Stock Market, Dollar and Commodity Charts of the Week

By: Mike_Paulenoff

This week's Charts of the Week cover the overall equity market via the S&P 500 and then look at the dollar (via its ETF, the UUP) and commodities such as gold, silver and agriculture that are impacted by the dollar (via their ETFs such as the GLD, GDX, SLV, DBA and DBC).

The S&P 500, after peaking at 1150 in mid-January, fell to 1071.58 on January 29, but rallied back towards 1103-1104 resistance and couldn’t get through last week. It was a week replete with growing concerns that some European countries, including Greece, Portugal and Spain, might not be able to handle their mounting debt. A new downleg commenced from that 1103-04 area, hitting its low at 1044.50 Friday afternoon before a bounce to 1066.

Is the bounce a start of a new up leg or the end of a decline from 1150 to 1044? My suspicion is that it is not, that this is a failed rally and the first down leg. The 50- and 20-day moving averages are now accented to the downside, the 20 sharply so and is now below the 50, which is not a good sign from the near-term momentum perspective. The closer the 20-50 combination gets to 1103-1104, the more powerful the resistance area will be, so that this week if the rally continues from 1066 and can manage to get close to 1100, let's be aware of how powerful the resistance is at 1104-1103.

My cycle work also suggests a downturn. While the shorter 20-22 day cycle indicates the market is due for some kind of a rally, the longer 18-20 week cycle, which has been very reliable, has peaked. So we're going to be cautious of key resistance, first at 1085-90, and next at 1104, and then at 1120, especially on rallies that don’t have particularly high-quality advance-decline work or that have poor up/down volume statistics.

While the equity markets look lower, the dollar continues to rally. The ETF we trade for the dollar is the PowerShares DB US Dollar Bullish (UUP), which is based on the DXY or the Dollar Index, a basket of currencies that is about 55%-60% based on the euro-dollar.

The UUP broke out at around 22–22.20, which looks like an inverted head and shoulders pattern. The upside target, using a measured move, is somewhere in the 24.20–24.50 area, and that's purely from a technical perspective and assuming normal market conditions.

But this is not a normal market, but one instead where you get news every few hours it seems that some other country's CDS's are blowing out. Amidst crisis conditions in Europe, the dollar is being looked at as the currency of choice -- the flight-to-safety currency. And supposing more dominos fall in Europe and the ECB says it's coming to the rescue, where could the dollar index go in that scenario?

Applying Fibonacci retracement levels to the entire move down since November 2008 from 27 down to 22, a 50% retracement would be 24.56, which is right in the area of the measured move off its base. A 62% Fib retracement would put the UUP at 25.20.

A rising dollar certainly has implications for gold and other commodities. Looking at gold via the SPDR Gold Shares (NYSE: GLD), last week we had a major trend break, though gold recovered with the equity markets in the last hour on Friday from 102.28 in the GLD to 104.82. Is this the beginning of something new on the upside? I doubt it, because this looks to me like gold has built a pretty big top over the course of Nov '09-Feb '10.

It looks to me as though the GLD, with its 200-day at 99–99 3/4, probably will have to loop down and test 100. The 100-level is not only the prior high before it broke out and took off in the final up leg, but it also represents, or is close to, the prior-rally peak back in February '09.

Looking at the Market Vectors Gold Miners ETF (GDX), you can see on the condensed chart going back to October 2008 that a major trend break has taken place in the GDX. It looks like a significant top is in place above 45. On Friday it broke 40 intraday, but managed to close at 42.40 or so. If it rallies to 45 you have to either get out or perhaps even go short. A lot would depend on the dollar. This is not a particularly healthy chart and probably it's going to break this level and may end up somewhere in the 36 to 34 area.

Another metals chart to watch is iSharesSilver Trust (SLV), which has really gotten hurt and looks like it has a big top on it. So, silver, as well as gold and gold mining are all impacted significantly by the dollar, which is being accumulated based on a growing crisis that could get a lot larger and a lot wider.

The PowerShares DB Agricultural Index (DBA), which looked like it could be on the verge of breaking out to the upside mid-January, also has gone straight down as the dollar has gone up. It has broken some serious support that suggests it's going significantly lower, to 22.60-.50 and maybe 22-21.90.

The PowerShares DB Commodity Index (DBC), which is the industrial metals side, too, has had a hard time. It moved up with the stock from March 2009 and peaked in the first week of January 2010, and appears to follow the movements of the S&P 500 fairly closely.

In order to get any traction on the upside, the DBC really has to get back above 23.30 (the prior high was 23.80 – 23.85), but the price structure is below the 200-day moving average at 23.02, and the 20- and 50-day are pointed down sharply.

Based on this DBC Index, my sense is that the aluminums and coppers of the world are in trouble, which is probably a reflection of China as well. While it seems like everyone is expecting China to flip the lights on and stop restrictive lending, the commodity index charts are telling us that China may not be the engine of growth this time around or at least for a little while, which could have major impact on commodities, commodity-based stocks, and the dollar as well because the dollar keeps going up.

One more chart, the Claymore/MAC Global Solar Energy ETF (TAN), shows a massive up move between November 2009 and January 2010, but the TAN has given it all back and is sitting on very important support at 8 roughly down to 7.90. If that level breaks, the TAN will probably have significantly more weakness down to 6, and eventually retest the low from March ’09 at 4.67.

If that's the case, then this will be a repudiation of global alternative energy initiatives. The money won't be there to invest in solar energy, and more importantly, perhaps, oil prices will be collapsing as well, dampening alternative energy incentives and the price of the TAN.

So, we've covered the S&P 500 Index, the UUP and how the dollar is impacting the commodity industry. For me, I’ll be looking to sell rallies in the S&P unless 1104 or 1103 is taken out. I’ll be looking to sell rallies in the commodity industry and I’ll be looking to buy bids on the dollar.

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By Mike Paulenoff

Mike Paulenoff is author of MPTrader.com (www.mptrader.com), a real-time diary of his technical analysis and trading alerts on ETFs covering metals, energy, equity indices, currencies, Treasuries, and specific industries and international regions.

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