S&P 500 AND RUSSELL 2000 FAIL AT BROKEN SUPPORT -- DOLLAR HITS NEW HIGHS AS EURO PLUNGES TO NEW LOWS -- 10-YEAR TREASURY YIELD BREAKS BELOW SEPTEMBER LOW -- GOLD ESTABLISHES FIRST RESISTANCE AND TESTS SUPPORT
S&P 500 AND RUSSELL 2000 FAIL AT BROKEN SUPPORT ... Link for todays video. Concerns in Europe spread across the Atlantic as selling pressure hit stocks on Wednesday. Todays selling pressure comes after an oversold bounce that extended to Tuesday. Chart 1 shows the S&P 500 breaking support levels from the March-April lows. These broken supports combine to mark the first resistance zone. $SPX became oversold with the decline below 1300 and bounced back above 1325. Tuesdays high was just below broken support from the April low. With todays decline, the support break has passed its first test and remains the dominant chart feature. Also notice that the 50-day moving average clearly turned lower this month. Picking the next support zone is a challenge because there are several possible points. Taking an educated guess, I would choose the 50% retracement in the 1250 area. Keep in mind that support levels are only potential stopping points in a downtrend. Resistance levels are important in a downtrend because they help define weakness. A move above the first resistance level (1360) would call for a reassessment.
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Chart 1
Chart 2 shows the Russell 2000 ($RUT) breaking support in the 780 area and broken support turning into resistance on Tuesday. This small-cap index bounced and failed at the support break, which keeps this support break as the dominant chart feature. I am marking key resistance at 800. A move above this level would clearly negate the support break and call for a reassessment of the current downtrend. As far as downside targets, the Fibonacci cluster marks at target around 730.
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Chart 2
DOLLAR HITS NEW HIGHS AS EURO PLUNGES TO NEW LOWS... After a bounce in stocks on Tuesday, the risk-off trade resumed on Wednesday with the US Dollar Fund (UUP) hitting a new 52-week high and the Euro Currency Trust (FXE) recording a new 52-week low. Chart 3 shows UUP breaking resistance in mid May and surging above its January high this week. With higher lows and higher highs since August, the dollar is clearly in a long-term uptrend. Chart 2 shows FXE breaking below its January lows last week and moving below 124 today. Even though the Euro is oversold, there are simply no signs of support and the ETF remains in a clear downtrend. The Euro is at the heart of the current risk-off movement and it will take a sustainable bounce to push investors into riskier assets.
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Chart 3
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Chart 4
10-YEAR TREASURY YIELD BREAKS BELOW SEPTEMBER LOW... The 10-year Treasury Yield ($TNX) fell below 1.7% (17) with a sharp decline on Wednesday. US Treasuries and German Bunds are also part of the risk-off trade. Treasuries are the ultimate safe-haven right now because the US treasury market is one of the deepest and most liquid markets in the world. Compared to German Bunds, treasuries also offer a chance to avoid Europe altogether, which appears to be the case with investors right now. Why else would investors buy an asset that yields a paltry 1.7%?
There are two reasons to buy treasuries. First, they represent a safe-haven to park money during times of uncertainty. Second, there are capital gains to be had should yields continue to fall. Remember, bond prices and bond yields move in opposite directions. A decline to 1.5% would produce a decent capital gain in the 7-10 year T-Bond ETF (IEF). Chart 4 shows %TNX moving below its 2008 low, which marked the nadir of the last financial crisis. The new low in the 10-year Treasury Yield is bearish for stocks because treasury yields and stocks are positively correlated. Chart 6 shows the Correlation Coefficient ($SPX, $TNX) in positive territory for most of the last 12 months. Chart 7 shows IEF hitting a new 52-week high today.
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Chart 5
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Chart 6
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Chart 7
GOLD ESTABLISHES FIRST RESISTANCE AND TESTS SUPPORT... Gold was hit by weakness in stocks and strength in the Dollar this month and this week. For May, the Gold SPDR (GLD) is down over 6%, the US Dollar Fund (UUP) is up over 4% and the S&P 500 ETF (SPY) is down over 5%. Gold is positively correlated with stocks and negatively correlated with the Dollar. This relationship could change if gold gets its safe-haven status back, but we have yet to see a breakout on the price chart. Chart 8 shows GLD moving into its support zone and then consolidating the last two weeks. Overall, the trend is down since the August-September high. In other words, the onus is on the bulls to reverse this downtrend. With a surge and pullback the last two weeks, the ETF established first resistance at 155.50 and a break above this level would be the first bullish signal to watch.
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Chart 8
The indicator window shows the Commodity Channel Index (CCI) with oversold set at -200. Typically, oversold is set at -100, but I think a true oversold condition requires a deeper threshold. Notice that CCI dipped below -200 four times in the past year. Subsequent surges above +100 signaled bullish reversals that foreshadowed decent advances in bullion. This surge above +100 signal comes right from Donald Lambert, creator of CCI. In his view, a surge above +100 should be watched because it can sometimes signal the start of a new uptrend. Conversely, a plunge below -100 can signal the start of a new downtrend. Chart 9 shows weekly candlesticks for Spot Gold ($GOLD). The Stochastic Oscillator is turning up, but has yet to cross back above 20.
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Chart 9
ITALIAN, SPANISH AND PORTUGUESE STOCKS HIT 52-WEEK LOWS IN MAY ... Never mind Greece. Weakness in Italy, Spain and Portugal is weighing on the world over the last few days. Even though it is a big week for economic reports in the US, Europe continues to dominate the news. So much for a hiatus before the Greek elections. In the latest round of negative news, Spanish banks are in trouble because of a liquidity crisis brought on by bad real estate loans. The yield on the 10-year Spanish government bond hit 6.69% on Wednesday and the spread between Spanish bonds and German bunds is at its widest since the birth of the Euro. Chart 10 shows the DJ Spain Index ($ESDOW) hitting a 52-week low in early April and continuing its slide throughout May. A new 52-week low bodes ill for the Spanish economy and this could extend to Europe. Note that I am using the DJ Spain Index ($ESDOW) because it is updated throughout the day at StockCharts. The Spain Bolsa de Madrid IBEX 35 Index ($IBEX) is the key country index and it is updated at end of the day. The IBEX is shown in the indicator window for reference.
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Chart 10
Unsurprisingly, Portugal, Spains neighbor, also shows signs of trouble as its equity index tumbled to another 52week low today. Chart 11 shows the DJ Portugal Index ($PTDOW) breaking consolidation support in April and falling over 15% in May. The index is down over 45% from its 2011 high.
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Chart 11
Chart 12 shows the DJ Italy Stock Index ($ITDOW) breaking its September lows this month and then consolidating around 105. Overall, the index declined into September, formed a bearish rising wedge and broke wedge support to signal a continuation of the bigger downtrend. At this point, a move above 120 is needed to negate this long-term bearish trend. Incidentally, the yield on the Italian 10 year bond surged to 6.12%
