Archive for November, 2010

Four Ways to Monitor the Dollar and Risk Trade

Tuesday, November 30th, 2010

With European debt markets getting little relief thus far from the Ireland bailout, we need to keep a continued eye on the U.S. dollar. A weaker U.S. dollar tends to provide tailwinds for stocks, commodities, gold, and silver. Therefore, a longer-than-expected rally in the greenback may provide headwinds for these assets, with gold being the possible exception in the near-term.

We outlined some concerns relative to a dollar rally and risk aversion on November 10th. With the Federal Reserve embarking on an aggressive money printing campaign (a.k.a. quantitative easing or QE), it seemed unlikely the dollar would muster the strength for a 7% rally, but that is exactly what has happened.

We will continue to have competing forces in the currency markets in the form of debt problems in Europe vs. Fed policy in the United States. Fundamental drivers related to a weaker dollar and higher assets prices are outlined on this QE resources page. To find the competing bullish forces related to the dollar, you need to look no further than Portugal, Spain, and Italy over the next few months.

There are four relatively easy ways to track the progress of the dollar and risk aversion. The first is to monitor the dollar’s behavior near its 200-day moving average (shown below).

US Dollar 200 day moving average

The second way to monitor the health of the dollar’s current rally is to evaluate the reaction of market participants as the U.S. Dollar Index trades between 80.89 and 83.06. These levels have coincided with significant trend reversals in the past (see arrows below). If the buck’s rally is to be short-lived, then the horizontal blue band shown below is a logical area for the bears to regain control.

US Dollar Key Levels to Watch

The third way to keep an eye on the buck is to watch the 10-week moving average (MA). Notice in the chart below how significant rallies in the dollar were accompanied by a turn up in the 10-week MA (think blue line). The current turn would be more significant if it remains in place at the end of the week.

US Dollar 10 week moving average tries to turn

The fourth method to take the dollar’s temperature is to look for a zero cross of the Rate of Change (ROC) indicator on a weekly chart. Past rallies of any significance and duration have been accompanied by a bullish cross of the zero line in ROC. A cross has not taken place yet, which means some continued skepticism is warranted as to the sustainability of the dollar’s current rally.

US Dollar Rate of Change

For now, the bulls remain in control of the dollar and the bears remain in control of the euro. In terms of equities, Stock Market Levels to Watch, remains relevant in the face of continued weakness in risk assets.

Stock Market Levels to Watch

Monday, November 29th, 2010

Key S&P 500 levels where buying interest may resurface:

  • 1,175 to 1,178
  • 1,163 to 1,165
  • Near 1,156
  • 1,144 to 1,147
  • 1,132 to 1,135

More information on how these levels were determined can be found in How Far Can Stocks Fall? and S&P 500 Levels to Watch.

S&P 500 Major Support Levels 2010 to 2001

S&P 500 Major Retracement Levels 2010 to 2001

Longer-Term Outlook For Risk Remains Favorable

Monday, November 29th, 2010

While further corrective activity may be in store for risk assets, the longer-term outlook remains favorable. The CCM Bull Market Sustainability Index (BMSI) closed Friday at 3,383. From a historical risk-reward perspective, the current BMSI tells us the next one-to-three months may see further consolidation. The outlook, based on history, for the next six months to a year favors the bullish side of the ledger.

S&P 500 Risk Reward Analysis

With ongoing concerns about global debt and low economic growth, we will continue to monitor the markets with an open mind. For now, with the data we have in hand, the odds favor markets making higher highs over the next six-to-twelve months.

S&P 500 Levels to Watch After Spain Says ‘No Problems Here’

Wednesday, November 24th, 2010

The situation in Europe reminds us of a general manager’s dreaded vote of confidence for his underperforming and embattled coach. We will expand on some risk-management concepts today after the dreaded ‘we do not need a bailout’ comments coming out of Spain. From Bloomberg:

Spanish Finance Minister Elena Salgado said there’s “absolutely” no risk the country will need an international bailout as its borrowing costs compared with Germany’s surged to a euro-era record. Asked in an interview on Punto Radio in Madrid if Spain risked having to seek a rescue like Ireland or Greece, Salgado said “absolutely not.” The euro faces “speculative attacks” which Spain is in the “best conditions to resist,” she said. (Full Story).

On November 17th in How Far Could Stocks Fall, we used various methods to look at the S&P 500’s potential downside risk. One method used in the November 17th analysis was Fibonacci retracements. We decided to expand the retracement analysis since the market remains fragile due to concerns related to tensions between North and South Korea, as well as the ongoing debt-related problems in Ireland, Portugal, Spain, and Italy.

Being aware of retracement levels can help you make more informed buy and sell decisions. For example, if the current correction were to build some momentum, you may decide to wait for a retracement level to be violated on a closing basis prior to reducing your exposure to risk. The basic concept is all markets have natural ebb and flow where “giving back” some gains is a normal part of any healthy market. Retracements bring new buying interest and allow markets to move higher.

S&P 500 Retracement Levels Table

Retracements pertain to both market advances and market declines. They can be calculated using closing prices or intraday prices. In this expanded analysis, we added a few additional market moves and calculated the retracements using both closing and intraday prices. The values shown in the table above and graph below are the average results using closing and intraday prices. The levels enumerated below deserve the most attention based on a variety of factors, such as trendlines (not shown).

S&P 500 Retracement Levels Graph

One of the most common mistakes made by individual investors is to underestimate the short-to-intermediate-term impact of loose monetary policy. This QE resources page can help you better understand the Fed’s impact on the price of stocks, gold, silver, copper, etc.

Moving Averages May Tame S&P 500 Decline

Tuesday, November 23rd, 2010

With the information we currently have in hand, we would expect any corrective activity in stocks to look more like 2009 than 2010. The rally off the March 2009 lows followed a very significant correction (a bear market). The current rally has followed two significant corrections in 2010 (Jan-Feb and Apr-July). If this hypothesis plays out in the real world, it is helpful to know what a “typical” correction looked like in 2009.

2009 Shown Below:

Moving Averages May Stem Stock Declines

If the 40, 50, and 75-day moving averages remain important during any corrections in Q4 2010, current market weakness could subside near 1,182, 1,173, or 1,144.

2010 Shown Below:

S&P 500 Moving Average Support

Market Says Be Patient With Entry Points For Gold

Tuesday, November 23rd, 2010

We own gold, like gold, and plan to buy more gold, but the market is telling us to be patient for a while longer in terms of looking for a good risk-reward entry point for GLD (gold ETF). Numerous short-term indicators are still flashing some “be careful” signals.

Gold Risk Reward Analysis 1 of 2

These charts are as of November 23rd at 2:05 p.m. EST (USA).

Gold Risk Reward Analysis 2 of 2

Current Correction Should Be Tamer Than Spring/Summer Plunge

Tuesday, November 23rd, 2010

We have some elements in place for corrective activity, including fundamental concerns in Europe and high levels of investor optimism. The spring 2010 correction was painful with the S&P 500 falling 16%. If history is any guide, the current correction will most likely fall into the 3% to 5% range, rather than the 8% to 16% range. All corrections are unsettling, but the current situation should not be as gut-wrenching as what transpired between the April 2010 highs and the July 2010 lows. Investors who were patient and rode out corrections in 2009 were rewarded.

S&P 500 - 2009 Corrections

Updated look at current support for the S&P 500 is shown below.

S&P 500 - Support

We have tailwinds coming from Fed policy (see videos & analysis). We also have a market that is in better shape to date relative to where it stood prior to the spring and summer correction. Prior to the spring/summer decline, the weekly chart of the S&P 500 showed significant bearish divergences between MACD and price (left side of chart below). Today’s market has a much better looking weekly MACD relative to price (right side of chart below).

S&P 500 - Better Shape Than In Spring

Three to five percent pullbacks are to be expected during any market advance. A 3% drop from the recent closing highs would take us to 1,189 – this has already occurred with the close of 1,178 on November 16th. A 5% pullback would take us to roughly 1,165 on the S&P 500, which is near an area of possible support. A move back to the next logical area of 1,156 would result in a 5.7% correction from the recent highs. A move to 1,144 would be a 6.8% correction. A break below 1,132, especially on a weekly closing basis, would be concerning and would make us much more risk averse (see table for key areas of possible support).

In terms of seasonals, we have entered a favorable period which may provide tailwinds for stocks over the next six to seven months. Obviously, the situation in Europe needs to be monitored closely.

Europe and Korean Tensions Weigh on Risk Assets

Tuesday, November 23rd, 2010

Exchange of fire between North and South Korea along with ongoing debt concerns in Europe have U.S. investors nervous this morning. We will continue to monitor all markets closely. Support levels outlined in How Far Could Stocks Fall? still apply to the current market (see table below).

S&P 500 Possible Support 2010-2011

The U.S. Dollar Index sits near 78.67 this morning; still below last week’s high of 79.46 (see chart below).

U.S. Dollar Index Possible Resistance 2010-2011

For now, the bulls remain in control of the primary trends. It is too early to get overly concerned about the market’s recent weakness. However, it is not too early to pay attention with an open mind relative to bearish outcomes. Markets do not go straight up; backfilling, fundamental concerns, and uneasiness are part of any market advance.

U.S. Dollar: What to Watch This Week

Monday, November 22nd, 2010

As of 8 a.m. ET on Monday, the U.S. futures are flat to slightly down and the U.S. Dollar Index has climbed to 78.48. The four forms of resistance we showed on Sunday are near last week’s intraday high of 79.46. A break above, and more importantly a close above, 79.46 would be negative for stocks and commodities.

U.S. Dollar Index:  What to Watch This Week

On the economic front, we have existing home sales due Tuesday, and reports on durable goods and personal income on Wednesday.

Dollar Leans Bearish, But Bulls Have Some Hope

Sunday, November 21st, 2010

As we head into a new week, the U.S. dollar needs to be monitored closely. The daily and weekly charts of the dollar below can help us better discern if the recent rally attempt may have more legs after some corrective action. The big picture still leans bearish for the greenback, but there are a few reasons to keep the door open to higher highs over the next two weeks.

Outlook for U.S. Dollar - Daily - Technical Analysis Blog

Like the daily chart, a weekly look at the dollar is a mixed bag with a continued bearish slant.

Outlook for U.S. Dollar - Weekly - Stock Market Blog