DOLLAR CONTINUES TO WEAKEN AS EURO AND YEN RALLY -- THAT FAVORS HIGHER COMMODITY PRICES, AND GOLD IN PARTICULAR -- GOLD INDICATORS SUPPORT HIGHER PRICES -- SO DOES THE FACT THAT GOLD MINERS ARE RISING EVEN FASTER THAN THE COMMODITY
DOLLAR INDEX TESTS SUMMER LOW... The decline in the U.S. dollar continued this past week. The daily bars in Chart 1 show the US Dollar Index ($USD) falling to the lowest level since last summer. That was its lowest close since the start of 2015. Part of the dollar selling came from the Fed's dovish tone at this week's meeting. Some of it also came from a first quarter GDP report of only 0.5%. By contrast, first quarter eurozone growth came in higher. That gave a boost to the euro. Chart 2 shows the euro closing at the highest level in six months. That's not what the ECB central bank wants to see and may explain some selling in European stocks this week. The biggest FX news came from Japan. The Japanese central bank decision to do nothing on Thursday pushed the yen even higher and Japanese stocks lower. Chart 3 shows the Japanese yen surging to the highest level in eighteen months. That's the last thing the Japanese central bank wants to see. That surprise contributed to selling of global stocks on Thursday and Friday. The euro and yen account for two-thirds of the value of the USD. They're the two biggest reasons why the dollar is falling.
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Chart 1
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Chart 2
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Chart 3
GOLD REACHES 15-MONTH HIGH ... Commodities are the main beneficiary of a falling dollar, and gold in particular. Chart 4 shows the price of gold ending the week at $1294 which is the highest reading since January 2015. There's power behind the rally. First of all, gold has risen above a falling trendline drawn over its early 2014/2015 highs. For another, the 50-day average has crossed above the 200-day by the widest margin in five years (blue circle). Another bullish factor for the yellow metal is the fact that gold mining shares are rising even faster. The orange line in Chart 5 plots a "ratio" of the Market Vectors Gold Miners ETF (GDX) divided by the price of bullion since 2008. The solid gold line is bullion. Chart 5 shows the stock/gold ratio surging this year and having risen above a falling trendline extending back to the start of 2011 (shortly before the price of gold peaked). Gold miners have gained 88% this year versus a 22% gain in the commodity. That's good news because gold miners usually fall faster than bullion in down years, and rise faster in up years. In other words, it's usually a good sign for the gold when gold mining stocks are leading it higher. Like they're doing this year. That strengthens the view that the new uptrend in gold is for real.
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Chart 4
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Chart 5
ENERGY RALLY IS ALSO FOR REAL... The falling is dollar is benefiting all commodities, and stocks tied to them. That includes industrial metals and energy. Energy and materials were April's two strongest sectors. Their charts also support the view that their rally is for real. The weekly bars in Chart 6 show the Energy Sector SPDR (XLE) nearing the highest level in nearly six months after having broken through a falling trendline extending back to the middle of 2014. It is also trading above its 40-week average for the first time in two years. Momentum indicators also support the rising price trend. The 14-week RSI line (top of chart) has risen above 50 for the first time in two years. In addtion, its weekly MACD lines (below chart) have bottomed and are trading near a two-year high. It's also noteworthy that the XLE bottom formed in January took place right at its October 2011 bottom. The XLE still needs to clear its fourth quarter high to strengthen its uptrend even more. The weight of the technical evidence, however, supports the view that energy stocks have bottomed along with the price of crude. The same is true of commodities in general.
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Chart 6
TECHNOLOGY SPDR RETESTS 200-DAY LINE... Techology was the week's worst sector. That's not too much of a surprise as I've been writing about the ongoing rotation out of growth stocks (mainly technology) and into cheaper stocks (like energy). Wednesday's message showed the Technology Sector SPDR (XLK) falling to the lowest level in more than a month and trading below its 50-day average. Chart 7 shows the XLK now testing its 200-day average and chart support along its early February peak at 41.37. That's an important test for it and the rest of the market. That's because the market usually struggles when technology is underperforming like it is now. The XLK/SPX ratio (top of chart) has fallen to the lowest level in six months. I also suggested, however, that relative strength in other sectors should be enough to contain any damage from technology stocks. That's providing of course that the tech selling doesn't get too much worse.
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Chart 7
S&P 500 PULLS BACK ... The daily bars in Chart 8 show the S&P 500 pulling back from resistance formed during the fourth quarter. That's not surprising considering that the 14-day RSI (top of chart) has shown negative divergence near overbought territory at 70 (black arrow). And the fact that daily MACD lines (below chart) have turned down from their fourth quarter high (blue circle). I showed same two short-term warning signs at the end of the previous week. A further pullback to its early April low (flat line) or its moving average lines wouldn't be surprising and wouldn't disturb its current uptrend. With April behind us, the market is entering a seasonally weaker period that usually lasts from May to October. That may also cause some traders to take some money off the table. As I've suggested in earlier messages, however, money coming out of technology stocks is finding its way into cheaper parts of the market. That often leads to short-term selling. But it should be enough to keep the market's major uptrend intact.
