HOME CONSTRUCTION ISHARES TESTS KEY SUPPORT -- DJ AIRLINE INDEX BOUNCES FROM OVERSOLD TERRITORY -- THE KEY LEVEL TO WATCH ON THE GOLD BREAKOUT -- EURO TESTS A MAJOR SUPPORT ZONE -- BANDWIDTH HITS 52-WEEK LOW FOR YEN INDEX -- NIKKEI 225 IGNORES A FIRM YEN
HOME CONSTRUCTION ISHARES TESTS KEY SUPPORT... Link for today's video. Chart 1 shows the Home Construction iShares (ITB) breaking out with a move in late May and early June, but then falling back to support this week. The sharpness of this week's decline is a concern because it shows some pretty intense selling pressure. Notice that ITB fell around 6% from the early July high to today's low and wiped out the June gain. The ETF is now testing support in the 23.5-24 area. A break below this zone would totally negate the wedge breakout and be bearish. The indicator window shows the price relative moving to a new low as ITB continues to underperform the broader market.
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Chart 1
DJ AIRLINE INDEX BOUNCES FROM OVERSOLD TERRITORY... Chart 2 shows the DJ US Airline Index ($DJUSAR) bouncing after becoming oversold earlier this week. The overall trend for this index is clearly up. The index hit a 52-week high with a big breakout at the end of 2012 and continued higher with a steady advance throughout 2013 and 2014. The green dotted lines mark when CCI hit -100 or lower and then moved above zero. -100 is a mild oversold condition that develops during a correction. The subsequent break above zero signals that the correction is ending and the uptrend is resuming. Notice that CCI dipped below -200 in mid April and early July. These were more extreme oversold conditions, but still within a bigger uptrend. CCI is making a bid to break above zero today and signal an end to the most recent correction. On the price chart, the index is on the verge of breaking the early June trend line.
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Chart 2
THE KEY LEVEL TO WATCH ON THE GOLD BREAKOUT... Gold broke out with a big surge in June and this breakout zone turns into the first support to watch. Chart 3 shows Spot Gold ($GOLD) surging from early January to mid March and then correcting with a falling wedge that retraced just over 62%. Gold formed a higher low at 1240 and broke out with moves above 1280 and 1320. The falling wedge, higher low and breakout suggest that the March-May decline was corrective, which means the breakout signals a continuation of the prior advance (1180-1390). Using the measured move methodology, another 17.8% advance from the June low would target the 1450 area. For signs of failure, I will be watching support in the 1300 area. Adding a little buffer, a break below 1290 would call for a reassessment. In other words, a strong breakout should hold and gold should continue higher. A move back below 1290 would show weakness.
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Chart 3
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Chart 4
Chart 4 shows weekly prices for Spot Gold over the last three years. First, the bigger trend appears to be down. Even though gold bounced off the 1200 area twice and held above this area in June, we have yet to see an upside breakout and a higher high. A move above 1400 would change this. Second, notice that gold has a strong negative correlation to the 10-YR Treasury Yield. Gold falls when yields rise and gold rises when yields fall. Gold plunged from October to June as the 10-YR Treasury Yield rose from 1.7% to 2.7%. Though not as pronounced, gold is up around 15% from its December low and the 10-YR Treasury Yield fell from 3% to 2.55% this year. Further weakness in the 10-YR Yield would be positive for gold**, while an upside breakout would be negative. The indicator window shows the 2-week Correlation Coefficient ($GOLD,$USD) with a 52-week moving average. Notice how the moving average has been negative since March 2012. The second indicator window shows gold with a strong negative correlation to the Dollar.
EURO TESTS A MAJOR SUPPORT ZONE... The Dollar could also hold the key to gold and the Euro could hold the key to the Dollar Index because it accounts for some 57% of the index. Chart 5 shows the Euro Index ($XEU) in an immediate uptrend defined by the July 2012 trend line and the green support zone. Despite this uptrend, I am watching closely because a break down would be quite bearish. Overall, notice that $XEU retraced 62% of the prior decline with a rising wedge. This looks like a bearish setup and the 2014 lows hold the key. Adding a little buffer, I would mark long-term support at 134, a break of which would be quite bearish. I then would mark the first downside target in the 127.5 area. The indicator window shows the Aroon Oscillator turning bullish with a move above +50 in December 2012. This indicator remains bullish until there is a counter signal with a move below -50. The Euro ETF (FXE) is the tradable instrument. Chart 6 shows the Dollar Index ($USD) within a trading range the last nine months.
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Chart 5
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Chart 6
BANDWIDTH HITS 52-WEEK LOW FOR YEN INDEX... At 13.6%, the Yen is the other big piece of the Dollar puzzle. Chart 7 shows the Yen Index ($XJY) bouncing in January and then moving into a tight consolidation the last few months. The index has traded between 97 and 99 for most of the last ten weeks. The pink lines show the Bollinger Bands contracting and the bottom indicator window shows BandWidth hitting a 52-week low. This means the bands are their narrowest in over a year and the noose is tightening. John Bollinger theorized that a volatility contraction leads to a volatility expansion, which implies an impending move. Chartists can watch 99 for a bullish breakout, and 97 for a bearish break down. The Yen ETF (FXY) is the tradable instrument.
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Chart 7
NIKKEI 225 IGNORES A FIRM YEN... The Nikkei 225 ($NIKK) has a negative correlation with the Yen, but this relationship has become strained the last few weeks. Chart 8 shows the Nikkei breaking out in late May and working its way higher in June and early July. The breakout is bullish and holding with the June-July lows combining to mark a support zone in the 14800-15000 area. A move below this level would reverse this uptrend. The indicator window shows the Correlation Coefficient ($NIKK, $XJY) in negative territory until late June. This means the Nikkei rises when the Yen falls and visa versa. Even though the Correlation Coefficient moved into positive territory for a couple weeks, I think the negative correlation will ultimately prevail here. Chartist should, therefore, watch the Yen chart for clues on the Nikkei. It is also worth noting that the Nikkei 225 is largely positively correlated with the 10-YR Treasury Yield. Putting it together, a falling Yen and rising 10-YR yield are bullish for the Nikkei. A rising Yen and falling 10-YR are bearish for the Nikkei.
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Chart 8
5-YR TREASURY YIELD STILL CHALLENGING RESISTANCE... Even though the 10-YR Treasury Yield ($TNX) is not a tradable instrument with "buyers" representing a support zone, it is based on a tradable instrument, the 10-YR Treasury Note ($UST). Chart 9 shows $TNX testing support from the lows extending back to July 2013. Overall, I still think the bigger trend is up and the one year trading range is a consolidation after the breakouts. As Greg pointed out on Thursday, the trend within this consolidation is clearly down. $TNX briefly broke support in late May, but recovered and moved back into the 25-27 area. A break above 27 (2.7%) would reverse this downswing and target a challenge to the 3% area.
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Chart 9
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Chart 10
Chart 10 shows the 5-year Treasury Yield ($FVX) within a large triangle consolidation. A consolidation after a surge is a bullish continuation pattern. A breakout at 18 (1.8%) would be quite bullish for yields and bearish for bonds. The indicator window shows the difference between the 10-YR Treasury Yield and the 5-year Treasury Yield. This differential widened from April to November and then narrowed from December to July. The narrowing is negative for banks because it affects their lending margins. The spread is narrowing mostly because the 10-YR Treasury Yield declined and we should watch this yield for clues on the future of the spread.
