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Global Economy Is Looking Up

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Keep an eye on the US dollar and its relation to other currencies.

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Summary of Yesterday's Notable Technical Developments

Stocks rallied enthusiastically Monday sending the Dow and NASDAQ back above important resistance levels (10,507 and 2271, respectively); the S&P remained below 1139 resistance level.

Commodities
were sharply higher as gold ran right up to its 1120 resistance area and oil managed to close above the $80 level.

The US Dollar Index
was lower yesterday, testing support at 77.47.

Today: All eyes should be on the dollar as the DXY has been below support (77.47) this morning and PowerShares DB US Dollar Index Bullish (UUP) is flirting with its support at 22.80. Let's see if the dollar can catch a bid here or if it must move lower (more support nearby) before working higher toward our intermediate-term target of 81 to 83. Oil is nearly flat while gold is higher by more than 0.5%; stocks are mixed and rather flat while the benchmark 10-year Treasury is stronger with its yield around 3.77%.

Market Internals: NYSE
(Figures are rounded)


Click to enlarge


Critical Market Components (with ETF proxies):

S&P 500 (SPY): short-term support is Thursday's low of 1114.81; more substantial support comes in at the 75-day moving average of 1085; meaningful resistance comes in at 1139, which is a convergence of Fibonacci levels. The SPY has corresponding support levels of 111.39 to 108.21; resistance comes in at around 118.50.

NASDAQ (QQQQ): on Monday, the NASDAQ blew through both the 2271 and 2292 resistance levels. Those levels now become support. The next minor resistance comes into play at 2331 (March 2007 lows) with more substantial horizontal-line resistance coming up at 2400 and 2500.

Dow Jones Industrials (DIA): the Dow also blew through its resistance at 10,507 and -- if there's no quick giveback -- appears headed to the next resistance area at 11,000. Previous resistance at 10,507 and 10,450 now becomes support. For the DIA, resistance comes in at 106.36 to 106.63; initial support is at 105.

10-Year US Treasury Yield (TLT): resistance for rates on the 10-year Treasury remains the 3.8% to 3.9% range and support is still down at the 3.6% level. There's a tug-of-war going on between the forces of potential inflation (pushing rates higher) and those of the "safety trade" (pulling rates lower) when money flows out of stocks and commodities. These levels translate to support for TLT at 89 and resistance at just below 92.

Commodity ETF (DBC): the DBC broke out above its recent resistance level of $25 and appears headed to minor horizontal-line resistance at $25.60 to $25.68 (June 2007 highs). Support for DBC is now the $25 breakout point with additional support at $24 below that.

US Dollar Index (UUP): the range for the DXY remains 77.47 to 78.44 on a closing basis. The lower end of that range is being threatened today. This trading range translates to 22.80 as support and 23.20 as resistance for UUP -- the ETF proxy for a rising dollar. If the DXY breaks down below 77.47, there's plenty of additional support just below starting at 77.24.

Semiconductor Index (SMH): the SOX closed just below its upside resistance at 366.52 (Fibonacci projection); the next meaningful resistance above that is 384.28 (bottom of first wave lower from July 21, 2006); horizontal line support exists at 332.11. These levels translate to 28.43 as resistance and 27.50 and 26.50 as resistance for the SMH exchange-traded fund.

Bank Index (KBE): the banking sector got off to a nice start for 2010 yesterday, but there's no change to the technical condition of this group; for the index, critical support exists at 41.62; staunch resistance at 44.82. The KBE exchange-traded fund has support and resistance at 20.72 and 22.57.

Crude Oil (USO): crude oil easily closed above resistance at $80 (now support) and is rapidly headed to the next resistance level at $82. A close above $82 would likely lead to an acceleration to the upside in prices to around the $85 level. USO support comes in at around 40 now while its resistance is 41.92 (corresponds with the $82 level in crude) and 42.56 above that.

Gold (GLD): gold is trading right at resistance created by the underbelly of the broken previous uptrend line at the 1120 to 1122 range. Support for the yellow metal comes in at 1075 in the short-term with 1045 as our ultimate target (for new buys) below that. For GLD, the buy point would be around the 105 level while its resistance comes in at 110 to 110.50.

Key Charts

The Baltic Dry Index for the last 12 months



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The Baltic Dry Index vs. the S&P 500 for 3 months


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The Baltic Dry Index vs. the Amex Oil Index for 3 months


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  • The charts above show the popular Baltic Dry Index over the last year and three-month comparisons versus the S&P 500 and the Amex Oil Index. The Baltic Dry Index (BDI) is widely followed as a proxy for global economic activity.

  • The charts show that the BDI has pulled back nicely after a powerful move to the upside that began in late summer. Two points need to be made here:

    • The run-up in the BDI in 2009 merely made up for a fraction of the massive decline that occurred in 2007 through 2008 (especially late in 2008). The charts offered by Capital Link Shipping only go back one year; more history can be found at Bloomberg.com.

    • Second, the most recent pullback appears to have brought the BDI down to a rising uptrend line (not shown here due to chart constraints).

  • The up-and-down move by the BDI over the last three months hasn't been reflected in the price movements of the S&P. Surprisingly, the recent BDI pullback hasn't coincided with a pullback in equities. Perhaps there's a delayed reaction (down) still to come in the S&P -- but there doesn't seem to be a strong relationship here. The S&P seems to be trading on its own, rather than being led by or tethered to the BDI.

  • There appears to be more of a directional correlation between the BDI and the Amex Oil Index, but the magnitude of the moves in price are clearly not equivalent. With the price of oil rising nicely recently, we can see that there has been a turn up in the BDI. Perhaps there's the opposite relationship here where oil leads the BDI (as opposed to the BDI leading the S&P in theory).

  • There is no information in these charts that would lead me to believe that we're in for further economic problems in the short term. Again, we must be cognizant of the longer-term history not shown here, but the short-term look at the BDI would give us a neutral-to-positive outlook for the global economy, commodity prices, and equities.

  • Risks to the positive outlook just mentioned would come from a continued bout of strength by the US dollar, which would likely weigh on both equity and commodity prices and would certainly have economic ramifications (which would vary depending on the part of the world in which you live) globally.


Strategy: Based on the information presented in the charts, I would maintain a modestly constructive outlook for the global economy and for the global equity and commodity markets as a by-product of that economic outlook. Be aware of the movements of the US dollar versus other currencies, however, as further strength could have an effect on the global economy and global equity and commodity markets.

Inter-Market Observations:

Bond Prices (falling): Bonds have been moving lower in price and higher in yield on the long end of the curve. Two-year Treasuries have been very weak of late, too, as heavy supply and concerns that the Fed may not be as accommodating begin to weigh on the short end.

Stocks (still rising): Stocks continue to rise despite a lack of confirmation by the volume figures. There hasn't been any clear bearish reversal signals for stocks in quite a while, so it's advisable to remain with existing stock positions and add only to strong sectors on any minor pullbacks.

Commodities (rising):
Commodities have come out of a bit of a consolidation phase and are attempting to work higher here. Oil and copper seem to be leading on the upside while gold is continuing to work off a short-term overbought condition.

US Dollar Index (neutral to rising): The US dollar has clearly broken out of its downtrend for much of 2009. Obviously there will be periods where the DXY consolidates its gains (like now), but I believe the intermediate trend is higher for the greenback.

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No positions in stocks mentioned.

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