EMERGING MARKET SELLOFF STABILIZES -- PRECIOUS METALS BOUNCE ON FALLING DOLLAR -- NASDAQ STILL IN TRADING RANGE -- SMALL CAP INDEX TESTS ITS 50-DAY AVERAGE

EMERGING MARKET SELLOFF HAS STABILIZED... Thailand's earlier decision to put controls on foreign money invested in its stock market caused an initial plunge in that country's stock market, and nervous selling across other emerging markets. The central bank quickly excluded stock investments from their currency controls and helped stabilize the earlier price slide. Most of the selling appears to have taken place in Asian markets. Even so, no serious chart damage has been done to the chart of the Emerging Markets iShares (EMM). Chart 1 shows today's lower price gap on rising volume. The EEM price bars are holding above their mid-December low at 109.88, and appear to have stabilized. Its 50-day moving average, which defines the intermediate uptrend, is trading near 106 which coincides with its late November low. The point & figure boxes in Chart 2 show initial chart support just above the 106 level (using a percentage price scale). The EEM would have to close at 105.49 or lower to issue a p&f sell signal. It's nowhere near doing that.

Chart 1

Chart 2

EURO BOUNCE BOOSTS GOLD ... The U.S. dollar, which had been bouncing from an oversold condition over the last two weeks, is selling off today against European currencies. Chart 3 shows the Euro gapping higher (partially on news that the U.S. 3rd quarter current account deficit widened). The fact that European bond prices are falling (and yields rising) on stronger European business confidence also favors the Euro over the dollar. That's giving a boost to precious metal assets. Chart 4 shows the StreetTracks Gold Trust Shares (GLD) bouncing off moving average support. Chart 5 shows the PHLX Gold & Silver (XAU) Index doing the same. Even silver, which took a hit recently, is bouncing.

Chart 3

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Chart 5

SILVER STABILIZES AFTER HARD FALL ... Silver took a real hit late last week. The daily bars in Chart 6 show the Silver iShares (SLV) tumbling on Friday and Monday on heavy volume. That's not the kind of action we like to see in an uptrend. The good news is that SLV is still trading above its 200-day average and is trying to bounce today. We'll be keeping an eye on it.

Chart 6

NASDAQ 100 STILL IN TRADING RANGE ... Yesterday I showed the S&P small and midcap indexes backing off from chart resistance at their May peaks. I also suggested that any further small-cap selling might cause some short-term profit-taking in large cap stocks as well. That's because they all usually trend in the same direction. Weakness in one group often leads to weakness in the other. The same is true for the Nasdaq market. It looked to me last week like the Nasdaq market was ready to resume its uptrend. So far, that hasn't happened. The daily bars in Chart 7 show that the Nasdaq 100 Shares (QQQQ) pulled back from their late November peak at 44.86 and are now testing the bottom of their month-long trading range. No real chart damage has been done. Just more sideways trading. But that's enough to hold the rest of the market back. Two support levels to watch in Chart 7 are the intra-day lows at 43.47 and 43.34. The 50-day moving average, which currently sits at 43.23, is another important support line. The QQQQ would have to close below all three levels to signal further slippage and justify some short-term profit-taking.

Chart 7

SMALL CAP INDEX IS TESTING 50-DAY LINE ... Despite the fact that the S&P 600 Small Cap Index has backed off from its May peak (and continues to underperform large cap stocks), it hasn't suffered any serious chart damage. The daily bars in Chart 13 show the SML testing its 50-day moving average. That's an important support line to watch on market pullbacks. That's because minor pullbacks usually find support at the 50-day line. Meantime, the S&P 500 Large Cap Index in Chart 14 is holding up much better. If you compare the two charts, you'll see that the SPX usually does better when the SML is rising along with it. That's why the SML test of its 50-day line may determine the short-term direction of both indexes. The same is true of the Nasdaq market. The bottom line is that the fourth quarter market uptrend is still well intact. We're watching some of its weaker links, however, for any signs of short-term weakness. If any problems develop, they're likely to show up first in the Nasdaq and small cap indexes.

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Chart 9