JUMP IN THE DOLLAR PUNISHES COMMODITY PRICES AND PREVENTS UPSIDE BREAKOUT IN CRB INDEX -- PRECIOUS METALS WERE HIT ESPECIALLY HARD -- CRUDE OIL IS OVERBOUGHT BUT STILL IN UPTREND
DOLLAR INDEX BOUNCES OFF 200-DAY LINE... An impressive upside reversal day on Wednesday enabled the Power Shares US Dollar Index (UUP) to bounce off its 200-day moving average as shown in Chart 1 (see arrow). That dollar turnaround was apparently the result of Mr. Bernanke omitting any mention of QE3 in his testimony before Congress that day. That's dollar friendly since infusions of more money into the system resulting from Fed bond purchases weakens the dollar. At the same time, the European Central Bank (ECB) spent more than expected on the second round of its Long-Term Financing Operation (LTRO). LTRO involves three-year loans to European banks at 1%. That had the effect of weakening the Euro. The immediate reaction in all of the financial markets was fairly dramatic. Stocks sold off in the heaviest trading this year. U.S. bond yields jumped. [Fed buying of longer-dated bond maturities has kept yields unusually low]. The biggest gainer was the U.S. dollar. The biggest losers were precious metals.
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Chart 1
GOLD AND SILVER SELL OFF IN HEAVY TRADING ... Gold and silver prices suffered one of their worst days in memory on Wednesday. Chart 2 shows the Gold Trust SPDR (GLD) plunging in very heavy trading for the same reason that the dollar jumped. That leaves GLD still below its early November peak near 175. It has to get through that barrier to reinstate its uptrend. The GLD is still trading above both moving average lines (see arrow), which means that its overall trend is still up. Chart 3 shows Silver iShares (SLV) suffering a huge downside reversal day on Wednesday as well (also in very heavy trading). That price plunge negated the previous day's upside breakout through its fourth quarter high. It also put the SLV back below its 200-day average. Chart 4 shows that Wednesday's downside reversal also occurred at a downtrend line extending back to last April. It's too soon to determine if Wednesday's losses were just a short-term over-reaction to something the Fed chairman didn't say. The price and volume action over the next week may help to determine that. Despite this week's setback, the SLV still remains above initial chart support near 32. The fate of both markets will also depend on the direction of the dollar. This week's setback in precious metals also prevented an upside breakout in the Market Vectors Gold Miners (GDX) Index.
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Chart 2
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Chart 3
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Chart 4
CRB INDEX BACKS OFF FROM OVERHEAD RESISTANCE... This week's commodity setback occurred just as the CRB Index was testing important overhead resistance at its late October high near 325, and its 200-day moving average (as shown in Chart 5). That prevented an upside breakout in the commodity group. A Friday selloff in crude oil contributed to Friday selling in the CRB (crude has a 23% weight in the CRB which is the single biggest weighting). Crude oil, however, has a much stronger looking chart. Chart 6 shows the Spot Light Crude Oil ($WTIC) price still in an uptrend, but meeting some minor resistance near 110. The daily RSI line (above chart) has reached overbought territory over 70, which suggests that some profit-taking is likely. Initial chart support lies near 105, with even support likely near the trendline drawn over its fourth quarter highs. Crude prices would have to fall well below that support line to signal an end to its current uptrend.
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Chart 5
