iStock_000009640360XSmall Morning Chart Book: 07/28/10

Dan Wantrobski CMT (215) 665 - 4446

We continue to expect a U.S. equity market rally into August.

 

 

 

  • The benchmarks have all broken back above their respective 50-day moving averages and are now trying to move past the 50% retracement threshold of the April-June decline.
  • Small- and mid-cap sectors have been participating- confirming strong breadth readings over recent advances.
  • Dow Theory looks to be supportive of a buy signal on the stock markets should the industrials and the transports break past their respective June highs on a closing basis.
  • Outside risk gauges such as copper prices and the euro have been stronger- both have broken back above their respective 50-day moving averages.
  • Safe havens are not triggering any warning signals: the U.S. dollar index remains under pressure, yields on the ten-year note have stabilized and may be showing signs of a minor double bottom; and gold has been very weak lately. These are moderately oversold on a short-term basis and may cause the equity benchmarks to stumble somewhat over the near-term.
  • Financials, cyclicals, and energy have been leading (relative basis) during the most recent charge; in a not so distant fourth has been technology. This is generally a good sign, although we note that utilities, staples and telecom (defensives) also remain within bullish trends against the broader S&P 500. Continue to use a bar-bell approach.
  • Key benchmarks are back above their respective 50-day moving averages. We are also seeing some minor trend line breakouts on the shorter-term daily charts as well.

 

Safe Havens

At the other end of the spectrum, we were glad to see the safe havens weaken as investors moved back into the risk markets. For the time being, neutral- to –bearish formations in these areas are likely to be beneficial for further equity market strength in our view.

The U.S. Dollar

DX: 82.295

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The U.S. dollar index has slid considerably (and most noticeably against the euro). Though oversold on a short-term basis, the longer-term weekly chart shown above has the currency breaking below its 30-week moving average (red line) just as it sits on the 50% retracement zone of its 2009-2010 rally. A break below 82 would likely lead to a 61.8% retracement of that same rally effort- rendering a target closer to 80. As the recent safe-haven play, further weakness such as this would likely aid a benchmark like the S&P in rallying further- at least over the short-run. Initial resistance for the dollar now resides within the 84.50-85.50 region over the next few weeks.

10-Year Note Yields

TNX: 3.052%

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The TNX has also been showing signs of stabilization recently. As a safe haven draw against the risk markets, higher yields would be a bullish development for the stock markets over the short-run in our opinion. On the trading chart above, note the potential minor double bottom on the TNX- complete with rising MACD lows (lower portion). This suggests that yields are poised to test the 3.13% zone in sessions ahead- a breakout there would be bullish for the TNX, rendering secondary targets near the 3.20-3.25% region over the next few weeks. Such a move could confirm the rotation away from safety once again.

As a side note, we have also outlined the Japanese yen as safe haven. The yen remains bullish overall- but overbought on a short-term basis. Any fades that reduce overbought pressures on the currency may help the cause for U.S. equities over the next few weeks. The rising 50-day moving average for the yen currently resides at 1.118 for initial support.

 

Source: ChartBook

 

 

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