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May 2001 highs to the relative lows

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With tensions rising in a different part of the Middle East, the U.S. dollar weakening against major foreign currencies, jobless claims at multi-year highs and economic signs that the economy is lowly improving, it is enough to have a fundamental analyst pulling their hair out.

One thing I'm doing today is going back to some basics and trying to understand a range.

Technology stocks continue to be the weakest area of the market, yet today's 1.54% gain in the GSTI Software Index (GSO.X) 121.96 +1.54% while not spectacular is somewhat surprising.

One things that is a bit "perplexing" to me that I'm still trying to figure out is why we haven't seen a "rush" back into Treasuries with tensions mounting in the Middle East. One reason could be the weakening U.S. Dollar and there are still some sellers in the Treasury market that are freeing up cash.

As discussed before, the weaker U.S. dollar could well turn out to be a positive for many US-based multi nationals, thus the stronger performance of the Dow Industrials on a relative basis.

Here's a quick look at the 10-year YIELD chart. I'm trying to "understand" here that there has been a lot of cash freed up from this market, and then use the same "range" of retracement here in other areas of the market.

10-year YIELD Chart - Daily Interval

For "whatever" reason, retracement from the May 2001 high YIELD to the November lows, sure "fits" with how this YIELD has traded in recent months. For now, I'd expect YIELD support at the 4.967% level. Noting how YIELD pullbacks have found support at the 38.2% and 50% retracement levels. For now, 61.8% would at least be some similarity to past action as the 10-year YIELD has been setting a pattern of higher highs and higher lows since the November bottom.

Dow Industrials Chart - Daily Interval

Same "type" of retracement used in the 10-year YIELD can be applied to the Dow Industrials. Simply attaching to the lows and then back to the May 2001 highs. Here too, we see some "fit" with how the Dow has traded. I'm still not sure that this is the group of stocks that bears should be shorting.

NASDAQ Composite Chart - Daily Interval

Based on retracement and comparing to the 10-year YIELD and Dow Industrials, we get a "3-dimensional" view of where some Treasury money has been "sticking" and where it hasn't. Note that the NASDAQ didn't get above its 80.9% retracement level, while the 10-year YIELD did and so did the Dow Industrials. Weak stocks/sectors and markets usually outperform on the downside when things soften up and boy that has been true with the NASDAQ. The Dow has hung together "relatively" well compared to the NASDAQ.

The S&P 500 Index (SPX.X) is just about "in between" as it relates to retracement. But here's something a little interesting that we've noted in the past couple of months. Look at Japan.

Japan Ishares (AMEX:EWJ) - Daily Interval

The Japan Ishares (AMEX:EWJ) have traded pretty strong recently and bulls may not have seen as much downside here as in some U.S. equities. It's interesting that the EWJ didn't find a bottom until early this year. The recent break higher at $8.62 has actually "stuck" and kept some bullishness here. Giving some hint that the money coming out of U.S. Treasuries may indeed be finding its way into Japan, but may also be more inclined to stick with some of the larger multi-nationals that are found in the Dow Industrials.

Try this on other sectors your trading. Check out the different healthcare sectors like the HMO.X and RXH.X for some interesting observations on where some Treasury cash has been flowing.

Jeff Bailey
Senior Market Technician
Option Investor

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