KANSAS CITY SOUTHERN LEADS STRONG TRANSPORTATION RALLY -- DOW INDUSTRIALS TRY TO REGAIN 50-DAY LINE -- BOUNCE IN CHINESE STOCKS BOOSTS GLOBAL STOCKS -- CANADIAN DOLLAR AND COMMODITY ETF BOUNCE OFF 200-DAY LINES TOGETHER -- GOLD MAY BE BOTTOMING
TRANPORTS LEAD STOCK RALLY ... Tuesday's message showed a number of stock indexes testing initial support at their early March low, which is the first line of chart support during the current market pullback. Most of those indexes have either bounced off that initial support level or have climbed back above it. Although I showed the Dow Industrials on Tuesday, I'm focusing on the Dow Transports today. I'm doing so partially because it's the strongest index in today's market bounce. And, secondly, because its chart pattern may help clarify the current market trend. Chart 1 shows the Dow Jones Transportation Index bouncing impressively off its early March low near 5050. That bounce is keeping the Dow Transports in a sideways trading range between its first quarter highs and lows (see horizontal lines). Another positive feature in today's transportation rally is the fact that it's being led higher by rail stocks, which are among its most economically-sensitive stocks. The group's strongest percentage gainer in Kansas City Southern (KSU). Chart 2 shows that rail leader climbing more than 4% today. KSU is closer to its first quarter highs than lows. The ability of the transports to bounce so strongly off their spring lows is a positive sign for them and possibly for the rest of the market which is in the process of testing similar support levels.
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Chart 1
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Chart 2
DOW INDUSTRIALS TRY TO RECLAIM 50-DAY LINE... Chart 3 shows the Dow Industrials trying to reclaim its 50-day moving average (blue arrow) which it broke earlier in the week. It needs to do that to repair short-term technical damage. It also needs to clear some initial overhead resistance. The "hourly" bars in Chart 4 show that resistance ranging from 13000 to 13100 (yellow area). The 13000 level represents a fifty percent retracement of its April drop. Chartists like to see the Dow industrials and transports confirming each other trend signals. So far, the tranports are holding up okay. Now it's the industrials' turn to start acting better.
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Chart 3
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Chart 4
CHINESE STOCKS RALLY... One of my recent concerns has been relative weakness in foreign stocks. One of the reasons global markets are rallying today is some good economic news from China and a strong rebound in Chinese stocks. Chart 5 shows the FTSE China iShares (FXI) climbing nearly 4% today in rising volume. That puts the FXI back above its 200-day average. Chart 6 shows EAFE iShares (EFA) bouncing off of its 200-day line. One day's bounce doesn't make a trend. But it does prevent foreign developed stocks from falling below that important long-term support line.
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Chart 5
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Chart 6
STRONGER CANADIAN DOLLAR HELPS COMMODITIES... Another factor helping stocks and commodities today is a weaker dollar. That's partially due to comments from some Fed governors about the Fed's plan to keep rates down through 2014. That's not good for the dollar. Two of the day's strongest currencies are the Aussie and Canadian Dollars, both of which are closely tied to trends in commodity markets. Chart 7 show the Canadian Dollar bouncing off its 200-day line today. At the same time, Chart 8 shows the DB Commodities Tracking Fund (DBC) doing essentially the same thing. The similarity between the two charts is striking. Commodity buying may also be linked to stronger Chinese stocks. China is the world's biggest importer of commodities.
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Chart 7
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Chart 8
GOLD MAY BE BOTTOMING... Another market that benefits from low interest rates and weaker dollar is gold. That commodity is rallying nicely today. The three circles in Chart 9 paint a potential "head and shoulders" continuation pattern in the making for the Gold Trust (GLD). If that interpretation is correct, the recent correction in gold represents the "right shoulder" in that potentially bullish formation. GLD still needs to clear its moving average lines to strengthen its short-term trend. More importantly, it needs to clear the potential "neckline" drawn along its November/February highs. Its 14-day RSI line (above chart) is trying to move above the 50 level which shows stronger momentum. In addition, its MACD lines (below chart) appear to be bottoming.
