One of our readers recently pointed out that the blue 50-day moving average is declining for the first time since last March, and asked if that makes it more of a resistance barrier. The short answer is probably. Although most attention is paid to "crossings" above and below a moving average, the "direction" of the line itself is also important. Near the end of October, the SPX fell below its rising 50-day line briefly before moving back above it within a week (see circle). Last July, the SPX also fell below its 50-day line for eight days before turning back up again (see box in Chart 2). At that time, the 50-day line continued rising as well. Since mid-January of this year, however, the 50-day line has been dropping. That makes the recent price decline a bit more serious. For recent damage to be reversed, therefore, at least two things have to happen. First, the SPX needs to close back above the blue line. Secondly, the blue has to start rising again.

The Gold Futures ($GOLD) market has begun to capture traders' attention once again, for the developing technical patterns would suggest new highs above $1225/oz will materialize in the months ahead. Unfortunately, we haven't included a Gold Futures price here, but take our word for it: a rather bullish consolidation is confirmed, with prices having broken above the 20-day and 50-day moving averages. This obviously would presume that we become buyers of the Gold Futures. However, that isn't the case when one considers the relative chart pattern of the Gold Miners ETF / Gold Futures Ratio (GDX:$GOLD), for the chart clearly demonstrates that one should be a buyer of GDX rather than $GOLD.

The technical reasons are rather simple:
1) A very large trading range has formed between roughly .025 and .070; each level has been tested multiple times in sequence.
2) A larger bottom was forged in late-2008 much like that of late-2000. If the latter is like the former - and we do think it is, then the cycle wind will be at the back of higher ratio prices for several years further into the future. A minor mean reversion target would be the overhead 250-week moving average, which we think would provide only minor resistance until trading range resistance is once again tested.
2) A clear corrective process has developed in the latter half of 2009, which is above trendline support and mirrors the corrective process of the late-2001 period. Moreover, each of these corrective processes occurred with the 30-week stochastic rolling over from something less than overbought levels. If the current pattern is like that of 2001 - then sharply higher prices are ahead.

Thus, if one were bullish of Gold in general - then one should own the Gold Miners rather than the Gold Futures or Gold ETF (GLD). If were agnostic about the direction of Gold, then the evidence is sufficiently compelling that this would make a great hedged pairs trade.

Good luck and good trading,
Richard

Last week we were looking at a bearish reverse flag formation, but this week prices broke above a short-term declining trend line, effecting a bullish resolution of the flag and changing the short-term outlook to bullish. This was confirmed by a PMO (Price Momentum Oscillator) buy signal, generated as the PMO crossed up through its 10-EMA.

The negative side of the picture is that volume accompanying the breakout and subsequent advance only has been averaging about 85% of the 250-EMA of daily volume, which does not reflect broad confidence in the move. This, plus other evidence we will discuss, makes me think the breakout could be a bull trap.

Our market posture for the S&P 500 remains neutral; however, our Thrust/Trend Model (T/TM) could generate a buy signal if positive price action can continue and the Percent Buy Index (PBI) can cross up through its 32-EMA. To clarify, the PMO buy signal is one-half of a T/TM buy signal. The PBI is harder to generate, and is intended to keep the T/TM from reacting too quickly to short-term rallies.

Additional negative evidence is that most of our short-term indicators are very overbought, as illustrated by the CVI (Climactic Volume Indicator) and STVO (Short-Term Volume Oscillator) charts below. Until those conditions are relieved, it will be difficult for the market to make upward progress. And it may take a price decline to clear the conditions. In this regard, it is possible that the support implied by the recent lows will be retested, if not violated.

Finally, my cycle projections still call for a 9-Month Cycle low around the first part of April.

Bottom Line: The market can often overcome short-term overbought conditions, but most often these conditions are cleared by price pullbacks. The recent breakout could reveal itself as a bull trap.

With a quarter point hike in the discount rate, the Fed surprised some in the media, but few in the bond market. As one of the most interest rate sensitive asset classes, the bond market often moves before an actual Fed move. First, the Fed has been jawboning about the end of quantitative easing for some time now. Second, the Fed specifically mentioned the possibility of future rate increases last week, which was noted in the Market Message on Wednesday, February 10th. Third, short-term interest rates have been moving higher since November. Yes, the bond market has been pricing in some sort of rate increase or tightening since November. The chart below shows the 3-month T-Bill Rate ($IRX) over the last 12 months. Short-term rates declined from March 2009 until November 2009. Rates bottomed in late November and moved higher the last three months - well ahead of the Fed move. Even with the three month advance, short-term rates are still historically low.

Click this chart for details

History is a valuable tool in the stock market as we witness cycles repeating themselves all the time. Our major indices and the various sectors and industries rotate back and forth as our economy moves from strength to weakness and back to strength again. Certain sectors perform better during strong economic times while others outperform as our economy stumbles. I like to use this knowledge as the market makes its moves up and down to determine "staying power". For instance, transportation stocks tend to lead the economy out of recession and it makes sense because as economic conditions improve, industries like the railroads are relied upon to ship more goods, etc. So when charts relating to the transportation group begin moving up on a relative basis to the S&P 500, it generally will alert us to the probability that the underlying economy is strengthening and we should look for higher prices in the broader market to continue. When transports underperform on a relative basis, however, it tells us to be a bit more cautious about the overall market. Take a look at the chart below:


An obvious question to me is - why have transport stocks failed to break out to new relative highs since September 2009? Furthermore, the transportation index made a triple top price breakout above the 4050 area in early December, failed to capitalize with much in the way of further gains, and then broke down badly in late January with very heavy volume. Currently, transports are moving higher on much lesser volume and now are back to challenge that 4050 area and their 50 day SMA. Check out the next two charts: