STOCKS REMAIN ON THE DEFENSIVE -- QQQ IS TESTING 50-DAY AVERAGE -- WHILE S&P 500 TESTS SHORT-TERM SUPPORT NEAR 2640 -- FALLING DOLLAR BOOSTS GOLD -- JAPANESE YEN SURGES TO 15-MONTH HIGH
POWERSHARES QQQ IS TESTING 50-DAY AVERAGE ... Wednesday's message showed the PowerShares QQQ (representing the Nasdaq 100 Index) pulling back from overhead resistance at its late January peak. That suggested profit-taking in the technology-dominated QQQ and the rest of the market. It also suggested a retest of its 50-day moving average. Chart 1 shows that test taking place today. Since the QQQ led the market higher during its February rebound, what it does from here will tell us something about the direction of the rest of the market. Wednesday's message noted the absence of strong volume during its recent rebound. While yesterday's selling came in heavier trading. That helped put the market on the defensive.
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Chart 1
S&P 500 IS TESTING UNDERLYING CHART SUPPORT ... The daily bars in Chart 2 show the S&P 500 falling back below its 50-day average in late Wednesday trading which ended its February rebound and put it back on the defensive. The SPX is now testing potential support near 2640 which I mentioned on Wednesday (flat line). That can be seen more clearly in the hourly bars in Chart 3 which show the SPX testing a small shelf of support near 2640. The fact that the 14-hour RSI line (top of chart) has reached oversold territory at 30 might also provide some support. If that doesn't hold, a retest of the February low or the 200-day moving average might be in store. That wouldn't be surprising within the context of a normal market correction. Market corrections normally take place in three legs (one down, one up, and another down). We've already had two. We may now be in the third leg which often retests a previous low to form "double bottom" price pattern. That could happen again. But only if the 2640 level doesn't hold.
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Chart 2
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Chart 3
DOLLAR PULLBACK BOOSTS GOLD -- YEN SURGES ... Chart 4 shows the PowerShares Dollar Index (UUP) pulling back today from its 50-day moving average (blue circle) and more substantial chart resistance along its September low (red line). That's giving a boost to gold. Chart 5 shows the Gold SPDR (GLD) testing underlying support near its 50-day average and a zone of potential support along its October/November highs (green area). The direction that gold takes from here is largely dependent on the direction of the dollar since both markets usually trend in opposite directions. My overall view of gold remains bullish, although it has yet to achieve a bullish breakout over its January high. It may, however, get a boost from the surging Japanese yen.
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Chart 4
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Chart 5
JAPANESE YEN SURGES ON HAWKISH TALK ... My February 16 message showed the Japanese yen surging to the highest level in fifteen months, and pointed out that the yen and gold have usually trended in the same direction. The yen is also the second biggest currency in the Dollar Index (13%) behind the euro. So a stronger yen is bad for the dollar. Chart 6 shows the Japanese currency surging to another recovery high today. That most likely resulted from BOJ Governor Kuroda mentioning a possible time frame for exiting Japan's ultra-loose policy of quantitative easing. That may also explain a 3 basis point jump in the Japanese 10-Year bond yield today. And that, in turn, may explain today's 5 basis point jump in the 10-year Treasury yield. Japanese bond yields are the lowest in the developed world and have acted as a weight on other sovereign bond yields. Any hint of higher rates in Japan could put added upward pressure on other global bond yields, including the U.S.
