Why The Fed’s Dollar-Bashing Could Bode Well For This ETF
Monday, December 22, 2008
by Jim Stanton, Technical & Quantitative Analyst, Smart Profits Report
As we head into the final days of 2008, the stock market seems to have entered “holiday mode.” And after one of the most frenetic and stressful years on record for investors, it comes as blessed relief.
Over the past couple of weeks, the Dow Industrials have seen a net gain of just 55 points, while the S&P 500 is up just over 11 points. Sure, these indexes have made new rally highs, but it’s been a struggle.
As for the tech-heavy Nasdaq indexes, they’ve fared a little better, gaining just over 3% over the past couple of weeks.
But the strongest performers don’t always come from the biggest players…
Big Performance From Small Players
The small-cap indexes have enjoyed the best gains recently, tacking on about 5%. Remember, it’s historically small-cap stocks that lead economies out of a recession, so it’s well worth keeping an eye on indexes like the Russell 2000 (^RUT) and the S&P 400 Midcap Index (^MID).
In my December 8 “Sector Watch” column, I included a 2-hour intraday chart of the S&P 500, so let’s get right up-to-date, as of last Friday’s close.
Moving With The Waves… The Next Short-Term Levels For The S&P
As you can see, the S&P 500 did trace out a 3-wave (Elliott Wave Theory) move to the upside. While I expected this move, the index has so far not reached its main upside target of 927. However, if you recall, I did mention that this complex chart pattern had generated an alternative upside target around 898, which has been reached.
Last Friday, the index drifted down and tested a short-term trendline and could reverse higher from here. However, if the S&P 500 closes below that trendline, it could signal more consolidation - perhaps testing the 850 level, and possibly as low as the 815 level.
While two of the four small-cap indexes that I follow have triggered daily buy signals, none of their larger-cap counterparts have managed to do the same. Only one has reached its upside objective, but overall, the intermediate-term trends remain bullish for now.
Now onto this week’s sector…
As Federal Stimulus Pressures The Dollar, Look For This ETF To Bounce Back
Until last Friday, the U.S. Dollar Index had shed more than 12% from its November highs. Moves like that usually bode well for the commodity markets - as evidenced by the strong upward swings for gold, silver, cocoa, coffee, and the grain markets. But oil and copper haven’t responded yet.
With all the money the Federal Reserve and U.S. Treasury have pumped into the financial system lately, the dollar will continue to cringe and suffer for as long as the Asian and European markets don’t do the same in order to deal with their own problems.
It is still very possible that the rally in the U.S. stock indexes from the November lows is just a bear market rally. If that’s the case, traders will probably turn their attention back to the commodity markets if the dollar remains weak - and especially if the stock indexes head south again.
So let’s check out the PowerShares DB Commodity Index Tracking Fund (AMEX: DBC)…
It’s no coincidence that DBC and crude oil both made their highs in July, as oil prices topped out at $147 a barrel.
That precipitous 50% drop you can see for DBC since then is largely due to the tumble that oil prices have taken (as well as several other commodities). And with oil trading at lows last week, DBC hasn’t been able to gain much traction.
But look for that to change if oil prices begin to head higher again.
The downtrend line off of the July highs currently comes in around $24, which also coincides with the 50-day moving average (marked in red). Keep in mind, though, that as time goes by, the trendline and 50-day moving average will slowly move lower.
Here’s the deal: If DBC can manage to close above the trendline and the 50-day moving average a couple of times, it should be good for a move up to the $29 to $33 area.
That’s all for this week. Have a safe and merry Christmas.
Jim
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