EURO TRUST FORMS BIG BEARISH PATTERN -- DOLLAR INDEX HOLDS FLAG BREAKOUT -- BRAZILIAN REAL FUND HITS KEY RETRACEMENT -- SPOT LIGHT CRUDE CHALLENGES MAJOR RESISTANCE ZONE -- CAREFUL WITH THAT DOUBLE BOTTOM SIGHTING IN GOLD
EURO TRUST FORMS BEARISH REVERSAL PATTERN... Link for today's video. The Euro accounts for over 50% of the US Dollar Index ($USD) and the US Dollar Fund (UUP). This makes it the main Dollar driver to watch. Before looking at the bearish pattern, let's review the long-term chart for the Euro Index ($XEU), which corresponds to the spot price for Euro/Dollar. Chart 1 shows $XEU breaking wedge support and holding this support break. As a continuation breakdown, the July lows mark the long-term target in the 121-122 area. The April high and a small buffer mark long-term resistance at 133. The indicator window shows MACD moving into negative territory over the last two weeks.
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Chart 1
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Chart 2
Chart 2 shows the Euro Currency Trust (FXE), which is an ETF designed to track the Euro. A head-and-shoulders pattern is taking shape since September and the ETF is testing neckline support with a bounce this week. A break below 126.5 would confirm this bearish pattern and target lower prices. MACD is in negative territory and I am marking momentum resistance at .30 for now. Fundamentally, I have a bearish bias towards the Euro because the economic fundamentals in the US appear better. However, I would not let this bias override bullish price action because I have seen picture-perfect head-and-shoulders patterns fail. The chart is bearish now, but a surge above 129 would provide the first sign that support is going to hold. A break above 131 would fully negate the pattern.
DOLLAR INDEX HOLDS FLAG BREAKOUT AND EXTENDS... Chart 3 shows the US Dollar Index ($USD) with a flag breakout last week and a long-term uptrend since May 2011. Keep in mind that the US Dollar Index is based on a basket of currencies versus the Dollar (Euro, Yen, Pound, Canadian$, Swedish Krona and Swiss Franc). In other words, there are several moving parts in this index. Most recently, the Dollar Index benefitted from a 25% decline in the Yen. Turning back to the chart, the flag breakout around 83 is holding and I am marking long-term support in the 80-81 area. The upper trend line of the rising channel marks an upside target in the 88 area.
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Chart 3
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Chart 4
Chart 4 shows the US Dollar Fund (UUP) with a flag breakout and this breakout turning into first support in the 22.5-22.6 area. A move below 22.50 would negate the breakout, but this would not be enough to turn bearish. The flag lows mark key support in the 22.1-22.2 area. A break below this low would reverse the medium-term uptrend. The Dollar uptrend could have ramifications on some key commodities, such as gold, copper and oil. All three fell from early February to mid April. Oil and copper bounced in May, but gold fell back the last two weeks.
BRAZILIAN REAL FUND HITS KEY RETRACEMENT... Chart 5 shows the Brazilian Real Fund (BZF) with an interesting setup over the last eight months. First, the ETF broke resistance with a surge above 19.20 in January 2013. Second, broken resistance turned into support in the 19-19.20 area and the correction retraced 50% of the prior advance. Third, a falling wedge formed since March. These are the hallmarks of a correction within a bigger uptrend, but let's see some signs of buying pressure before taking the bait. A surge off support would provide the first sign of a successful test. A breakout at 19.70 would reverse the falling wedge and signal a continuation higher. The indicator window shows MACD with resistance at .50, a break of which would turn momentum bullish.
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Chart 5
CRUDE CHALLENGES MAJOR RESISTANCE ZONE... Spot Light Crude ($WTIC) has been all over the place, and nowhere, since mid July 2012. Chart 6 shows a triangle taking shape the last ten months with resistance in the 97.50 area. Oil has been consolidating near this resistance level and a breakout would be quite bullish. In fact, a breakout would target a move towards the next resistance level in the 110 area. Strength in stocks could be helping oil, but Dollar strength could be holding oil back. The indicator windows show the correlation coefficients for oil/stocks and oil/Dollar. Even though the correlation coefficient for stock and oil fell back the last few weeks, oil has a strong positive correlation with the stock market overall. The lower window shows oil with a negative correlation to the US Dollar Index.
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Chart 6
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Chart 7
Figuring out oil has been quite challenging within the triangle consolidation. Chart 7 shows the US Oil Fund (USO) within an upswing since the late April breakout. The mid April trend line and mid May low combine to mark upswing support. A move below 32.75 would reverse this upswing. The indicator window shows MACD holding above its signal line as it flattens out. A move below the signal line would suggest weakening momentum.
CAREFUL WITH THAT DOUBLE BOTTOM SIGHTING IN GOLD... Chart 8 shows Spot Gold ($GOLD) testing the April low with a dip below 1350 this week. Support in the 1300-1350 area extends back to the January 2011 low. Despite support in this area, the long-term trend remains down and the most bulls can hope for is an oversold bounce. Broken support in the 1520-1550 area turns into an important resistance zone to watch for the long-term. The indicator window shows the Commodity Channel Index (CCI) moving below -100 in mid December and remaining oversold for most of 2013. This reflects strong downside momentum. The blue line marks the January high for CCI. A breakout here would provide the first clue that upside momentum is improving.
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Chart 8
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Chart 9
Chart 9 shows the Gold SDPR (GLD) bouncing off the mid April low with a move above 135 this week. This is the second bounce in three days. Even though the double bottom spotters are out in droves, false double bottoms occur often in downtrends. A potential double bottom forms every time there is a bounce off the prior low. Technically, double bottoms are not confirmed until there is a break above the intermittent high. Adding a little buffer, I would mark resistance at 145 and consider this just an oversold bounce until there is a strong breakout. The indicator window shows RSI hitting resistance in the 40-50 zone since November. Look for this zone to provide resistance again in a few days, perhaps weeks.
COPPER BOUNCES ALONG WITH SHANGHAI COMPOSITE... Copper is getting a bounce in May, but remains in a long-term downtrend. Chart 10 shows Spot Copper ($COPPER) breaking down in February with a move below the triangle trend line and November low. These support breaks turn into the first resistance zone in the 3.5-3.5 area, which is getting a challenge this week. A break above 3.5 would negate the prior breakdown and this would be quite positive for copper. As noted in Monday's Market Message, the Shanghai Composite ($SSEC) broke out over the past week and a renewed uptrend in Chinese equities could be positive for copper.
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Chart 10
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Chart 11
Chart 11 shows the Copper ETF (JJC) breaking support in the 43-44 area in March and broken support turning resistance. Also notice that a 50-61.80% retracement of the prior decline would extend to this area. After becoming oversold near 38, the ETF bounced with a pretty strong surge in May. The moment-of-truth is here as the ETF nears this resistance zone. The early May low at 40 marks first support. The indicator window shows the Shanghai Composite. Notice how these two moved up and down together over the last eight months. There is clearly a positive correlation between copper and Shanghai.
