DOW BREAKS KEY SUPPORT WITH SHARP DECLINE -- TREASURIES SURGE IN FLIGHT TO SAFETY -- US DOLLAR FUND BREAKS APRIL HIGH -- GERMAN BUND ETF SURGES AS ITALIAN BOND ETF MOVES LOWER -- EUROPEAN STOCKS MOVE SHARPLY LOWER WITH SPAIN LEADING
DOW BREAKS KEY SUPPORT WITH SHARP DECLINE... Link for todays video. The risk-off was in full force early Monday. Treasuries and the Dollar moved sharply higher as stocks, gold, the Euro and oil moved sharply lower. Chart 1 shows the Dow Industrials breaking below its March-April lows with a sharp decline. The pattern since early March looks like a double top of sorts and the next support zone resides around 12200. Broken resistance and the Fibonacci cluster mark support here. Chart 2 shows the S&P 500 breaking below its March and April lows as well. The 200-day moving average and broken resistance levels mark the next support zone around 1275. Both charts show momentum oscillators that have yet to become oversold. CCI for the Dow has yet to break below -200 and RSI for the S&P 500 has yet to break below 30.
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Chart 1
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Chart 2
TREASURIES SURGE IN FLIGHT TO SAFETY... It has a zero sum game between treasuries and stocks. Treasuries rise at the expense of stocks and stocks rise as the expense of treasuries. Chart 3 shows the 7-10 year T-Bond ETF (IEF) breaking ascending triangle resistance in early May and forging a 52-week high today. The ETF is up some 5% since mid March and showing upside leadership, which is negative for stocks because treasuries and stocks are negatively correlated. The indicator window shows the Correlation Coefficient trading in negative territory most of the last twelve months. Chart 4 shows the 20+ Year T-Bond ETF (TLT) breaking triangle resistance and moving above 120 today.
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Chart 3
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Chart 4
Chart 5 shows the 10-year Treasury Yield ($TNX) falling below 1.80%, which is well below the annualized Consumer Price Index (CPI). The CPI will be reported tomorrow, but I doubt it will drop substantially. With inflation running around 2.7% annualized, investors are getting a negative real return on 10-year treasuries. This speaks volumes on the flight to safety. Investors are willing to endure negative returns to insure a return of their capital.
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Chart 5
US DOLLAR FUND BREAKS APRIL HIGH ... Downward pressure in the Euro is sending the Dollar higher. Chart 6 shows the US Dollar Fund (UUP) breaking above its April high with a move through 22.30 today. The broken trendline and April high now mark the first support zone in the 22.1-22.20 area. Key support is based on the lows extending back to February. Chart 7 shows the Euro Currency Trust (FXE) with lower lows and lower highs the last nine months. The ETF recently broke descending triangle support to signal a continuation of this bigger downtrend. Another lower low projects a move below the January low.
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Chart 6
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Chart 7
GERMAN BUND ETF SURGES AS ITALIAN BOND ETF MOVES LOWER... European stocks and the Euro were hit with a triple whammy the last few days. Greece failed to form a new government over the weekend, Angela Merkels party lost regional elections in Germany and EU finance ministers are actually considering a Greek exit from the Euro. Uncertainty in Europe is clear as the yields on Spanish surged to a five month high. Italian bonds yields were also up, but German bond yields fell to all time lows. Investors are charging higher risk countries more interest and money is moving to relative safe havens (Germany and the US). Chart 8 shows the German Bund Futures ETN (BUNL) breaking resistance in early April and surging over 5% the last two months. More revealing, the indicator window shows the ITLY:BUNL ratio, which compares the performance of Italian bonds to German bunds. Italian bonds were outperforming from November to mid March, but have since started underperforming. Notice how the performance peak coincided with a peak in the Euro. Simply put, Italian bonds outperform when confidence in the Euro zone is rising and underperform when it is falling. Chart 9 shows the Italian Treasury Bond Futures ETN (ITLY) on the verge of a support break.
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Chart 8
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Chart 9
EUROPEAN STOCKS MOVE SHARPLY LOWER WITH SPAIN LEADING THE WAY... Stock markets in Germany, France and Spain were hit hard and remain relatively weak. Chart 10 shows the DJ Germany Index ($DEDOW) peaking in mid March and moving to its lowest level since mid January. Germany has the strongest economy and had the strongest stock market in Europe. A breakdown in German stocks suggests that problems elsewhere are starting to take their toll. On the price chart, the index broke a key support level in late April and early May. The 50% retracement line and broken resistance mark the next potential support area around 231. The April-May highs mark key resistance. I am using the DJ Germany Index because StockCharts.com updates this index throughout the day. The German DAX Index ($DAX), on the other hand, is an end-of-day (EOD) index that is updated after the close. Chart 11 shows the DAX for comparison. Notice that the S&P 500 and the German DAX Index have a strong positive correlation, which means both tend to move in the same direction. The breakdown and decline in the DAX, therefore, are negative for the S&P 500.
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Chart 10
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Chart 11
Chart 12 shows the DJ France Index ($FRDOW) falling to its lowest level since December 2011. The entire advance from January to March has been erased. Moreover, note that a lower high formed in March and the rising wedge break signals a continuation of the 2011 decline. The next support zone resides around 190. Chart 13 shows the DJ Spain Index ($ESDOW) breaking triangle support in March and hitting a new low in April. The index consolidated the last few weeks, but this looks like a mere rest within a downtrend.
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Chart 12
