ChartWatchers Newsletter Blog Archives

December 2012

GOLD AND THE DOLLAR ARE FALLING TOGETHER

One of the most consistent intermarket principles is that gold (and most commodities) usually trend in the opposite direction of the U.S. Dollar. That inverse relationship has broken down of late. Chart 1 compares the Gold Trust (GLD) to the Dollar Index (UUP) over the last year. Both markets have trended in opposite direction throughout most of the year -- until recently. The dollar bottom during October coincided with a peak in gold which is normal. What isn't normal is that both market have fallen together over the last month. The 20-day Correlation Coefficient (below chart) shows their correlation turning positive. When something unusual happens in intermarket work, there's usually a reason why. Let's examine the UUP a bit closer for some clues. Although the Dollar Index (UUP) measures the dollar against six currencies, it's dominated by the Euro. The Euro is the biggest foreign currency in the UUP with a weighting of 57% (Europe's four currencies comprise nearly three-quarters of the UUP). Chart 2 shows that the Euro and gold usually trend in the same direction. That was the case until mid-November when a rising Euro coincided with falling gold. The 20-day Coefficient (below chart) turned has turned negative which is unusual. So the answer to the recent change in the gold/currency relationship doesn't come from the Euro. It may be coming from the yen.

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SMALL CAPS LEADING THE DECEMBER CHARGE - AGAIN

To historians, this doesn't come as a surprise.  Since 1987, the Russell 2000 has produced annualized returns during the month of December of 43.38%.  April is the next best month for small caps with its annualized return of 21.84%, a very distant second.  Over the past 25 years, the Russell 2000 has fallen during December only 3 times.  In 2007, they fell 0.23%.  In 2005, they fell 0.60%.  The only poor December that small caps have experienced came in 2002 when they tumbled 5.72%.  Certainly part of that decline resulted from the 8.80% climb a month earlier in November 2002.  The point here is that history does tend to repeat itself in the stock market and December 2012 appears to be no different for small cap traders.
 
Consider the month-to-date gains thus far by index:
 
Dow Jones:  +1.27%
S&P 500:  +0.99%
NASDAQ:  +0.36%
Russell 2000:  +3.16%
 
I'll admit that my background as a CPA qualifies me as a "numbers geek".  So let's take a look at the December small cap relative outperformance another way - visually:
 
$RUT 12.22.12

This chart shows us the strength (and the relative strength) of the Russell 2000 over the past month.  But there's likely to be more relative strength in the days ahead.  From December 21st through December 31st, the Russell 2000 has racked up annualized returns of 96.19% since 1987.  The percentage of up days during this period is 69.36%, well ahead of the 55.40% chance of an up day throughout the year.
 
There's really no Santa Claus rally like the one we see on the Russell 2000 each year.
 
Happy Holidays and happy trading!

KEEPING AN EYE ON GOLD

In the past several weeks, the FOMC has voted to "expand" its balance sheet until which time economic growth is strong and getting stronger ($45 billion long-term treasuries/$45 MBS). One would have reasonably thought that Gold prices ($GOLD) would have rallied rather sharply - we certainly were of the opinion. But it did not happen given the gamesmanship exhibited by President Obama and House Speaker Boehner. However, the "game" is not over; there is still time for gold to find its footing and finally move to higher highs above $2000/ox upon which the media shall be all over this.

Gold 1222-12


Technically speaking, if we take a longer-term viewpoint of Gold ($GOLD), then we find the uptrend still intact, although probably a bit long in the tooth. However, that doesn't sway from the fact that a monthly bullish triangle is forming, and the fact prices managed to hold the 20-month moving average last week. Historically, the 20-month has been a very good support level - outside of the late-2008 correction that managed top hold the 40-month moving average. Too, we find the 9-month RSI tends to bottom around the 50-level on these corrections - which is exactly where it is at present. Therefore, we suspect the probabilities favor that this current test of the 20-,month will be succesful - hence a modicum of patience is warranted in holding a long position.

But that having been said, the alternative would be for prices to clear break the 20-month and fall very quickly towards the 20-month support level at $1455/oz. That is and of itself would be no tragedy to the gold bull market, but it it would certainly deplete many trading accounts to be sure. Regardless, we believe gold prices ($GOLD) have one last "blow off" move in them before a larger correction takes place. Its only natural, for gold is cyclical as well.

GOLD'S WEAKNESS PERSISTS

About a month ago I wrote an article stating that I thought that gold was resuming its long-term up trend, but that belief was conditioned upon price moving above the October top. That did not happen. Instead, after putting in a lower top in November, price has dropped below the November low, establishing a three-month down trend.

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The weekly chart shows that price has dropped below a long-term rising trend line, but I think the trading range (consolidation) between 1540 and 1800 is the dominant feature on the chart. It has held for over a year, and is considered to be a continuation pattern. The technical expectation is that price will head higher once the consolidation is complete. If the bottom of that range is violated, then gold would be in serious technical trouble.

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Because of the down trend since October, technical weakness is expressed through the PMOs (Price Momentum Oscillators) in the daily, weekly, and monthly (not shown) time frames, which are below their EMAs and falling. The Trend Model is NEUTRAL, which is appropriate for a trading range.

Finance Sector Leads and Regional Banks Come to Life

2012 is ending with a bang for banking stocks as sentiment towards this sector improved significantly in December.  Perhaps the big banks are looking forward to open-ended quantitative easing in 2013. The chart below shows the Finance SPDR (XLF) breaking above its autumn highs to record a 52-week high. In addition, the price relative (XLF:SPY ratio) recorded a 52-week high as XLF led the market higher. On the price chart, broken resistance in the 15.75-16.25 area turns into the first support zone to watch on any throwback (pullback). XLF is a bit overbought after a 10% advance since mid November, which makes it ripe for a pullback or consolidation. However, any weakness would be deemed a correction within a bigger uptrend.


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Click this image for a live chart

Regional banks are not as strong as the big banks, but the Regional Bank SPDR (KRE) came to life with a triangle breakout. KRE surged in mid November, consolidated with a small triangle (pennant) and broke resistance with a big move. This is a bullish development and the triangle now marks a support zone. The indicator window shows the price relative (KRE:SPY ratio) surging above the late October trend line. 

Merry Christmas and Happy New Year!!
--Arthur Hill CMT


HOMEBUILDERS SEEING CRACKS IN THE FOUNDATION

Homebuilders have been a leading industry group throughout the S&P 500 rally off the 2009 lows.  This strength has been particularly obvious over the past year.  Looking strictly at a shorter-term chart, technical indicators couldn't look much better.  Check it out:
 
$DJUSHB 1 Year Chart

While homebuilders did fall below their 50 day SMA a month ago and the most recent attempt to move back through that 50 day SMA failed, it looks strikingly similar to what we saw in early June, just before a huge 27% one month rally.  Trendline support continues to hold.  In addition, homebuilders consolidated in a short-term base in late August before breaking above 400.  The most recent selloff held support at 400 before rallying to test 50 day SMA resistance from underneath.  I'm eventually looking for this group to break to fresh new highs, possibly even before year end.
 
The short-term chart is not what's bothering me.  Instead, it's the long-term weekly chart where warning signs are just now starting to show.  Take a look at this 10 year chart:
 
$DJUSHB 12.8.12

The current technical pattern is quite similar to late 2003.  On the next high, in early 2004, a long-term negative divergence fomed and more significant selling followed.  On the chart above, I've indicated that with the next push higher in the price of the $DJUSHB, a long-term negative divergence is likely to print.  That is indicative of slowing momentum in the longer-term.  Generally, more significant selling follows.
 
I'm not quite ready to write off homebuilders.  In fact, I'm expecting them to lead at least one more push higher in equities.  After that move, however, we'll need to re-evaluate and perhaps lower our expectations for this industry.
 
Happy trading!
Thomas J. Bowley
Chief Market Strategist
Invested Central

http://www.investedcentral.com/

TRANSPORTATION ON THE VERGE OF BREAKOUT

The Dow Jones Transportation Index ($DJT) is on the verge of a major breakout that could see prices rise by up to +20%. Quite simply, the developing bullish pennant pattern would suggest that once a breakout of trendline resistance materializes, then a measured towards the 6000 to 6200 zone becomes a reality. In further support of this viewpoint, note the 20-week stochastic has turned higher from near the 50-level, while the 65-week moving average continues to provide major support to declines. Collectively, the risk-reward of long $DJT positions is rather good given one can measure their risk at the recent lows.

Djt 12-8-12

The manner in which to play this trade is several fold. One could look at the Dow Transports ETF (IYT) to mimic the index. Or, one could look at the the risk-reward of the particular stocks that make up the index such as the rails, truckers, and air freighters in general. Our particular focus is upon all of these, with CSX Corp. (CSX); FedEx (FDX) in particular, with Arkansas Best (ABFS) having potentially the largest percentage gain...but it has its flees so to speak. As with all of these stocks; do your technical homework.

Good luck and good trading,
Richard

FOREIGN STOCKS NEAR UPSIDE BREAKOUT

Foreign stocks look technically stronger than the U.S. at the moment. Tuesday's message showed EAFE iShares testing their spring high. Emerging markets are rising as well. A more comprehensive measure of foreign stocks that includes developed and emerging markets is shown below. Chart 1 shows the Vanguard FTSE All-World ex-US ETF (VEU) in the process of testing highs formed during the spring of this year. An upside breakout would give a boost to foreign stocks. The dotted line overlaid on the chart is a relative strength ratio of the VEU divided by the S&P 500. As I suggested on Tuesday, foreign stocks have been rising faster than the U.S. (rising ratio) since mid-year after lagging behind the U.S. during most of the past year (because of a falling dollar). After acting as a drag on the U.S. during the first half, foreign stocks are now leading the U.S. higher. Chart 2 shows foreign shares (VEU) in a stronger position than the S&P 500 (the VEU has risen 20% since June versus 10% for the S&P. Since global stocks are highly correlated, an upside breakout by foreign stocks would increase the odds for higher U.S. shares.

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Gasoline Breaks Down as Oil Forms Bear Flag

Gasoline Jan13 (^RBF13) formed a lower high and broke support with a sharp decline this week. First, notice that the trend since mid September is down with a series of lower lows and lower highs taking shape the last few months. This week’s breakdown signals a continuation of the medium-term downtrend and targets a move to the lower channel trend line. Potential support in the 2.50 area is confirmed by the 50-62% retracement zone. The indicator window shows MACD turning bearish with a move below its signal line and into negative territory. ETF traders can refer to the US Gasoline Fund (UGA).

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Click this image for a live chart.

Light Crude Jan13 (^CLF13) is also sporting a bearish setup. Note that the overall trend since mid September is down. Crude is attempting to firm in the 85-90 area, but cannot break 90 to reverse the downtrend. A breakout, and close, above 90 would be medium-term bullish. Barring a breakout, note that crude formed a bear flag over the last six weeks. Flags are continuation patterns. Bearish flags slope up and bullish flags slope down. A break below flag support would signal a continuation lower and target a move to next support in the 80 area. ETF traders can refer to the US Oil Fund (USO).

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