I love ETFs. They let you trade just about everything within the comfort of an equity trading environment. While I prefer to trade currencies and commodities in their “natural habitats”, their equivalent ETF counterparts make it easy for those who prefer sticking to what they are comfortable with.

I want to have a look at a couple of ETFs that I regularly analyze as they have a huge impact on the global financial markets and they are amazing sentiment indicators that don’t lie. I’m talking about the SPDR Gold Trust ETF (NYSE:GLD) and the Powershares DB US Dollar Index (NYSE:UUP), the Gold and Dollar ETFs.

This pair have been in the spotlight during the European sovereign debt crisis panic, but now find themselves to be the dogs of Wall Street. Gold and Dollar bulls have gone silent for some time as the ETFs show a steep decline in their valuation.

This is in relative terms of course, since a 10% decline in a stock is nothing (in this market that would be considered a star performer) but when the Dollar declines by 10%, that means that the value of all Dollar-denominated assets (including your house!) has also decreased by the same amount.

There is also a historical relationship between Gold and the Dollar, being an negative correlation (dollar down = gold up). Gold is a classic inflation-hedge against a sinking Dollar. While this has held true for decades, there are some short periods of time when this negative correlation breaks down, depending on geo-political-socio-economic-apocalyptic circumstances. That’s just my way of saying “depending on what part of the world is melting down”.

In the most recent case of decoupling, the afore-mentioned European debt crisis caused a flight to safety toward Gold and the Dollar. Investors first began worrying about sovereign debt fears at the end of November 2009, long before Europe made every front page headline in the world. This is partly indicated by a sharp rally in Gold and the start of the most recent uptrend in the Dollar.

Let’s look at what the ETFs have done recently.

The SPDR Gold Trust ETF (NYSE:GLD) has had a terrible July, down 5.08% at Friday’s close and up to 6.49% peak to trough. The Powershares DB US Dollar ETF (NYSE:UUP) has suffered a similar fate last month, falling 5.27%. Taking into cosideration the fact that Gold is denominated in US Dollars, the drop in Gold is actually far worse. 

Let’s have a technical look at the ETFs

It seems that complacency has returned to the markets, with the fear indicators down. This is troublesome, considering that the recent rally in the markets has only brought us back to the 2009 November highs. The financials are only at August 2009 highs and things are starting to look oversold. In addition to all that, Gold and the Dollar look like they could be finding support. See the below charts:

SPDR Gold Trust ETF (NYSE:GLD) Daily Chart

SPDR Gold Trust ETF (NYSE:GLD) Daily Chart (GLD) is quite oversold and seems to have found support at it’s 150-day moving average. The volume is clearly quite strong on the sell side as you can see, but this moving average has been strong support for (GLD) many times in the past year. If this support holds and we see a break above $117, I consider that to be very bullish for Gold and bearish for stocks.

Powershares DB US Dollar ETF (NYSE:UUP) Daily Chart

Powershares DB US Dollar ETF (NYSE:UUP) Similarly for (UUP), the oversold conditions make a case for a bounce. There is also support here at the 200-day moving average which is quite strong and the MACD looks like it could be reversing (green circle). While I don’t think that the Dollar is going to make a substantial rally, a bounce is certainly in the cards. The current trend is quite strong, so I wouldn’t play any knife-catching games here, but it is very important to monitor movements in the Dollar.

As I mentioned earlier, a trend reversal in these two ETFs would spell lower prices for stocks. This is not yet confirmed and hopefully will never be, but be weary of stocks at these levels. I wrote an article on Key Levels to Watch for before placing your bets in stocks and this will give you more information on what to look for in key sectors of the makets for signals. Stay tuned.

Written By Jordi Perez From Market Space Trading

NYSE:GLD, UUP