DOLLAR STILL UNDER PRESSURE -- BUT EURO AND YEN ARE STILL IN DOWNTRENDS -- GOLD'S TREND MAY DEPEND ON THE EURO -- DOW MAY RETEST 50-DAY LINE -- TRANSPORTS FAIL TO REACH NEW HIGHS -- UTILITIES WEAKEN AT 200-DAY LINE -- APPLE NEARS RECORD HIGH
DOLLAR BREAKS SHORT-TERM SUPPORT... I keep writing about prospects for a bounce in the U.S. Dollar, and it keeps dropping. My last message showed the PowerShares Dollar Index Fund (UUP) testing chart support at its early December low. The red circle in Chart 1 shows the UUP slipping below that short-term support level on Tuesday (although it's bouncing today). Some of the dollar selling may be tied to selling in stocks this week (and some nibbling at safe haven assets like gold). In my view, however, the long-range trend of the Dollar Index is higher. The horizontal lines mark Fibonacci retracement levels measured from the August low to the early January 14-year high. The UUP is close to testing its 50% retracement level, which often acts as a support zone. The boxes on top show two versions of its RSI line. The top line shows the 14-day RSI line. Notice, however, that the line has failed to reach oversold territory at 30 since last June. The lower line shows the more sensitive 9-day RSI line which has worked better over the same time span. The fact that the 9-day RSI line has bounced three times off the 30 level this month suggests that it is oversold and stabilizing. A look at the entire chart since last May shows it to still be in a major uptrend. A better reading on dollar direction may be gotten, however, by looking at some foreign currency charts.
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Chart 1
EURO AND YEN STILL IN DOWNTRENDS... Foreign currency charts are mirror images of the dollar. That makes them useful for determining the direction of the dollar itself. The Dollar Index (UUP) measures the dollar against six foreign currencies. The two most important are the euro and the yen. That's because the euro counts for 57% of the UUP, while the yen accounts for 13%. Those two currencies combined account for nearly three-quarter of the UUP. The other currencies are the British pound (11%), the Canadian Dollar (9%), the Swedish krona (4%) and the Swiss franc (3%). Chart 2 shows the euro testing chart resistance at its early December peak (blue arrow). The falling trendline starting in September shows the currency in a major downtrend. The euro would have to exceed both lines to threaten the uptrend in the Dollar Index. Chart 3 shows the Japanese yen bouncing modestly in January within the context of a major downtrend. Neither currency appears strong enough to seriously challenge the dollar uptrend.
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Chart 2
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Chart 3
GOLD TREND TIED TO THE EURO... The week's pullback in the dollar and stocks boosted the price of gold, but not enough to reverse its current downtrend. Since gold is negatively correlated to the dollar, it stands to reason that it's also positively correlated to the euro. The bottom line in Chart 4 shows a 60-day correlation of 90% between the two markets. The price bars also show a strong visual connection between the Gold Shares SPDR (orange bars) and the euro (blue bars). That means that the euro would have to break through lot of overhead resistance to support a strong rally in gold.
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Chart 4
DOW MAY RETEST 50-DAY LINE... The stock uptrend has stalled after last week's move into new highs. The two indicators on top of Chart 5 may explain why. The top box shows the 14-day RSI line falling back to its 50-day line. That followed a short-term negative divergence between it and the Dow which rose to a new high (blue arrow). The second box shows the two MACD lines failing to turn positive (red arrow). That also raises suspicions about the strength of the rally. The daily bars show the Dow Industrials heading down to a possible retest of its January lows and its 50-day moving average. That would be first serious test of the market's uptrend since the November 8 election.
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Chart 5
DOW TRANSPORTS PULL BACK FROM DECEMBER HIGH... Another short-term negative for the Dow is the inability of the Dow Transports to confirm its upside breakout last week. The daily bars in Chart 6 show the Dow Transports backing off from its December high near 9500. It's now in the process of retesting its 50-day line (and possibly its January low). These moves aren't enough to signal a major top in stocks. But any violation of support might be enough to warn that the month of February may see more volatility. The Dow Utilities are also starting to struggle.
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Chart 6
DOW UTILITIES FAIL TEST OF 200-DAY LINE... Chart 7 shows the Dow Jones Utility Average backing off sharply from resistance at its 200-day average. Rising bond yields during the second half of 2016 pushed bond proxies like utilities sharply lower. Their rebound since December has coincided with a pullback in bond yields over the last six weeks. This week's action, however, suggests that the utility rally may have run its course. That may also carry bad news for bond prices which drop when bond yields are rebounding. And that's what they appear to be doing.
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Chart 7
APPLE NEARS TEST OF 2015 HIGH ... Despite some short-term warning signals in the overall market, things can't be too bad when the market's biggest stock is surging 6% on the day to the highest level in two years. The weekly bars in Chart 8 show Apple (AAPL) nearing a test of its 2015 high just below 130. A close above that barrier would put the stock at an all-time high. The Apple/S&P 500 ratio (top of chart) has risen to the highest level in more than a year. It's normally a positive sign for the market's major trend when big technology stocks like Apple are still hitting new highs.
