ENERGY AND METALS STOCKS REMAIN ON THE DEFENSIVE -- TELECOM CONTINUES BREAKOUT

GOLD CONTINUES DOWNSIDE CORRECTION ... Gold stocks fell again on Friday to continue the downside correction that began late last week. The daily bars in Chart 1 show the Gold & Silver (XAU) Index heading down toward its 50-day day moving average. This week's downturn in the XAU (and bullion) shouldn't have been too much of a surprise. Last Friday I issued a warning when the XAU came up against major supply at its 1996 and 1987 highs as shown in Chart 2. That suggested to me that gold stocks were probably due for some profit-taking and bullion along with them. That's pretty much what we got. Chart 3 shows the StreetTracks Gold Trust Shares (GLD) falling the equivalent of $14 on Friday to continue the short-term correction. The heavy downside volume on Tuesday inflicted enough short-term damage to keep the GLD on the defensive. Chart 3 also shows that the Parabolic SAR stop was hit on GLD for the first time in 2006 which justified short-term profit-taking (which I also recommended that day). Gold wasn't the only commodity loser on the week. Most other commodities saw heavy selling. As a result, basic materials and energy were the two biggest sector losers for the week.

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CRUDE FALL HURTS ENERGY STOCKS ... After recently falling a test of its summer high near $70, crude oil fell below $62 on Friday for the first time in 2006. It also undercut its 50-day average and its December peak near $62. Heating Oil, unleaded gasoline, and natural fell to new lows for the year. The put heavy downside pressure on energy shares which had been the year's top performer. The fall from grace by energy shares can be seen in the falling relative strength line of the Energy Sector SPDR (XLE) in Chart 5. The XLE also fell below its 50-day line for the first time in the new year. [I also recommended partial profit-taking in energy shares on Tuesday]. Oddly enough, the selloff in commodity stocks didn't help the market that much. That's because there weren't enough other stocks moving up to counteract the heavy losses in commodity stocks. But there were some that I wrote about earlier in the week like healthcare, semiconductors, and telecom. Although the first two backed off a bit on Friday, telecom ended on a strong note.

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TELECOM BREAKOUT ... On Wednesday, I showed a bullish breakout in the Telecom Holders (TTH) which were also Friday's strongest group ETF. The TTH broke out to a new 52-week high on rallies in AT&T, Bellsouth, and Verizon Communications. The monthly charts show T and BLS reaching new three-year highs. Verizon is just starting to bounce off its late 2003 lows and closed above its 40-week (200-day) moving average for the first time in a year. I've been asked all week where money coming out of commodity stocks is going. Some of it is clearly moving into telecom stocks.

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HONEYWELL HELPS LEAD DOW HIGHER... The Dow had the best week of the major market indexes. Two of the top percentage gainers were in telecom (AT&T and Verizon). Other leaders were Disney, Dupont, and Pfizer (although PFE gave some back on Friday). By bar, the best chart performer in the Dow was Honeywell. The monthly bars in Chart 10 show why. The stock has just closed above its early 2002 peak at 39.02 which puts it at the highest closing price in four and half years. The blue line shows how Honeywell has done relative to the Dow itself. Its been a Dow leader since early 2003 and continues to be one. Earlier today we suggested that it looked like investors were starting to favor the more stable (and safer) type of large-cap stocks found in the Dow. If that is indeed the case, the strong chart action in Honeywell could move it near the top of their buy list.

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DOW CLOSES OVER 50-DAY LINE -- NASDAQ 100 BOUNCES OFF SUPPORT... A Friday bounce helped keep the market on an even keel. As a result, no serious chart damage was done during the week. The week's best performer was the Dow Industrials. Chart 11 shows the Dow closing well above its 50-day moving average and moving back toward the upper half of its 2006 trading range. The S&P 500 and the Nasdaq 100 closed just below their 50-day lines, but well above their early January lows. The most crucial test took place in the Nasdaq 100. And, for today at least, it passed that test. The daily bars in Chart 12 show the NDX scoring an upside reversal day just above its early January intra-day low at 1633. That's important for a couple of reasons. One is that the NDX has been the weakest of the market indexes over the last month. Therefore, it's ability to bounce off a previous reaction low is encouraging. Also the fact that it was the biggest percentage gainer on Friday. Daily stochastic lines also appear to be turning up from oversold territory under 20. When the market's weakest link starts to do better, that's usually a good sign. I suggested yesterday that the market's short-term trend appeared to be turning from "down" to "sideways". Although I'd like to all of the major indexes back over their 50-day lines, I suspect next week may see the market try to build on today's oversold bounce.

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