PRECIOUS METALS RALLY AS CENTRAL BANKERS STOP SELLING -- COMMODITIES HAVE A STRONG WEEK -- BONDS TUMBLE AS YIELDS REACH NINE-MONTH HIGH -- WAL MART HAS A BIG DAY -- DUPONT ON THE VERGE OF A SEVEN-YEAR HIGH

GOLD AND SILVER JUMP ON GOOD VOLUME ... Apparently, central bankers have been selling some of their bullion reserves over the past few weeks which has put downside pressure on the commodity. News that the European Central Bank announced plans not to sell any more gold before September caused heavy buying in precious metals today and their related stocks. The streetTracks Gold Trust Shares (GLD) rose the equivalent of $9.00 (1.4%) today on rising volume (Chart 1). Silver iShares gained 1.9% to do even better. Chart 2 shows the SLV climbing over its 50-day average on the strongest volume in nearly three months. It also broke a three-month resistance line. The daily MACD lines turned bullish for silver, and are close to doing so for gold. Precious metal stocks were the day's strongest group. Chart 3 shows the Market Vestors Gold Miners ETF (GDX) jumping more than 2% on very strong volume. The fact that precious metal shares rose more than the commodities is a positive sign.

Chart 1

Chart 2

Chart 3

XAU STARTS TO LEAD THE COMMODITY ... On May 16, I wrote an article showing that bullion usually does better when it's being led higher by gold shares. I showed that a ratio of the Gold and Silver Index (XAU) divided by gold had been dropping over the last year which had put a cap on the price of bullion, and suggested that ratio upturn was necessary for another bull leg in gold to start. Chart 4 shows the ratio climbing to the highest level in six weeks. It needs a close over its April peak to turn its trend upward. Chart 5 shows that a new 2007 high by the XAU/GLD ratio would also break an eighteen month down trendline. That would give a big boost to the entire precious metals complex.

Chart 4

Chart 5

WATCHING FOR XAU BREAKOUT ... The weekly bars in Chart 6 show the Gold & Silver (XAU) Index trading sideways since last spring. A decisive close at 150 or higher is needed to register a bullish breakout. The point & figure boxes in Chart 7 give the same message. A bullish breakout in precious metal shares would be a positive sign for the gold and silver. They're also getting some help from rising commodity prices in general.

Chart 6

Chart 7

COMMODITY PRICES ARE RALLYING ... Twelve of the nineteen commodities in the Reuters/Jefferies CRB Index rose today. That pushed the CRB Index into the plus column for the week and set the stage for a test of the "neckline" shown in Chart 8. The CRB Continuous Contract (CCI) in Chart 9 is much stronger. That's because the CCI has a smaller energy weighting and a bigger agricultural one. Energy has been one of the weaker commodity groups, while grains rallied this week. Chart 10 shows the DB Commodities Tracking Fund (DBC) moving closer to its old high. Rising commodity prices are also bullish for basic material stocks which had another strong day. What they're not bullish for is bonds.

Chart 8

Chart 9

Chart 10

BOND PRICES ARE FALLING ... One of the usual side-effects of rising commodity prices is falling bond prices (and rising bond yields). Yesterday I showed the 20-Year T-bond ETF (TLT) breaking its 200-day moving average. Chart 11 shows the 7-10 Year T-Bond Fund suffering that fate today. The yield on the 10-Year T-note meanwhile broke out to the highest level since last August (Chart 12). It remains to be seen if bond yields in excess of 5% cause problems for the stock market.

Chart 11

Chart 12

WAL MART HAS HUGE DAY ... Wal Mart's decision to buy back $15 billion worth of its shares (7.6% of the outstanding stock) pushed the big retailer nearly 4% higher today on massive volume. Chart 13 shows the stock challenging overhead resistance just shy of $50. A decisive close over that chart barrier would be an encouraging sign. Not only was Wal Mart the biggest percentage gainer in the Dow today, it pushed Retail Holders (RTH) to a new high (Chart 14). WMT is the biggest holding in the RTH.

Chart 13

Chart 14

DUPONT NEARS BULLISH BREAKOU T... Chemical stocks contributed to another record high in the basic materials group. One of the top performers in that group is Dupont. Chart 15 shows the stock on the verge of a new 52-week high. The monthly bars in Chart 16 are even more impressive. They show the stock on the verge of a new seven-year high after recently exceeding its early 2005 peak near 50.

Chart 15

Chart 16