I have a certain set of rules when it comes to the markets. Rule 4 is simple: A market that can't go up (or down), won't go up (or down). This seems confusing, I know, but let me explain.
From a technical point of view, if a market is exhibiting bullish indicators and patterns yet failing to rally, it isn't going to rally. A look across the commodity landscape shows a vast collection of bullish ruins including corn, soybeans, wheat, crude oil, and gold. On the other hand, if a market is showing bearish technical signals yet refusing to go down, it's highly likely that particular entity is setting up for a rally.
Take a look at the attached weekly chart for the U.S. dollar index (USDX). Going back to early 2015 the USDX was indicating its secondary (intermediate-term) trend, as well as the major (long-term) trend on its monthly chart, had turned down. Weekly stochastics (bottom) study established a bearish crossover (the faster moving blue line crossing below the slower moving red line) above the overbought 80% level the week of March 16, one week after posting its high of 100.390. On the monthly chart (not shown), stochastics established this same bearish crossover at the end of March. Technically, the USDX looked like it was headed for a breakdown.
The fundamental catalyst for such a move would prove to be the continued waffling of the U.S. Federal Reserve on interest rates. Month after month, quarter after quarter, the only thing that changed was the wording of the minutes with the bottom line remaining the same: The Fed wasn't confident enough in employment numbers to make a move on interest rates.
Yes, the USDX index did come down. On the weekly chart you'll notice that it posted an initial low of 93.133 the week of May 11, a test of support pegged at 93.236. This level marks the 33% retracement of the previous secondary uptrend from 78.906 (week of May 5, 2014) through the 100.390 high. After rallying back to test resistance 97.973 and 98.677, the USDX fell again to a low 92.621 (week of August 24).
This move to a new low should have been the nail in the coffin for the USDX. However it found renewed buying interest as it tested the 93.236 to 92.183 (38.2% retracement level) support area, so much so that it closed higher for the week. As weeks wore on, this spike reversal would prove a key turning point.
The USDX index would give one last bearish technical signal, a move to a new 4-week low of 92.806 the week of October 12, but once again subsequent interest has been nothing but unbridled buying. Heading into this week the USDX was testing resistance at 97.803, the 67% retracement level of the sell-off from 100.390 through the 92.261 low. As of Thursday evening the index had climbed to a high of 98.135, testing final resistance at the 76.4% retracement level, ahead of Friday's release of October's nonfarm payroll and unemployment numbers.
Shortly after 7:30 am (CT), the final vestiges of a technical downtrend were blown away by a nonfarm payroll number of 271,000 (analysts were looking for 177,000) and unemployment of 5.0% (September was 5.1%). The USDX rallied to a high of 99.345 with the next target being the March high of 100.390. Meanwhile, weekly stochastics are drawing near the 80% mark but still have room to let the USDX run before indicating an overbought situation is established.
Commodities, as one would expect, are a sea of red Friday morning. Gold is down almost $20, grains finished the overnight session on the defensive, and crude oil saw its modest morning gains erased. Despite remnants of bullish technical signals in some of these markets, Rule 4 would suggest continued pressure would not be surprising to close out the week.
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