM) with similar characteristics. However, IWM is not as close to its 2011 highs as SPY. Nevertheless, the overall trend remains up and we have yet to see significant selling pressure. The most obvious concern here is that a rising wedge is taking shape. Notice the dashed gray trendline. A rising wedge is potentially bearish patterns that mark a corrective advance within a bigger downtrend, but the current trend is clearly up as long as the wedge rises. As with SPY, broken resistance and the steep October trendline mark first support in the 75-76 area. Before moving on, notice that the IWM:SPY ratio broke resistance last week. This means small-caps are starting to outperform large-caps, which is a good sign for the market overall.
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Chart 2
EUROPEAN TOP 100 INDEX HITS RESISTANCE... Chart 3 shows the European Top 100 Index ($EUR) with a large rising wedge pattern as well. In contrast IWM above, notice that this index is hitting resistance near broken support and the 61.80% retracement mark, which is what one would expect for a bearish pattern. IWM, on the other hand, exceeded broken support and its 61.80% retracement. Even though the rising wedge in EUR looks like a corrective advance, we have yet to see a significant downturn to signal that the advance has ended. Broken resistance turns first support around 210. A break below this level would provide the first sign of a reversal. The December lows mark key support and a break below this level would fully reverse the uptrend that began with the late September low. The fate of the European Top 100 Index is important to the US stock market. Notice that the Correlation Coefficient has been above .25 the last 12 months and above .75 most of the last 12 months. The European Top 100 Index and the S&P 500 are positively correlated and moving in the same direction.
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Chart 3
PORTUGUESE STOCK INDEX BREAKS WEDGE SUPPORT... Even though EU leaders are meeting to discuss Greece, the markets seem to be moving on to Portugal. Bloomberg reports that the yield on 10-year Portuguese debt hit a record 15.78% today and Portuguese credit default swaps are the second most expensive in the EU (next to Greece). The heat is also filtering into the stock market as chart 4 shows the Portuguese Stock Index ($PSI) breaking wedge support with a sharp decline the last two days. This break comes within a bigger downtrend and signals a continuation lower. The December-January highs now mark key resistance in the 5750 area. The indicator window shows the Portuguese Stock Index relative to the German DAX Index ($DAX). $PSI is underperforming $DAX as the Price Relative broke support this month and moved to new lows.
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Chart 4
DOLLAR ETF BOUNCES OF FIBONACCI RETRACEMENT... News flow centered on the Dollar last week as the FOMC decided to extend its zero interest rate policy until late 2014. Interest rates, and more importantly, prospective interests rates, are important in the Foreign Exchange (FX or Forex) world. Demand for Dollars diminishes as US interest rates decline and the prospect for low interest rates extends. Conversely, an increase in US interest rates or the prospect for higher rates could increase demand for the Dollar. Given strength in the US economy over the last few months, FX traders were probably not expecting the Fed to extend its zero interest rate policy. This surprise extended the Dollars correction. Chart 5 shows the US Dollar Fund (UUP) falling rather sharply over the last two weeks. This decline started before the Fed policy statement and continued afterwards. Despite such a sharp decline, I think the long-term trend remains up for the greenback. Notice that this decline started after the ETF recorded a 52-week high in early January. New highs are bullish and reflect underlying strength. The Dollar was overbought and the FOMC gave investors a reason to take some profits last week. Admittedly, the chart for UUP is all over the place with big downswings and even bigger upswings. The trend favors the bulls as long as the upswings are larger than the downswings. The current decline has retraced around 50% of the prior advance (late October to mid January). The early December low also marks support in the 22 area. UUP is getting a bounce today and it looks like the Eye of Sauron is turning its gaze back to the Euro (see Lord of the Rings). Chart 6 shows a long-term price chart for reference.
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Chart 5
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Chart 6
EURO ETF HITS RESISTANCE FROM BROKEN SUPPORT... Keep in mind that currencies trade in pairs, such as Euro/Dollar, Dollar/Yen, Dollar/Swissy and Pound/Dollar. When it comes to the US Dollar Index ($USD), Euro/Dollar is the key currency paring because the Euro accounts for some 57% of the index. Fundamentally traders will compare EU and US interest rates, monetary policy and economic prospects for clues on currency direction. The European Central Bank (ECB) is also pursuing a low interest rate policy and opening the monetary floodgates with their version of quantitative easing. Technical traders will, of course, ignore the funnymentals and focus on the price charts. Chart 7 shows the Euro Currency Trust (FXE) surging to broken support and hitting resistance with a decline today. Also notice that the bounce retraced 38.2% of the prior decline. This is the minimum expected for an oversold bounce within a bigger downtrend. Chart 8 shows a long-term chart for reference.
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Chart 7
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Chart 8
YEN ETF BREAKS RESISTANCE IN FLIGHT TO SAFETY... Concerns with Europe are fueling the risk-off trade today. In addition to strength in the Dollar and US Treasuries, we are also seeing strength in the Yen, which is considered a safe-haven currency. Chart 9 shows the Yen ETF (FXY) surging above resistance from the November January highs. Overall, the ETF surged from April to August and then consolidated for several months. Although not a textbook example, this consolidation looks like a large falling channel or wedge. There is clear support around 136 from the November-January lows. Todays resistance breakout signals a continuation of the bigger uptrend and targets a move above the 2011 highs.
