GERMAN DAX PULLS BACK SHARPLY AS FRENCH CAC UNDERPERFORMS -- EURO MOVES LOWER AS DOLLAR CHALLENGES TRENDLINE -- GOLD FOLLOWS EURO LOWER AND FORMS POTENTIAL FALLING FLAG -- OIL MOVES LOWER WITHIN FALLING CHANNEL -- SPY GETS COLD FEET AT 2011 HIGHS
GERMAN DAX PULLS BACK SHARPLY AS FRENCH CAC UNDERPERFORMS... Link for todays video. Sorry to bring out the Greek card, but it appears that the weekend vote in the Greek parliament is rattling investors. Several sources have labeled this vote a referendum on the Euro. Passage of the austerity measures will insure another aid tranche from the EU and keep Greece in the club. Defeat would throw a serious wrench into the EU flywheel. While I have no clue how the vote will turn out, it is safe to say that stocks were already overbought heading into the vote and some profit taking is quite normal. The decline started in Asia, extended to Europe and is now hitting the US. Chart 1 shows the German DAX Index ($DAX) surging above 6600 this month and then pulling back with a sharp decline on Friday. The overall trend is up as a rising wedge takes shape. Even though this is potentially a bearish continuation pattern, the trend since mid September is clearly up. Broken resistance in the 6200-6400 turns into the first support zone to watch on a correction. Why should US investors care about the DAX? Because the S&P 500 and DAX have a strong positive correlation. The Correlation Coefficient ($SPX,$DAX) has been positive the last 12 months and above .60 since mid October.
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Chart 1
Chart 2 shows the French CAC Index ($CAC) moving back below 3400 on Friday. Notice that the rising wedge since September only retraced 50% of the prior decline and the French CAC Index is seriously underperforming the DAX. Broken resistance turns first support at 3250.
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Chart 2
EURO MOVES LOWER AS DOLLAR CHALLENGES SHORT-TERM TRENDLINE... Needless to say, the Euro is in the direct line of fire when it comes to the Greek vote this weekend. Chart 3 shows the Euro Currency Trust (FXE) breaking above resistance mid week and then falling back sharply on Friday. The breakout is clearly under threat of being negated. The four week trend remains up with this weeks low marking support. A move below this level would reverse the upswing and signal a continuation of the bigger downtrend. Chart 4 shows weekly bars over the last four years. The big trend is down since July 2008 and the swing within this downtrend is down since May 2011 (blue arrows).
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Chart 3
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Chart 4
Chart 5 shows the US Dollar Fund (UUP) firming in the 50-61.80% retracement zone on Wednesday-Thursday and then surging on Friday. The move broke the January trendline, but the ETF has yet to fully reverse the short-term downtrend. Follow through above Mondays high would break resistance and signal a continuation of the prior advance. Chart 6 shows weekly prices for reference.
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Chart 5
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Chart 6
GOLD FOLLOWS EURO AND FORMS POTENTIAL FALLING FLAG ... A surge in the Dollar is wreaking havoc on the commodities market with gold and oil moving sharply lower. Chart 7 shows the Gold SPDR (GLD) stalling the last two weeks and then moving sharply lower early Friday. It is possible that a falling flag is taking shape (pink lines). A move above this weeks high would end the falling flag and signal a continuation of the prior surge. Barring a breakout, the next support zone is in the 160-162.5 area, which is marked by the wedge trendline, mid January consolidation and 38-50% retracement mark . Failure to hold this area would suggest a failed breakout and call for a bigger reassessment.
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Chart 7
OIL MOVES LOWER WITHIN FALLING CHANNEL... Chart 8 shows the US Oil Fund (USO) moving below 38 with a sharp decline in early trading on Friday. This decline simply continues the downtrend that began in early January. Even though an inverse head-and-shoulders is still possible, a break above channel resistance is needed to reverse the six week slide. With todays decline, I am moving key resistance to 38.50. Barring a breakout, the next support zone is around 35, which is marked by broken resistance.
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Chart 8
Weakness in stocks and strength in the Dollar is weighing on oil today. Overall, oil is negatively correlated with the Dollar and positively correlated with stocks. However, these correlations got out of whack the last few weeks. Notice how stocks and oil moved in opposite directions the last six weeks, while oil and the Dollar moved in the same direction the last four weeks.
SPY GETS COLD FEET AT 2011 HIGHS... The S&P 500 ETF (SPY) surged to the 2011 highs last week and even broke above these highs this week. However, the breakout did not hold long as the ETF moved lower on Friday morning. Even though this is a logical resistance level and stocks are certainly overbought, I would view any weakness as corrective and not the start of a major trend reversal. Why? Because I do not see a major topping pattern and SPY is entitled to a correction after such a strong advance. The October trendline and late January consolidation mark the first support zone in 130-131 area. Broken resistance in the 128-130 area marks the second support zone. Chart 10 shows the Russell 2000 ETF (IWM) with a support zones in the 78-80 area and 76 area.
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Chart 9
