-Dollar surges and stocks hold their gains
-Dollar Index hits first resistance zone
-Gold hits trendline and retracement support
-Oil nears resistance from broken support
-Bonds tests very important support zone
The relationship between the Dollar and stock is changing. From March to November, there was a clear inverse relationship between the US Dollar Index ($USD) and the stock market. In fact, the inverse relationship has been in effect since September 2008, which is when Lehman collapsed. The Dollar bottomed in July 2008, a few months ahead of the Lehman collapse, but stocks did not move sharply lower until September. The US Dollar Index moved sharply higher in a flight to safety and peaked above 88 in March 2009. Stocks bottomed in March 2009 and this coincided with a peak in the Dollar. With the Dollar Index surging over 4% the last three weeks, it is significant that the S&P 500 held its gains. Given the prior inverse correlation, one would have expected weakness in the stock market.
-Dollar Index hits first resistance zone
-Gold hits trendline and retracement support
-Oil nears resistance from broken support
-Bonds tests very important support zone
The relationship between the Dollar and stock is changing. From March to November, there was a clear inverse relationship between the US Dollar Index ($USD) and the stock market. In fact, the inverse relationship has been in effect since September 2008, which is when Lehman collapsed. The Dollar bottomed in July 2008, a few months ahead of the Lehman collapse, but stocks did not move sharply lower until September. The US Dollar Index moved sharply higher in a flight to safety and peaked above 88 in March 2009. Stocks bottomed in March 2009 and this coincided with a peak in the Dollar. With the Dollar Index surging over 4% the last three weeks, it is significant that the S&P 500 held its gains. Given the prior inverse correlation, one would have expected weakness in the stock market.
There are a number of reasons behind Dollar strength. First, sentiment was enormously bearish towards the greenback. Second, the Dollar Index was oversold three weeks ago and at long-term support around 74. Fourth, the stock market remains strong and that bodes well for the economy. The Fed is more apt to raise short-term interest rates when the economy shows strength. The Fed is unlikely to raise rates until after the employment rate peaks, but short-term interest rates in the bond market will rise ahead of Fed policy. Fifth, currencies trade in pairs and the Euro is the biggest component (>50%) of the US Dollar Index. Negative developments in Ireland, Greece and Spain weighed on the Euro and benefited the Dollar.
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Gold hits trendline and retracement support
Recent strength in the Dollar weighed heavily on gold over the last few weeks. The Gold-Continuous Futures ($GOLD) declined back to around 1100 as the Dollar Index surged above 77. Gold has support around 1100 from the August trendline and the retracement zone (38-50%). However, I am concerned that continued strength in the Dollar could weigh further. Gold may not bounce until the Dollar corrects.
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Oil bounces back to broken support
West Texas Intermediate ($WTIC) remains a tough call right now so I will provide the bullish and bearish cases. On the bullish side, $WTIC has been rising since August with higher highs and higher lows. Even though oil broke support with a sharp decline in early December, it managed to rebound near the 62% retracement mark and hold well above its September low. Strength in the stock market is also positive for oil (economy/demand). On the bearish side, oil clearly failed to hold the support zone around 76 and broke down with a sharp decline. The move back above 74 looks like an oversold bounce and resistance will come into play soon. Strength in the Dollar is negative for oil and other commodities.
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30-year Bond tests key support
The 30-year Treasury Bond ($USB) failed to hold its early December breakout and plunged all the way back to its support zone (118-119). Thursday's sharp decline in stocks provided a boost for the long bond as it bounced off support. However, we have yet to see any downside follow through in stocks and continued strength could be bearish for bonds. The prospects of a rate hike sometime in the second half of 2010 could also keep pressure on bonds. A break below 118 would be quite bearish because the June-December advance looks like a rising wedge on the weekly chart. A wedge break would signal a continuation of the prior decline and target a move to the July low around 105-106. Also notice that the 10-Year Treasury Yield ($TNX) is challenging resistance and a breakout would be bullish for rates (bearish for bonds).
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Gold hits trendline and retracement support
Recent strength in the Dollar weighed heavily on gold over the last few weeks. The Gold-Continuous Futures ($GOLD) declined back to around 1100 as the Dollar Index surged above 77. Gold has support around 1100 from the August trendline and the retracement zone (38-50%). However, I am concerned that continued strength in the Dollar could weigh further. Gold may not bounce until the Dollar corrects.
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Oil bounces back to broken support
West Texas Intermediate ($WTIC) remains a tough call right now so I will provide the bullish and bearish cases. On the bullish side, $WTIC has been rising since August with higher highs and higher lows. Even though oil broke support with a sharp decline in early December, it managed to rebound near the 62% retracement mark and hold well above its September low. Strength in the stock market is also positive for oil (economy/demand). On the bearish side, oil clearly failed to hold the support zone around 76 and broke down with a sharp decline. The move back above 74 looks like an oversold bounce and resistance will come into play soon. Strength in the Dollar is negative for oil and other commodities.
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30-year Bond tests key support
The 30-year Treasury Bond ($USB) failed to hold its early December breakout and plunged all the way back to its support zone (118-119). Thursday's sharp decline in stocks provided a boost for the long bond as it bounced off support. However, we have yet to see any downside follow through in stocks and continued strength could be bearish for bonds. The prospects of a rate hike sometime in the second half of 2010 could also keep pressure on bonds. A break below 118 would be quite bearish because the June-December advance looks like a rising wedge on the weekly chart. A wedge break would signal a continuation of the prior decline and target a move to the July low around 105-106. Also notice that the 10-Year Treasury Yield ($TNX) is challenging resistance and a breakout would be bullish for rates (bearish for bonds).
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About the author:
Arthur Hill, CMT, is the Chief Technical Strategist at TrendInvestorPro.com. Focusing predominantly on US equities and ETFs, his systematic approach of identifying trend, finding signals within the trend, and setting key price levels has made him an esteemed market technician. Arthur has written articles for numerous financial publications including Barrons and Stocks & Commodities Magazine. In addition to his Chartered Market Technician (CMT) designation, he holds an MBA from the Cass Business School at City University in London.
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