OIL SINKS TO YET ANOTHER NEW LOW -- ENERGY SPDR REVERSES IN KEY RETRACEMENT ZONE -- STEEL STOCKS WEIGH ON METALS & MINING SPDR -- GOLD AND THE 2011 EUROPEAN CRISIS -- GOLD AND THE 2015 CHART -- GOLD, THE DOLLAR AND CORRELATION

OIL SINKS TO YET ANOTHER NEW LOW... Link for today's video. Chart 1 shows the USO Oil Fund (USO) falling some 3% on Monday and hitting yet another new low. The pattern since August has been decline, consolidate, break down and repeat. Oil has not really bounced the last six months. The bounces last a day or two and evolve into small consolidations pattern within a downtrend. The late December break is the latest bearish signal and it simply signals a continuation of the ongoing downtrend.

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Chart 1

ENERGY SPDR REVERSES IN KEY RETRACEMENT ZONE... Chart 2 shows the Energy SPDR (XLE) hitting a new low in mid December and getting an oversold bounce just above the 50% retracement line. After stalling around 80 in late December, the ETF moved lower the last four days and this looks like a continuation of the bigger downtrend. Chartists can now use the late December highs to mark resistance. The indicator window shows continued relative weakness in XLE. Note that I featured a big head-and-shoulders pattern in XLE in the Webinar on December 23rd.

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Chart 2

While XLE reversed in the 50-62% retracement zones, the Oil & Gas Equip & Services SPDR (XES) and the Oil & Gas E&P SPDR (XOP) reversed in the 38-50% retracement zones. These lower retracement zones tell us that the oversold bounces in XES and XOP were weaker. This makes sense because the stocks in XOP and XES are much less diversified than the big integrated oil companies, which dominate XLE. Chart 3 shows XOP bouncing to the 38% retracement line, stalling and then moving lower the last five days. Chart 4 shows XES with similar characteristics.

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Chart 3

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Chart 4

STEEL STOCKS WEIGH ON METALS & MINING SPDR ... The Metals & Mining SPDR (XME) is also getting hammered with a 3% decline on Monday. XME was one of the worst performing ETFs in 2014 and there are no signs of a bullish trend reversal or bottom here. The mid December bounce was quite weak as the stock did not even manage to retraced 38% of the prior decline. The indicator window shows the XME:SPY ratio in a clear downtrend as the ETF continued to show relative weakness. Note that most stocks in XME are part of the materials sector. Chart 6 shows the Steel ETF (SLX) with similar characteristics.

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Chart 5

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Chart 6

GOLD AND THE 2011 EUROPEAN CRISIS... There is talk that gold may get a lift because of the situation in Greece and quantitative easing by the European Central Bank (ECB). Even though the ECB was not involved in QE back in 2011, we did have the sovereign debt crisis and gold exploded higher. Can this happen again? First, let's review the chart from 2011. Chart 7 shows Spot Gold ($GOLD) hitting a new high in early May and then forming a triangle consolidation. The new high tells us the long-term trend was up and this made the triangle a bullish continuation pattern. A breakout around 1560 signaled a continuation of the uptrend and gold hit 1900 in less than two months.

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Chart 7

There are two big takeaways here. First, gold was already in an uptrend and the triangle breakout provided a signal in early July. We did not need to know about Europe to see this signal. Second, gold gave it all back as the Dollar advanced from late August to late December. Strength in the Dollar ultimately weighed on gold. Note that the European sovereign debt crisis was in full swing in July-August 2011. The indicator window shows the S&P 500 falling sharply in late July and early August. The Dollar Index was surprisingly flat from May to August and did not rise until September, which also marked reverse in gold. Gold had given up all its gains by yearend and the Dollar was finished the year strong.

GOLD AND THE 2015 CHART... Flash forward to 2015 and the financial media is totally focused on Greece. I have no idea how the Greek elections will affect gold, but I do think any signals we need will show up on the price chart. Yes, turn off the TV and turn on the chart! Chart 8 shows February Gold Futures (^GCG15). I am using the futures contract because it is the closest thing we have to a pure play on gold. The Gold ETFs are made up of a basket of futures contracts and the ETFs have management fees, which makes them good surrogates, but not pure plays.

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Chart 8

First, note that the long-term trend is down because gold hit a new low in early November. This means the bounce from 1140 to 1240 is a counter-trend move and the break below 1180 is bearish until proven otherwise. Gold has yet to continue lower as prices firmed the last two weeks, but I would like to see a break above 1220 to negate this bearish signal and consider a bullish alternative. The indicator window shows RSI below 60 since July. A break above 60 would be bullish for this momentum indicator. Chart 9 shows the Gold SPDR (GLD) with resistance marked at 116.

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Chart 9

GOLD, THE DOLLAR AND CORRELATION... Chart 10 shows the Dollar Index ($USD) breaking out in September and hitting its highest level since 2006. The index advanced over 10% last year and shows no signs of a top right now. Overbought is about the only negative I can come up with here and I do not consider overbought to be very negative. Why? Because it takes strong buying pressure to become overbought. The indicator window shows the correlation between gold and the Dollar. This is a weekly chart and I am measuring 26-week correlation, which is around six months. Except for a brief period in positive territory, gold has been negatively correlated with the Dollar for most of the last three years. With the Dollar in an uptrend and gold in a downtrend, this negative correlation reinforces the bearish argument for gold. Chart 11 shows monthly bars and an even bigger breakout.

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Chart 10

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Chart 11

EURO AND YEN DRIVE THE DOLLAR... The Euro and Yen are the key components in the Dollar index because the Euro accounts for around 57% and the Yen weighs in around 14%. The Euro's influence is even greater because the British Pound (~12%), Swedish Krona (~4%) and Swiss Franc (~3.5%) also feature in the Dollar Index. These three currencies have a very strong positive correlation with the Euro. The Euro-centric currencies, therefore, account for some 75% of the Dollar Index. Chart 12 shows the Euro Index ($XEU) with a large descending triangle over the last few years. A break below 120 would target a move to the 96-97 area. The lower trend line of a falling channel extends to the 105 area later this year for another target. Chart 13 shows the Yen Index ($XJY) in a free fall with the next big support zone in the low 70s.

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Chart 12

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Chart 13

TREASURY BONDS CONTINUE TO ATTRACT MONEY... The Treasury bond ETFs were in uptrends throughout 2014 and there are no signs of a top as we enter 2015, which means long-term Treasury yields could move even lower. Even though pundits talk down Treasury bonds because of their paltry yields, don't forget to add capital appreciation and trend to the equation. TLT was up over 20% last year. Gains like this make the yield irrelevant. Short-term, Treasury bonds could be benefitting from their safe-haven status. The Dollar is moving higher against the Euro and this means money may be moving from Europe to the US. These Dollars need to go somewhere and US Treasury bonds may be the place. The US Treasury bond market is a huge and liquid market.

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Chart 14

Chart 14 shows the 20+ YR T-Bond ETF (TLT) hitting a new high to extend its current uptrend, which has been in place since January 2014. Note that the 2014 uptrend in TLT did not derail the 2014 uptrend in the S&P 500. I would, therefore, not consider the new high in TLT to be bearish for stocks. TLT is once again getting a little frothy on the upside, but is by no means weak. Broken resistance and the late December low mark first support in the 122 area. The November lows mark key support in the 118 area. The indicator window shows the 30-YR Treasury Yield ($TYX) moving to its lowest level since August-September 2012. Chart 15 shows the 7-10 YR T-Bond ETF (IEF) within an uptrend and the 10-YR Treasury Yield ($TNX) moving below 2.1% this year.

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Chart 15

WEBINAR TOMORROW... I will be doing a Webinar at 1PM ET on Tuesday, January 6th. Click here to register

Thanks for reading and have a great day!
Arthur Hill CMT