Euro Weakness Drives Markets Lower For The Week

The S&P closed down just .18% for the week but the closing number on Friday of 1337.77 was 1.6% off of the highs of the week which were made on Tuesday at 1359.44. The Euro had another week to forget as it fell 1.73% on the week and is close to breaking the 1.40 level vs the dollar. Gold, silver, and PGM’s were also weak, but managed to stall the selling out later in the week and like the Euro, all have held on to critical support levels. Ultimately, I think that it is likely that we see a bounce this week in front of options expiration.

The wedge building on the SPY is in danger of breaking down after the big move to the downside on Friday. The 26 MA is providing support along with the $134 level which is a pivot high. I think that the S&P will continue its 3 week rally next week as there is strong support here and the dollar has covered a lot of ground in a short period of time which may lead to a pullback.

There has been good accumulation volume behind the dollar index’s move over the past two weeks. Yesterday it closed above the 50 MA and engulfed the previous candlestick. I think that the UUP makes a run at $21.80 before the end of the week, but I doubt that it will manage to close above that level. Expect the rally to come early in the week, while it stalls out by Wednesday or Thursday, which should give the markets the lift off of support that they are looking for. Remember that options expiration is Friday and many of the major asset classes are currently right above support or right below resistance going into next week so volatility should be a given.

FXE found support after testing $140 though it is below the 50 MA and selling volume has increased substantially. It is approaching the 30 line on the RSI and appears to be oversold so a bounce may be in order before the next week is over.

Silver re-tested the 100 MA on friday and managed to reject the lows as it closed 2% higher on the day. Horizontal support is at $34 and there have been two cases where it has made bottoming tails on the daily chart. On those days $34 was tested and rejected for a much higher close off of those intraday lows. These bottoming tails are the exact inverse of the topping tails that silver formed when it made a run at $50. However this does not mean that it’s done moving down, it may break support at $34 and test $30 for all anyone knows, or it may trade sideways for a while. Whatever the case may be, it has tested support several times and shown that it is not ready to move lower quite yet. This, in combination with how oversold the Euro is, and how overbought the dollar is (still short term), makes for plenty of sense for it to finish higher next week.

Gold has outperformed silver on the way down and as stated before, I am using gold’s movement as a gauge for the strength in the commodities and precious metals sectors because it is by far the most sober asset of them all. Gold should be the tool investors and traders use as a confirmation of movements in other commodities. As of right now, Gold is the best indicator to use to time the market and to determine if price activity is legitimate or false. When silver made its massive run at $50, gold, and other commodities for that matter, did not confirm the meteoric rise. This and the CME margin hikes prove that the move in silver was mainly due to speculation and overleverage and not physical demand or inflation. This is good news for silver investors because in doing so, the CME averted a premature mania phase in silver and if silver continues to trade sideways or even fall further, more and more pundits will become bored with it and assume that the previous run was the end of it.

Likewise, on the way down gold has outperformed silver and made the same bottoming tails as it has tested support. It closed below the 26 MA on friday but I would need to see another close below the 26 to confirm that as those bottoming tails are signs of a rejection of anything below that level. Gold has support in intervals of $20 ($1460, $1440, $1420), so if at some point it does continue to move lower, those will be the pivot points for traders to scalp, and for investors to potentially accumulate.

Ultimately for next week, be on the lookout for a rally in commodities and equities as the Euro gets out of oversold territory and the dollar takes a breather. I think that the dollar may rally early on in the week, but by options expiration it may come back down to the 50 MA again.

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About Aaron Basile
Market Technician, Equity/Commodity Trader, Austrian Economist, Contrarian Investor

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