RISING DOLLAR PUSHES COMMODITIES NEAR SIX-YEAR LOWS -- GOLD, COPPER, CORN, AND CRUDE TEST YEARLY LOWS -- WEAKNESS IN METAL AND ENERGY SHARES ARE STARTING TO WEIGH ON THE BROADER MARKET -- S&P 500 RETESTS SUPPORT AT ITS 200-DAY AVERAGE
RISING DOLLAR PUSHES CRB INDEX NEAR AUGUST LOW ... My previous message explained that one of the casualties of a rising U.S. Dollar would be weaker commodity markets. With the dollar having recently risen to a new seven-month high, commodity prices are in retreat. The brown line in Chart 1 shows the CRB Index (of nineteen commodity markets) falling to the lowest level since August (through yesterday). That commodity selling started in mid-October just as the U.S. Dollar Index started rising. A rising dollar almost always results in lower commodity prices (and stocks tied to them). The commodity selloff has been quite broad and includes industrial and precious metals, energy prices, and agriculturals. Several of those markets are testing six-year lows.
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Chart 1
GOLD, COPPER, CRUDE, AND CORN TEST MAJOR SUPPORTS... The orange bars on top of Chart 2 show the price of gold falling back to its summer lows. [So have silver, palladium, and platinum]. That has pulled gold and silver miners lower. Industrial metals like aluminum and copper are also under pressure. The red bars in Chart 2 show copper testing its 2015 lows as well. A drop into new lows would put that economically-sensitive commodity at the lowest level in six years. That has hurt copper shares. [More on that shortly]. The same is true with energy. Chart 3 shows the price of WTIC crude oil testing previous support around $42. It may also be headed for a test of its summer low. That explains recent heavy selling of energy shares. Even agricultural commodities are falling. Chart 4 shows corn threatening its August lows. Expectations for larger crops are also pushing soybeans lower. [Commodity charts are based on yesterday's (Wednesday) closing prices, although commodity prices are trading lower again today].
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Chart 2
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Chart 3
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Chart 4
COPPER, SILVER, AND ENERGY SHARES WEAKEN ... Chart 5 shows the Global X Copper Miners ETF (COPX) falling back to its September low. Its relative strength ratio (solid red line) also turned down in mid-October (when the dollar started rising). [Aluminum and steel stocks are also under pressure]. The same is true of gold and silver shares. Chart 6 shows the Global X Silver Miners ETF (SIL) in a similar situation, as are gold miners (GDX) on top of Chart 6. All are reacting badly to a rising dollar. And all are weighing on the broader market. As are energy shares.
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Chart 5
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Chart 6
ENERGY SHARES SHOW RELATIVE WEAKNESS... One of the factors starting to weigh on the broader market is renewed selling in metal and energy shares (owing to falling commodity prices). The black bars in Chart 7 shows the Energy Sector SPDR (XLE) meeting resistance near its 200-day moving average (red line) and falling back to its (blue) 50-day line. Its relative strength ratio (gray line) has also slipped. The falling gray line since May reflected relative weakness in energy shares which started to weigh on the broader market. Energy share stabilized in late August and helped support the market during September and October. In fact, energy shares help lead the October rally. That's no longer the case. Although energy shares have yet to experience a serious breakdown, relative weakness in them (and the rest of the commodity group) have removed some support from a stock market which is up against resistance around its old high,.
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Chart 7
S&P 500 RETESTS 200-DAY AVERAGE ... Going into this week, the S&P 500 was up against chart resistance along its summer high and in a short-term overbought condition which was starting to weaken. That was shown by its 14-day RSI line (top of chart) starting to retreat from its overbought level at 70. That line is nearing its first potential support level at 50. At the same time, the price bars show the S&P 500 pulling back to initial support at its 200-day moving average (and the 2060 level). Daily MACD lines (below chart) have turned slightly negative for the first time since late September, which also reflects short-term weakness. [The fact that weekly MACD lines are still positive, however, is supportive to the market's broader uptrend]. Even if the 200-day line is broken, important support is likely around the September peak near 2020. So far, this looks like a normal pullback after October's strong gains. And seasonal trends remain positive, especially after Thanksgiving.
