Over the last two days, commodity stocks and commodities opened strongly, but quickly lost ground to profit-taking in the early morning hours. The consolidation process seemed orderly until today when silver dropped $1.80, gold dropped $47.90, and crude oil dropped $3.19 at the session lows. Basically, supply has entered into the equation. So far, the sell-off is looking like a buying opportunity with Gold holding just above its 50-day moving average at the close. Even the more volatile, Market Vectors Gold Miners ETF (GDX) was able to stage a rally in the final market hours to hold near its recent, December lows.
It’s merely the natural order of things when a trend consolidates. Trains leave stations, but there’s always a stop ahead. Since the dollar broke out of its bearish 2H 2010 channel (see my Dollar Tech article) during November, this consolidation is a necessary stop that commodities have to make before the next train leaves.
Just as in December 2009, strong economic data is supporting the U.S. dollar. On December 4, 2009, traders were jolted by a huge improvement in the jobs data. That day, the U.S. dollar broke out above the 50-day moving average (DMA) to start a 6-month bullish trend. In the past two days: the ISM’s Manufacturing Index rose to 57 (a reading above 50 is expansionary), construction spending was up for November, domestic vehicle sales were reported at a healthy 9 million units (the index has been in an uptrend since August), and factory orders for November were up 0.7%. This is good because many economist feared inventory overhang would hinder 4th quarter growth. Stronger economics will support the U.S. dollar, as will higher interest rates.
Interest rates have bottomed since October and are now testing the old February and March lows (now resistance). So far the consolidation has been shallow. A very steep, rising 50-DMA looks poised to cross above the 200-DMA as confirmation of the long-term trend higher for interest rates.
From a technical standpoint, the dollar has continued to consolidate between the 200-day moving average (above) and the 50-day moving averages (below) as I estimated a month ago in Dollar Tech. Because gold and the dollar are in a trading range, it would be premature to call for a move up or down out of the range. Follow the break-out at those key levels for guidance.
Side Note: Wireless
As I mentioned in my December 14th market observation, "Wireless: Old Tech, New Uses", wireless technology stocks have been overlooked by many - until now. The New York Times, citing unnamed sources, reported that Qualcomm is near a deal to acquire Atheros Communications (ATHR) for roughly $45 a share, or $3.5 billion. Atheros closed the day, up 19.29%. If you like the tablet PC story, you have to like the technology that unleashes the tablet’s strengths: access to the internet and internet-enabled applications. Wireless technology doesn’t just stop at the tablet. Read my article to find out what other new applications for wireless technology are here today, compared to in the 90s when you may have owned the group.
