And the Answer Is…

by Guy Lerner

And the answer is….the Dollar Index is going lower!

Figure 1 is a weekly figure of the US Dollar Index. This is the same graph we have shown for weeks upon weeks now, and with a weekly close below the key pivot at 74.62, there is a high likelihood that the Dollar Index will trade lower.

Figure 1. Dollar Index/ weekly

Key pivot points are the best areas of support and resistance, and at the end of this week, price will close below a key pivot or support level. Just looking at the chart, we note that every close below a key support level but one has resulted in a significantly lower Dollar Index. That one instance is highlighted inside the gray oval and defined the 2008 bottom, which were the all time lows for the Dollar Index. A close below support levels is how one defines a down trend. Old support is new resistance, and I would not consider getting long the US Dollar Index until this level is cleared. We are playing probabilities here.

So what does a lower Dollar Index all mean? I am sure you know the answers by now. In a macro sense, we will still have policies in this country and in Europe that “kick the can down the road” thus assuring the destruction of fiat currency. In other words, some sort of deal will be struck that bails out Greece and that raises the debt ceiling here in the US. The deals will likely fall short of addressing the real issues, and little will be solved except that we can have the “crisis” another day. Risk assets will be preferred, and precious metals will continue their out performance. Equities will continue to perform well, but upside potential is capped by valuation, economic, sentiment, and inflationary concerns.

Of note, I will be on holiday for the next 2 weeks and I will be posting to the blog sparingly.

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NDX 100 upside breakout?

by Kimble Charting Solutions

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Gold continues higher after breakout ...

by Kimble Charting Solutions

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Repeating pattern on S&P 500

by Kimble Charting Solutions

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The Week Ahead: For Stocks, The Debt Ceiling’s the Limit

by Tom Aspray

The markets would probably be much more bullish if not for the debt-ceiling debate in Washington, and in fact last week’s rally will need to last into an early-week debt deal or we could see a correction ahead, writes MoneyShow.com senior editor Tom Aspray.

The dual Euro and US debt crises have been dominating the market action for at least the past several weeks, but now the Eurozone countries appear to have taken definitive action.

With the agreement to work out Greece’s debt problem, it seems clear that the Eurozone leaders are committed to taking whatever steps are necessary to keep the contagion from spreading.

Most technical analysts, but few fundamental analysts, realize the important role that psychology plays in the stock market. I think it is one of the more important factors in determining the market’s direction on a week-to-week or month-to-month basis. Fundamentals, I feel, are the key factor in the major trends.

The global debt fears have kept many out of the stock market since the May highs, and a failure to act on the debt ceiling could further depress the market. Conversely, I think raising the debt ceiling before the deadline would give the US and global stock markets quite a boost. The dollar index violated important support last week suggesting that some are not expecting the debt ceiling to be raised.

The earnings reports by technology giants Google (GOOG) and Apple (AAPL) clearly have raised the hopes for a further economic recovery. Without the debt crisis deadline looming over the market, stocks would be much higher.

Technically, last week’s action suggests that the uptrend from the June lows has resumed, but further strength is needed this week. It will be important for the other major averages, including the S&P 500, Dow Industrials, and Nasdaq-100 to join the Dow Transports in making new highs.

As I discussed earlier in the week, it is the airline sector that has kept the Transports from going even higher. A rally failure at the May highs by the S&P 500 would certainly weaken the technical outlook.

The most encouraging development in this quarter’s earnings was from the banks, as several—including Wells Fargo (WFC) and JPMorgan Chase (JPM)— reported earnings that were much better than expected. WFC is up over 10% from last Monday’s low, while JPM is up over 8%.

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However, the financial sector is still badly lagging the S&P 500,and while my RS analysis of the sector has improved, it shows no confirmation of a bottom. The chart above tracks the percentage performance of the Select Sector SPDR Health Care (XLV), the Spyder Trust (SPY) and the Select Sector SPDR Financial (XLF) since the start of the year.

The XLV is up 11.9% so far this year, about double the 5.9% gain in the SPY. The XLF is now down 5.9% for the year, but just a week ago was down closer to 10%.

Looking at this in a different way, if you bought XLV at the start of the year instead of XLF, there would have been a 17% difference in performance.

This week we get the double whammy: more earnings reports, combined with a basket full of economic data. On Tuesday, we get the new-home sales figures, the S&P Case-Shiller Housing Price Index, and the latest readings on consumer confidence.

Wednesday will bring durable-goods orders, and later in the day, the Beige Book will be released. On Thursday, jobless claims and pending-home sales data follows, while Friday we get the initial advance readings on the second-quarter GDP.

WHAT TO WATCH

The stock market, after declining seven days from the highs (similar to April’s correction), rebounded impressively last week. The market internals were very impressive last Thursday. The A/D lines are all rising, but most are still significantly below the early-July highs.

Therefore, we need to see further strength this week to indicate that the major averages can move past the highs. If this occurs, it will of course be important that the A/D lines also make new highs.

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S&P 500
The key support level for the Spyder Trust (SPY) at $129.80 was broken intraday last Monday, but the SPY closed the day at $130.61.

The sharp rallies last Tuesday and Thursday were impressive, with the next resistance at $135.36 to $135.70. Major resistance follows at $137.18 and the May highs.

The S&P 500 A/D line has turned up after holding its uptrend (line a) from the June lows. A break of this uptrend will indicate a drop back to the June lows. There is important A/D support at last Monday’s lows.

A daily close in the SPY below $132.42 would weaken the short-term uptrend.

Dow Industrials
The Diamonds Trust (DIA) did briefly drop below the 50% retracement support at $122.83 last Monday, before rallying sharply. It’s already close to the July highs at $127.37. It was hurt Friday by Caterpillar‘s (CAT) weak earnings.

There is further strong resistance at $127.67 to $128.63 (the May highs).

The Dow Industrials’ A/D line slightly violated its short-term trend (line b) last week, but is still holding well above the longer-term support (line c).

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GLD and SLV: When and Where to Buy

by Tom Aspray

Expect short-term pullbacks in these precious metals ETFs to set up good buying opportunities in the week ahead. Here are the key price levels to watch for each fund.

Monday’s close above $1600 in the August gold futures contract got the attention of many investors and traders, but instead of reacting bullishly, there were quite a few who were taking profits on some of their positions.

Even more surprising was that some were even looking to trade the expected pullback while remaining bullish for the long term. Apparently, some think the recent surge was a blow-off top, but technically, the charts suggest that we just resolved the flag formation, which is a classic continuation pattern.

Experienced traders also know that trading against the major trend has wiped out its fair share of trading accounts.

The volume analysis supports this viewpoint, as it confirmed the recent breakout and the weekly on-balance volume (OBV) has continued to make new highs with prices. This has clearly been a year for sticking with the weekly trend analysis, as the short-term swings have been difficult to trade. For example, on July 1, the SPDR Gold Trust (GLD) gapped down to support, and then on July 5, after the holiday weekend, gapped higher, marking the start of the recent rally.

Certainly, if your long position is too large to let you sleep at night, reducing it when prices are rising is a good idea. Otherwise, do not try to time your core positions while the monthly and weekly analysis remains positive.

My short-term analysis for gold does suggest a pullback that could carry into next week, and John Person, an expert in seasonal commodity trends, tells me that gold typically bottoms in late July or early August. Therefore, traders or those not long GLD could get a good entry point next week, and the hourly Starc bands may help in identifying that entry point.

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Chart Analysis: The daily chart of the SPDR Gold Trust (GLD) shows the completion of the flag formation, lines a and b, as the daily Starc+ bands were tested for several days last week. The weekly Starc+ band is currently at $158.50 with upside targets from the flag formation in the $160-$162 area.

• I have also plotted the Fibonacci arcs on the chart to give a time perspective. The initial arc is currently at $152 along with the 20-day exponential moving average (EMA) and the Starc- band
• The former resistance, line a, which is now support, and the 50% arc line will be in the $150.70 area by early next week with the final arc in the $149.50 area by the end of he week
• The on-balance volume broke through its resistance, line c, with prices. It is still holding well above its rising weighted moving average (WMA). The weekly OBV (not shown) did make new highs last week and is also positive

The hourly chart for GLD allows us to zero in on the key support levels to watch. There is initial support on the hourly chart at $153.70 with the trend line breakout level at $152-$152.50.

• The 38.2% support level is at $151.80 with the 50% support at $150.30. The key 61.8% support is at $148.80, which I doubt will be tested
• On the bottom of the chart, I have plotted one of my favorite momentum studies, the RSI3, which is a three-period moving average (MA) of a five-period relative strength index (RSI)
• The horizontal lines note that the highs and lows in the RSI3 correspond nicely with prices, reaching either the Starc+ or Starc- bands on the hourly chart
• For example, on July 18, GLD hit its high of $156.58 between 11:30 am and 12:30 pm when the hourly Starc+ band was being tested. The RSI3 peaked that hour at 87 and then declined to 83 the following hour
• On Tuesday (July 19), GLD closed on the Starc- band with the RSI3 oversold at 20
• The hourly chart has initial resistance now at $156.04, and if this level is exceeded, it will suggest the correction is already over

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The iShares Silver Trust (SLV) rallied close to the 50% retracement resistance at $40.10. The daily Starc+ band is at $40.70 with the 61.8% retracement resistance at $42.05.

• The daily OBV did break out through resistance, line b, along with prices. The weekly OBV has turned up but is still below its weighted moving average
• There is next support on the daily chart at $36.50-$37, which corresponds to the 20-day EMA and the former resistance, line a
• There is additional support and the daily Starc- band in the $36 area. Key support is now at $34
• From a Fibonacci time analysis standpoint, the correction should be over by the middle of next week

The hourly chart of SLV is set up the same way as the hourly GLD chart. The 38.2% support level is at $36.90 with additional chart support at $36.70, line c.

• The 50% retracement support is at $36.10 with the 61.8% support at $35.30
• The correlations between the tests of the Starc bands and the RSI3 have also been highlighted on the chart
• The RSI3 is trying to turn up after Thursday’s close and is well below overbought levels

What It Means: The technical outlook for the SPDR Gold Trust (GLD) is much more positive than that of the iShares Silver Trust (SLV), where the weekly analysis is still negative after silver’s May plunge. A pullback in GLD going into the middle of next week should set the stage for a move to further all-time highs.

How to Profit: For GLD, go 50% long at $152.34 and 50% long at $151.46 with a stop at $147.47 (risk of approx. 3.1%). Sell half the position at $159.76 and raise the stop to $151.84 on the remaining position. Of course, it is possible that we will not get such a deep correction before the uptrend resumes.

I have no formal recommendation for SLV at this time, but traders could look for a decline into the $35.50-$36.90 area to buy, using a stop under $34.

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