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Stocks hold gains after currency intervention

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Stocks are holding onto the bulk of their morning gains as the U.S. Dollar Index (dx00y) 106.62 +0.25% shows one of its first gains in nearly 2-weeks.

The U.S. dollar is seeing some upside after the House approved an increase in the federal debt limit ceiling to $6.4 trillion from the previous $5.95 trillion, while a currency intervention from the Fed and the European Central Bank (ECP) to weaken the Yen against the U.S. Dollar is having the larger impact of the stronger dollar in today's session.

Today's currency intervention had the Fed buying U.S. dollars and selling Japanese Yen, while the ECB intervened by buying Euros and selling Yen.

While this has the basket of major currencies showing the U.S. Dollar Index (dx00y) 106.02 +0.25%, the gain in the dollar is not across the board.

If we turn to the futures markets we see that the September Euro futures (eu02u) $0.9947 +1.03 are once again jumping to new highs against the U.S. dollar after the ECB's intervention. In essence, the ECB's actions combined with the Fed's is propping up the U.S. Dollar against the Yen, but not a full fledged strengthening of the U.S. Dollar against all currencies.

The September British Pound futures (bp02u) $1.5202 (unchanged) are flat against the U.S. Dollar and perhaps can be used as a more "neutral" currency to measure the U.S. Dollar against as this currency and Britain's banks were not involved in today's intervention.

Current analysis is that today's currency action looks to be a greater response to the intervention than that of the House approving the raising of the debt ceiling.

Gold stocks are under some selling pressure as the Gold/Silver Index (XAU.X) 72.26 -1.57% is the weakest sector of the various indexes we monitor, but not getting "hammered" as may have been the case under a more bullish response to the U.S. Dollar if it had also shown strength against the Euro and the British Pound. This is partially noted in that August Gold futures (gc02q) $317.90 -0.53% are still holding above yesterday's lows. As mentioned in previous commentary, gold, the commodity itself in which futures are traded on, are seen as more of a true hedge against currency woes and today, we're not seeing as much selling in the futures markets as we are in the gold stocks (equities), which in the end report earnings that will be tied to the commodity produced.

December Gold futures (gc02z) - Daily Interval

We haven't seen a complete "flush" in gold prices at all today, and this hints that there may still be some underlying bullishness and lingering concerns about the weaker U.S. Dollar. The above chart is the December Gold Futures chart, which we can use going forward. While it is highly advised that gold stock traders trade their stocks based on the underlying security itself and honor their stops, the ability of the gold futures markets to hang tough hint that investors in the commodity itself aren't "eager sellers."

I've highlighted two areas on the above chart with "pink circles" where similar pattern is observed. Earlier this spring, the December gold futures held a retracement support level near $302, then broke above downward trend and created a bullish move higher. Now we see gold futures trying to hold the 319 level of retracement support.

I'm suggesting that any DIVERGENCE from the past (a break lower instead of a rebound higher) would be a near-term blow to gold stocks and may give further insight into the currency situation.

So far, I don't see any type of "eager selling" in the gold markets to truly say that currency woes have been put to rest.

As such, I remain relatively cautious towards the broader stock market as the gold futures market doesn't necessarily confirm that concerns about a weaker U.S. Dollar have totally abated.

Jeff Bailey
Senior Market Technician
Option Investor

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