Trading is not a game of exacts. Perfectionists need not apply. Markets are made up of many irration...
The Week Ahead: Currency Wars and Commodities
02/15/2013 6:05 pm EST
Big declines in both the yen and crude oil may be giving the market a sneak peek at a near-term correction. But whether or not you believe a correction would be healthy at this stage, MoneyShow's Tom Aspray shares his market analysis and what you should watch for this week.
The action Friday in the stock market was overshadowed by the sharp declines in crude oil and gold in early trading. The widely watched SPDR Gold Trust (GLD) dropped to its lowest level since last August, and the nearby crude oil contract was down close to 2% during the day. Both did close above the early lows.
The major averages closed the week pretty much unchanged, even though the S&P 500 made new rally highs during the week. Meanwhile, the debate in the financial media continues to pit the generally bearish traders against the fundamental money managers, who consider many stocks to still be undervalued.
Of course, many of these money managers have had this view for some time, while traders can change their views several times during the same week. I try to analyze the market in terms of risk, and since mid-December the number of good-risk buying opportunities has declined significantly.
As we head into the long weekend, we also have the G20 meeting, where the focus is likely to be on the Bank of Japan's action to weaken the yen, as well as the deteriorating state of the Eurozone economy.
The so-called currency wars-better defined as competitive devaluation-have gotten a lot of press lately, particularly by those who are pessimistic about the economy and the stock market.
The currency war in the 1930s was facilitated by many countries going off the gold standard, as they tried to revive their economies by lowering the value of their currencies. Lately, many have been fixated on the recent weakness in the yen, as the dollar-yen rate has recently risen from around 75.5 yen to the dollar to 93.5.
The long-term chart of the exchange rate shows that it is barely a blip, as the long-term downtrend (line a) goes back to 1976, when the rate was 305 yen per dollar. I was analyzing the Yen in the early 1980s, when it traded from 199 to 277. It would now take a rise above 121 just to break the downtrend (line b) that goes back to 1990.
Just since last November, the yen has gained 25% against the Swedish krona, and some fear that after the last week's disappointing data on the Eurozone economy, there will be more pressure to weaken the euro by lowering rates.
The long-term chart of the euro-dollar exchange rate shows a series of lower highs since 2007 (line c). A decisive break below the support that goes back to 2010 (line d), now at 1.2260, would project a much weaker euro.
The bottom line for right now is that the long-term trends for both the yen and euro have not changed. They should be monitored, as this may change later in the year. And for those investing in country ETFs, as I pointed out recently, it is important to analyze the status of the country's currency before you invest.
NEXT: What to Watch|pagebreak|
In last Friday's column, I discussed the how crude oil prices often lead the stock market higher and lower. I pointed out that crude oil could be forming a double-top formation. At the time, crude was trading well above $97 per barrel. By this Friday morning, crude was almost $2 lower.
The chart shows that key support (line a) has not been broken, and so far the selling does not appear to have been that heavy. Still, the OBV looks ready to drop back below its WMA, and a break of support (line b) would be more negative. One should note that often crude will top out a week or more before the stock market, but a short-term top in oil will increase the odds of a short-term market top.
The economic news was generally positive last week. While the gains in retail sales were meager, given the higher payroll taxes, it could have been worse. There were more than offset by the strong reading on manufacturing from the Empire State, which rose 18% to over 10, which is a strong sign of growth.
Also on last Friday, industrial production declined a bit, while the preliminary reading on consumer sentiment from the University of Michigan was up sharply to 76.3. The long-term chart still suggests that sentiment is bottoming, and a move above the 80 level would be more encouraging.
On Tuesday, we get the Housing Market Index, with housing starts and producer prices following on Wednesday. There is a full slate of potentially market-moving data out on Thursday, including jobless claims, the Consumer Price Index, existing home sales, the Philadelphia Fed Survey, Leading Indicators, and the flash PMI Manufacturing Index.
Another strong reading from the flash index would support the strong data from the Empire State Manufacturing Survey, and will indicate that the economy is healthier than most think.
What to Watch
The stock market moved in and out of positive territory to close mixed. Overall, it was a positive week for the stock market.
The longer the market moves higher without a correction, the focus becomes what type of correction we will get. It would actually be healthier for the market to see a 3% to 7% correction now, like what occurred in February and March 2011, than to wait for a few more weeks.
That decline lasted only 16 trading days, and dropped the Spyder Trust (SPY) by almost 7%. The final selling was spurred by the nuclear disaster in Japan, and many who were looking for a pullback to buy were likely scared by the quickness of the decline.
It is also possible that we will just see a one- or two-week correction, possibly from higher levels, and then another push to the upside.
NEXT: Stocks and Tom's Outlook|pagebreak|
There was little change in the sentiment numbers last week, from either individual investors or financial newsletter writers. One longtime follower of market sentiment, Mark Hulbert, shared his current analysis of sentiment in a recent MoneyShow interview, including how he suggests investors should interpret the data.
The daily chart of the NYSE Composite shows the breakout above major resistance (line a) in January, and a pullback to the breakout level would not be surprising. There is also support from the 2011 high at 8,714. The 20-day WMA is not far below current levels at 8,875.
On the chart, you will notice the sharp drop in early 2012 (line 1) that took the market just over 2% lower in a few days. The market quickly reversed to the upside and made new highs in the following weeks. At the same time, the Advance/Decline line dropped below its WMA, but soon made new highs.
The break in the A/D line through resistance (line c) on December 20 (line 2) was a sign of internal strength, and the recent sharp rally was not surprising. The A/D line now appears to be losing some upside momentum, and it could drop below its WMA this week.
The Spyder Trust (SPY) was down Friday, but managed a slight gain last week, as it made a high of $152.61, just below the resistance at $153.12.
The quarterly R2 resistance is at $155.10, and the all-time high is at $157.42. It may require a correction before the all-time highs can be challenged.
The S&P 500 A/D line turned lower Friday, but is still well above its rising 21-day WMA. A drop back to the breakout level (line c) would not be surprising on a correction.
The 20-day EMA is at $150.42, with more widely watched support now at $149.50. A break of this level should signal a decline back to the September highs at $148.15, if not the $146 level. The daily and hourly on-balance volume (OBV) analysis I featured in my recent Trading Lesson did confirm the highs last week, and it closed above its WMA.
The SPDR Diamond Trust (DIA) has closed slightly lower the past two weeks, as it continues to underperform the S&P 500. The close last Friday was not far above the 20-day EMA at $138.75. The next good support from last fall is at $136.39, with the daily uptrend (line e) at $133.50.
The Dow Industrials A/D line closed Friday just above its WMA and its uptrend (line f). This uptrend is likely to be broken on a correction. The weekly OBV (not shown), which turned down the previous week, is still declining.
The rally in the PowerShares QQQ Trust (QQQ) appears to have run out of gas, as it closed the week lower. It needed to move above the resistance at $68.35 to confirm a stronger rally.
The 20-day EMA is now at $67.37, with stronger support at $66.46 to $66.10 and the monthly pivot support.
The Nasdaq-100 A/D line has turned down, but is still barely above its WMA. It may take a day of very strong A/D ratios next Tuesday to keep it from dropping below its WMA.
The iShares Russell 2000 Index (IWM) had another solid week, closing up almost 1% for the week even though it was down slightly on Friday. The 20-day EMA is at $89.97, with the former resistance, now support, at $88.85 (line c). The monthly pivot support is at $87.
The Russell 2000 A/D line flattened out a bit Friday, but is still above its rising WMA. The A/D line has first support (line d) and the September highs. There is longer-term support at line e.
NEXT: Sector Focus, Commodities, and Tom's Outlook|pagebreak|
The iShares Dow Jones Transportation (IYT) was up just over 0.5% last week, as it continues to lead the Dow Industrials higher. The weekly chart shows a narrow range, and volume declined late in the week. There is first good support now at $100.60 to $102, as IYT is well above the quarterly pivot at $93.21.
The sector ETFs were mostly up or down slightly last week. Just before the close, four were up, four were down, and one was unchanged. The Select Sector SPDR Industrials (XLI) and the Select Sector SPDR Financials (XLF) did the best, up 0.9% and 0.8% respectively.
On the downside, the Select Sector SPDR Energy (XLE) and the Select Sector SPDR Technology (XLK) both lost 0.6%. XLE and XOP were both discussed in more detail in last Friday's column, as was crude oil.
I have recommended taking some partial profits in my favorite sectors in the past few weeks, and I will be watching them closely in the week ahead.
The yield on the ten-year T-Note closed the week back above the 2% level, and the uptrend from last summer's lows is still intact. There is initial support now in the 1.80% to 1.83% area.
The SPDR Gold Trust (GLD) gapped to the downside Friday and hit a low of $154.56 before rebounding to close at $155.81. The weekly chart shows that the next major support from 2011 is in the $148.20 area (line a). If this is broken, the major 38% support is now at $140.
The weekly OBV closed above its WMA last week, but reversed this week and is now below it. There is important OBV support at the early January lows (line b). The sentiment and technical picture look as though a bottom was in place, and aggressive investors who went long at $161.34 were stopped out at $156.42 for a 3% loss.
The Week Ahead
In last week's column, I thought the technology sector might come back to life and provide the fuel for prices to accelerate again to the upside. This is still possible, but it sure did not happen last week.
I continue to recommend taking some profits on long positions. I added some more sell recommendations in my review of the Charts in Play portfolio last week, and may have even more this week.
I am still finding a few stocks that appear to have already completed their correction and are close to good support. If you have had some good winners this year, you should take a look at these new picks...but if you have not been in stocks so far this year, I would not join the party now. I continue to think that there will be a better opportunity later in the year.
Related Articles on STRATEGIES
Matthew Kerkhoff, options expert and editor of Dow Theory Letters, continues his 14-part educational...
The monthly S&P500 Emini futures candlestick chart has not had a pullback in 14 months. This has...