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Dollar decline boosts commodities, Treasuries, while Stocks stall out

Key Themes:

1. Dollar decline following FOMC has accelerated overnight as a repricing of risk has led to breakdowns to the lowest levels of the year in DXY, while commodities are beginning to show increasing signs of strength, as witnessed by recent surges in both Energy and Precious Metals.  DXY pullback down under mid-February lows at 95.24 should allow for a further correction down to levels hit last August near 92.50-93.50

2. S&P managed to rise back above last Friday's highs given WTI Crude's rebound, and at 10pm EST Wednesday night, both had surpassed the late week highs from last week.  Yet big reversals happened overnight, coinciding with a strengthening in the Yen and Japanese NIKKEI reversing all of its early gains, which in turn hit European stocks, now down over 1%.   Overall, it's still difficult for one to sell into this move until trends are broken, (which would take a break of SP-1995)  but noticeable signs of trend reversal are now occurring in assets which have historically correlated well with S&P, such as both TNX and USDJPY.   Momentum wise, signs of near-term overbought conditions have begun to wane a bit given the stallout earlier in the week, but we'll need to see a close underneath the 20-day moving average to expect acceleration.  For now, it's a warning that bears watching in the days ahead.

3. WTI Crude's rally might encounter difficulty moving much further after an 8% rally just in the last couple days, which at last night, had successfully exceeded last Friday's highs near $39. As the chart below shows, this area adjoins an uptrend line from mid-February, and is thought to be resistance to this rally.  For now though, impressive to have seen a complete "About-Face" with Crude moving quickly from $36 back to $39 to cast doubts on its hourly pattern being a true Head and Shoulders reversal pattern.

4.  Gold and Silver stocks look attractive given Gold's ability to recoup most of its two-day decline, while XAU finished at the highest levels since last May, nearly 10 months ago.  This sets up for the eighth straight week of gains, but we've seen scant evidence of any deterioration whatsoever and each of the last seven weeks made higher highs, higher lows and higher closes.  Movement back up to near $83 looks likely for XAU before any real resistance occurs.

5.  Treasury yields moved exactly opposite the equity market on Wednesday, which was a rarity and potentially a warning sign, as bonds and stocks have seldom moved in the same direction.  Given that stocks just pushed back to new highs overnight after the last few days of consolidation, but have since retreated, it's worthwhile to notice that Treasury yields have retreated a full 14 bps on the 10-year yield down to key support near 1.86.  This area intersects an important uptrend for TNX, similar to 1995 for S&P Futures, so a break of this area would be thought to be important, and likely bearish for the Financials, and for stocks.

Overall, the US Dollar's decline post FOMC yesterday set the tone for the S&P to move higher initially, but Treasury yields might have given the bigger clue, and always important to watch when Stocks and bonds start moving in unison after weeks and months of moving opposite.  The unfolding in the Dollar vs Japanese Yen, and overnight flight to safety with Gold rallying further has resulted in yields pulling all the way back to 1.86 on the 10-yr, a key area of support.  USDJPY meanwhile, has made a more severe breakdown down to its own important line in the sand at just North of 111, while S&P remains well above its own key area at 1995.  (Futures dropped nearly 17 handles from overnight highs)  For now, a warning sign of a possible larger reversal after a 12% run in stocks within the last four weeks, but the key will be breaks of 1.85-6 for TNX, breaks of 111 by USDJPY and violations of 1995 by S&P Futures. 

Given the US Dollar breakdown to multi-month lows last night by DXY, Materials and Energy should be favored for strength, along with sticking with Utilities for now, which still look too early to fade given a possible breakdown in Yields.  Gold and Silver stocks in particular look attractive after Wednesday's move and should rally further given Thursday morning strength in Metals.


S&P popped back to new high territory given Wednesday evening's Crude rush back above $39 but has since fallen to give back all of its overnight gains, and flirting with areas just above key support at 1995.  For now,   Given the warning signs given by USDJPY and TNX, we should look for possibility of this joining suit, but will be difficult to do much until we witness a break of 2000, where the 10-day moving average lies and then 1995, the larger trend.


S&P has stalled out a bit in the last few days, but yet, the trend remains bullish from mid-February, with ongoing signs of higher higher and higher lows from mid-February, with no signs of weakness.  Momentum has grown overbought and stalling a bit after regaining about 70% of the prior decline since November and it's right to be bullish, yet not complacent at this stage with eyes on the area of 1995-2000.


WTI Crude has miraculously recovered all the way back to new highs as of late Wednesday evening, with prices having now spiked more than 8% in the last couple days.  This area at $39.25 is important as resistance given the retest of former trendlines being extended from February lows, and prices have become understandably overbought.  For now, trends are far more positive in the near-term, with WTI having successfully recovered all this technical damage, but still a concern to have this one-month trend having been violated.  As of Thursday morning, prices have retreated a bit down under $39, but still higher given the dramatic breakdown in the US Dollar.


Charts of the US Dollar index have violated mid-February lows, bringing the DXY down to the lowest levels of the year.  Price patterns at this point call for an acceleration down to last Fall's lows, which lies between 92.50-93.50, and should have importance.  This decline should be a Boon for commodities and commodity sensitive stocks, and Materials and energy, could continue their recent outperformance after being last months worst performing groups.


XAU surged back to new highs on Tuesday, finishing above $71, which puts the index at the highest level since last May, nearly 10 months ago.  Despite commonly watched indicators like the Relative Strength index (RSI) being overbought, as we all know, overbought doesn’t mean “Sell” and they can certainly stay overbought for some time.   With two days left in the week, XAU is set to make its eighth straight week of gains, with an ongoing pattern of higher highs and higher lows.  Only if it closes back down “UNDER” its 20-day moving average, which it hasn’t done since the rally began back in late January, would it be likely that XAU could experience some selling pressure.  Seen another way, a close at new multi-week lows at this point is a “MUST” to think that Gold and Silver stocks are beginning a consolidation.  For now, the Fed’s actions have served to turn the US Dollar back to the downside, and have lifted the Metals.   This trend should continue up to test last January highs near $83 at a minimum before any slowdown, technically speaking, which is about a 17% rise from current levels. 



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