US DOLLAR INDEX IS POISED TO BREAKOUT AND CONTINUE UPTREND -- EURO FAILS AT KEY RETRACEMENT -- YEN NEARS LONG-TERM SUPPORT ZONE -- AUSSIE BREAKS SUPPORT WITH SHARP DECLINE -- SPOT LIGHT CRUDE SURGES TO RESISTANCE LINE
US DOLLAR IS POISED TO BREAKOUT AND CONTINUE UPTREND... Link for todays video. With continuing Yen weakness and recent declines in the Euro, the US Dollar Index ($USD) surged and is poised to break flag resistance. Chart 1 shows the index with a large rising channel since April 2011. The index surged in early 2013 and broke triangle resistance in the 81-81.5 area. After becoming short-term overbought near 82, the index corrected with a falling flag, which is a bullish continuation pattern. Last weeks surge above the upper trend line signals another continuation higher with two upside targets. With the flag flying at half-mast, the upside target for the flag breakout is around 86 (83.5 79 = 4.5, 81.5 + 4.5 = 86). The upper trend line of the rising channel marks the second target in the 88 area in July-August. Notice that I extended this chart 15 bars (weeks) and added a fictitious price indicator in the top window to create space. Chart 2 shows the US Dollar Fund (UUP) breaking channel resistance with surge this month.
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Chart 1
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Chart 2
EURO FAILS AT KEY RETRACEMENT... Chart 3 shows the Euro PHLX ($XEU) reversing in the 50-61.80% retracement zone and breaking wedge support earlier this year. This legacy Philadelphia Exchange (PHLX) chart is equivalent to the Euro/Dollar cross. This is a two and a half year bar chart that captures the long-term trend. This rising wedge looks like a corrective bounce, which means the breakdown signals a continuation of the bigger downtrend. The summer lows around 121-122 mark key support. The indicator window shows MACD turning negative this week. With the Euro accounting for over 50% of the US Dollar Index and US Dollar Fund, this breakdown in the Euro is bullish for the Dollar. Chart 4 shows the Euro Currency Trust (FXE) falling to the late April low last week. Aroon Down (red) surged to +100 to signal a change in trend. A support break at 128.5 would complete the medium-term breakdown in the Euro ETF.
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Chart 3
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Chart 4
YEN NEARS SUPPORT FROM BROKEN RESISTANCE... Chart 5 shows the Yen PHLX ($XJY) in a free-fall, but the first support level is in sight. This chart is the equivalent of the Yen/Dollar cross. The index is down over 25% from its November high and oversold, but the trend is down and the world is bearish on the Yen. Even though the Yen Index became oversold in December and this trade is getting crowded, the decline continues because there are simply no Yen buyers. Currency traders are pricing in unprecedented monetary easing championed by Prime Minister Abe. Yes, it looks like Chairman Bernanke has met his match! How far can this index fall? Chart 6 indicates that first support is at hand as broken resistance turns first support in the 96-99 area. A bounce in the Yen could trigger a correction in the Nikkei, which is as overbought as the Yen is oversold. Chart 7 shows the Nikkei ($NIKK) surging over 60% the last seven weeks. Needless to day, exporters led this move as the falling Yen increased Japanese competitiveness.
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Chart 5
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Chart 6
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Chart 7
AUSSIE INDEX BREAKS SUPPORT WITH SHARP DECLINE... You will never hear officials speak of weakening their currencies, but central bankers could be in the midst of an undeclared currency war. The Yen is falling like a rock, the US Fed is buying $85 billion worth of securities per month, the Bank of England is printing money and the European Central Bank (ECB) is considering the purchase of asset-backed securities. In short, monetary leaders may support a weak Yen in the press, but their actions may suggest otherwise. Last week the Australians cut their key rate and the Australian Dollar Index ($XAD) plunged below support. This chart is the equivalent of the Aussie/Dollar cross. Chart 8 shows the Aussie consolidating since August and then breaking below the prior lows with a move below 101 last week. This is bearish for the Aussie Dollar and bullish for the US Dollar.
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Chart 8
SPOT LIGHT CRUDE SURGES TO RESISTANCE LINE... Spot Light Crude ($WTIC) turned quite volatile with a pair of 8+ percent moves the last six week. Strength in stocks is positive for the economy and oil demand, but strength in the Dollar is potentially negative. A successful breakout in the Dollar and correction in stocks could weigh on oil. Chart 9 shows $WTIC plunging 9.3% in April and then rebounding with an 8.75% advance the last three weeks. Despite this strong rebound, the prior decline was bigger and oil is at resistance in he 97-98 area. Notice that oil reversed in this zone three times this year. Overall, a large triangle is forming and a break out would be bullish. Failure at resistance and a subsequent support break would argue for a decline to the next support zone in the 75-77 area. Chart 10 shows the US Oil Fund (USO) with the blue trend lines marking the last three swings. The mid April trend line and Fridays low mark upswing support at 33.25.
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Chart 9
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Chart 10
GOLD TURNS BACK AFTER 50% RETRACEMENT... Last weeks surge in the Dollar may have affected gold as the Gold SPDR (GLD) reversed near the 50% retracement. First, lets look at the weekly chart. Chart 11 shows Spot Gold ($GOLD) breaking support with a sharp decline in March. Gold bounced off support from the 2011 low, but this was just an oversold bounce within a bigger downtrend. The support break in the 1520-1550 area turned first resistance and this level was never challenged. A move above 1550 is needed to negate this support break and reassess the downtrend. The indicator window sows the Commodity Channel Index (CCI) spending most of its time below -100 as selling pressure persists. A break above the January high in CCI is needed to signal an upturn in momentum. Chart 12 shows the Gold SPDR (GLD) hitting resistance at the 50% retracement and falling sharply the last three days, which is when the Dollar bounced. GLD needs to break 143 to keep this counter trend rally alive.
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Chart 11
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Chart 12
COPPER HITS RESISTANCE ZONE AS BASE METALS ETF FALLS BACK... Chart 13 shows Spot Copper ($COPPER) breaking down in March and rebounding the last two weeks. The rebound is impressive in percentage terms, but it still looks like an oversold bounce within a bigger downtrend. JJC broke the triangle trend line in late February and the October low in early April. Broken support and the April high now mark a resistance zone in the 3.4-3.5 area. The triangle break down is still the dominant chart feature. It would take a move above 3.50 to warrant a reassessment. The indicator window shows the Correlation Coefficient ($SPX,$COPPER) moving to its lowest level since April 2008. This is a concern because stocks and copper are usually positively correlated. This negative correlation implies that something needs to give. Either stocks turn south to join copper or copper moves higher to join stocks. Chart 14 shows the Base Metals ETF (DBB) hitting resistance in the 17.50 area and RSI hitting resistance in the 50-60 zone.
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Chart 13
