Written by Jim Welsh
Dollar
As noted in the last two WTR’s:
“I expect the Euro to exceed 1.2536 before a top is in place, and the Dollar to fall below its low of 88.44 before it bottoms.”
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The Dollar dropped to a new closing low on Thursday and new intra-day low below its low on January 25 on Friday. Friday’s upward reversal was a key reversal day since Friday’s low was below Thursday’s low and high and was accompanied by a higher close. The Dollar’s RSI on Thursday was 31.8 when it closed at 88.59 and well above its RSI of 21.3 on February 2 when the Dollar closed at 88.67.
The RSI divergence and reversal higher are the first signs that the Dollar has begun its bottoming process. Further confirmation will come if the Dollar is able to close above the 90.57 on February 2. Sentiment toward the Dollar is very negative and positioning in the Dollar shows a net short position, which has preceded a rally in the Dollar in recent years.
Click on any chart below for large image.
Euro
The Euro rallied above its prior high of 1.2536 on January 25 as expected. On Friday it experienced a key reversal lower as the high and low was above and below Thursday’s range. As I discussed in the January 29 Weekly Technical Review,
“The Euro topped on May 5, 2014 at 1.3993 and dropped .3652 until bottoming on January 2, 2017 at 1.0341. A 61.8% retracement of that large decline would carry the Euro back up to 1.259. The longer term chart of the Euro suggests it could rally back to the down trend line connecting the highs of April 2008 at 1.6008, May 2011 at 1.4938, and May 2014 at 1.3993. This trend line comes in near 1.2770 and will decline modestly in coming weeks.”
The high on Friday was 1.2554 which is not far from the 61.8% retracement, but is well below the level of the trend line. A decline and close below 1.2100 in coming weeks would likely confirm that an important high has been recorded. On Friday I established a partial position in the Euro inverse ETF EUO which is leveraged 2 to 1. Normally, I use 1 to 1 ETFs, but the volume in the 1 to 1 inverse ETF is too low.
Interest Rates
The high so far for the 10-year Treasury was 2.926% on Thursday before dipping to 2.85% on Friday and rebounding to 2.915% today. The key level remains 3.03%, the high from December 31, 2013. On February 14 the bond market was surprised by a pickup in core CPI inflation. Although yields ticked higher they didn’t blow out as one might have expected given the news. Part of the reason may be the positioning in the bond futures market which shows bond traders have already established the second largest short position in years.
The largest position was in February 2017 just before bond yields topped in March and subsequently fell. I think Treasury bond yields could fall by 20 basis points (0.20%) in coming weeks. The Atlanta Fed’s GDPNow forecast has dropped from 5.4% a few weeks ago to 3.2% on Friday. As discussed in the January and February Macro Tides, I thought GDP would come in less than expected in the first quarter. Although I expect inflation pressures to increase in coming months, there may be a short term respite which will allow bond yields to come down. This could be reinforced if Average Hourly Earnings gain for February is lower when reported on March 9 than the 2.9% reported in the January jobs report.
On February 16, US Commerce Secretary Wilbur Ross unveiled suggestions for punitive tariffs on foreign steel and aluminum. The Commerce Department has proposed one of three options for steel: a 24 percent tariff on all imports, a 53 percent tariff on imports from select countries, or cutting the level of all steel imported by the US by 37 percent. The Commerce Department proposed a tariff of at least 8 percent for aluminum. The White House has said that President Trump could take until mid-April to decide exactly which of the Commerce Department’s proposals to implement. If President Trump decides to impose tariffs, our trading partners are likely to respond with trade protectionist policies of their own.
If this occurs, the stock market will respond negatively and bond yields would likely fall in anticipation of slower economic growth as trade barriers reduce trade.
The high last week on the 30-year Treasury bond was 3.179%. It then dipped to 3.103% on Friday before rebounding to 3.17% today. It’s possible for the yield to fall to 3.00% in coming weeks, which would close a gap on the yield chart.
Stocks
The market was extremely oversold when it bottomed on February 9. The rally since then has removed the oversold condition as measured by the 21 day average of Advances minus Declines, and leaves the market vulnerable to a pullback.
The S&P 500 topped at 2754.42 on Friday which was 10 points higher than the 61.8% retracement from the high of 2873 and low of 2533. A close below 2717 would increase the odds that the high for wave A was in place. As discussed in the February 12 WTR:
“The pattern of the decline from the January 26 high is instructive in terms of what is likely to unfold in coming days. It is fairly clear that the S&P 500 declined in a 5 wave pattern. This suggests that this correction is not over and after a rally is likely to be followed by another decline that will at least test the low of 2533 on February 9 or make a new low.”
The rally from the February 9 low is wave A which should be followed by a wave B decline. Wave A has traveled 221 points (2754 minus 2533). A 50% retracement of this rally would imply a pullback of 110 points and bring the S&P 500 below 2650. If this pattern analysis is correct, a wave C rally would then lift the S&P 500 above 2754 before the rebound from the February 9 low at 2533 is complete. The S&P would then be poised to fall and retest the low at 2533 and potentially decline below 2450.
Gold
Gold recorded an intra-day high of 1361.24 on Friday morning before reversing lower. A close below $1306 would set Gold up for a decline to $1275 and potentially $1250.
Gold stocks continue to underperform Gold which suggests a decline to $20.50 on GDX is possible.
Tactical U.S. Sector Rotation Model Portfolio: Relative Strength Ranking
The Sector Relative Strength Ranking is based on weekly data and used in conjunction with the Major Trend Indicator (MTI). As long as the MTI indicates a bull market is in force, the Tactical Sector Rotation program is 100% invested, with 25% in the top four sectors. When a bear market signal is generated, the Tactical Sector Rotation program is either 100% in cash or 100% short the S&P 500.
The MTI crossed above its moving average on February 25, 2016 generating a bear market rally buy signal. Based on the buy signal, a 100% invested position in the top 4 sectors was adopted. The MTI confirmed a new bull market on March 30, 2016. The MTI continues to indicate that a bull market is in force. Please note: Past performance may not be indicative of future results.
Disclosure
The S&P 500 Index is a broad-based measurement of changes in stock market conditions based on the average performance of 500 widely held common stocks. The Russell 2000 Index is a small-cap stock market index of the bottom 2,000 stocks in the Russell 3000 Index. The Nasdaq 100 is composed of the 100 largest, most actively traded U.S. companies listed on the Nasdaq stock exchange. All indices, S&P 500, Russell 2000, and Nasdaq 100, are unmanaged and investors cannot invest directly into an index.
