DOLLAR BOUNCE CAUSES PROFIT-TAKING IN OVERBOUGHT COMMODITIES -- US STOCKS REMAIN IN DOWNSIDE CORRECTION -- FOREIGN STOCKS ALSO WEAKEN -- CHINESE STOCKS SHOW RELATIVE STRENGTH -- BRAZIL STOCKS AND CURRENCY ARE TUMBLING TOGETHER
DOLLAR BOUNCES OFF CHART SUPPORT AS EURO WEAKENS... Last Saturday's message showed the U.S. Dollar Index (USD) testing important chart support at its June low. Chart 1 shows the USD rising to a three week high. That's not enough to signal a major upturn, but it is encouraging. At the same time, Chart 2 shows the Euro pullng back from chart resistance at its June peak. Neither of those moves represent major trend changes, but may reflect some "safe haven" buying of the U.S. dollar. Commodities experienced profit-taking on the rebound in the dollar.
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Chart 1
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Chart 2
OVERBOUGHT COMMODITIES PULL BACK ... The bounce in the dollar caused profit-taking in overbought commodity markets. Chart 3 shows the DB Commodities Tracking Index Fund (DBC) pulling back below its (red) 200-day moving average. At the same time, the 14-day RSI line (top of chart) moved into overbought territory over 70. Gold also saw some selling at week's end. Chart 4 shows gold having reached its first resistance barrier at its June high. Its 14-day RSI line (top of chart) also reached overbought territory. Oil also experienced some selling at week's end. Chart 5 shows crude oil pulling back from chart resistance at its March 2012 high near 110. [A resistance level is usually defined as a prior price peak]. At the same time, the 14-day RSI (gray line) is well below its July peak, which qualities as a "negative divergence" between it and the price of crude. That usually leads to more selling. Gold and oil have benefited from global tensions on the possibility of U.S. military action in Syria. What happens on that front will play an important role in the short-term direction of both commodities. Rising crude oil has also contributed to stock market selling around the world (but has helped energy stocks which were the week's strongest sector).
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Chart 3
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Chart 4
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Chart 5
S&P 500 REMAINS IN DOWNSIDE CORRECTION ... The stock market remains in a downside correction. Chart 6 shows the S&P 500 trading below its 50-day average which determines the market's short-term trend. The SPX has fallen into into the 50%-62% Fibonacci support zone. As I suggested last week, however, a further decline toward its June low would not be surprising. That's especially true with global tensions rising and the dangerous month of September starting. [September is usually the weakest month for the SPX]. Chart 7 shows the Nasdaq Composite Index which is the only index to remain above its 50-day line. That index bears close watching. A decisive close below its 50-day line would signal a deeper correction by it and the rest of the market.
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Chart 6
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Chart 7
FOREIGN STOCKS WEAKEN... Foreign stocks are falling faster than the U.S. Chart 8 shows EAFE iShares (which measures foreign developed markets in Europe Australasia and the Far East) falling below its 50-day line. Note that its August high fell short of exceeding its May peak. Emerging markets, which have been the world's weakest group, actually held up better. Chart 9 shows Emerging Markets iShares (EEM) actually gaining some ground later in the week. The EEM, however, remains in a downtrend. China has a lot to do with the ability of the EEM to stabilize.
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Chart 8
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Chart 9
CHINA SHOWS RELATIVE STRENGTH ... My last message showed the shares of Brazil and India tumbilng to four-year lows which has gotten most of the recent attention in emerging markets. Some good news, however, may be coming from China which has held up a lot better. Chart 10 shows China iShares (FXI) rallying during July and August. [Since the start of July, the FXI has gained 8% versus a -1.5% loss in the EEM. During those two months, Brazil lost -3% while India plunged -15%]. Chart 10 shows the FXI, however, challenging its 200-day moving average. Since China is the biggest holding in the EEM (19%), its direction has an important influence on EEM direction.
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Chart 10
BRAZIL REAL AND STOCKS FALL TOGETHER ... Last week's message attempted to show the recent collapse in the Brazil Real and Indian Rupee. I inadvertently showed Brazil iShares (EWZ) instead of the Brazil currency. Let's correct that here. Chart 11 compares the drop in Brazil iShares (blue line) to the WisdomTree Dreyful Brazilian Real Fund (green line). It's clear that both have been falling together since 2011, and especially since May when the Fed starting talking about tapering its bond purchases. [Since mid-2011, the Brazil stock ETF has lost -39% while the currency ETF has fallen -26%]. A close correlation usually exists between emerging market stocks and currencies. [China's currency has continue to rise]. That's one reason why central bankers in some emerging countries are raising rates to support their currencies. It's unlikely that global investors will put much money into emerging countries until their currencies stabilize.
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Chart 11
OVERSOLD EMERGING CURRENCY FUND TESTS MAJOR SUPPORT... The direction of emerging market currencies is very important to the direction of their respective stock markets. That's why today's final chart is so important. It shows the WisdomTree Dreyfus Emerging Currency Fund (CEW) in the process of testing its previous two lows formed during 2011 and 2012 (first two circles). [The CEW includes eleven emerging market currencies]. That's a very important test because that's the precise point where the CEW needs to stabilize to prevent a more serious breakdown. One encouraging sign is that the 14-day RSI line (bottom of chart) is in oversold territory for the third time in the last two years. Also encouraging is the slight "positive divergence" to the bottom right in the RSI line (see arrow). [A positive divergence is present when the RSI line shows a rising bottom while prices continue to drop]. That may provide some short-term stability in emerging market assets.
