COMMODITIES ARE WEEK'S TOP PERFORMER -- NATURAL GAS JOINS ENERGY RALLY -- XTO, APACHE, DEVON, AND NOBLE ARE GAS LEADERS -- EBAY POWERS INTERNET HOLDERS -- WATCHING P&F CHARTS AND MOVING AVERAGES FOR SIGNS OF IMPROVEMENT

COMMODITY ETF TESTING OLD HIGH ... Commodities were the weak's strongest asset class through Thursday. Not surpisingly, the U.S. Dollar was the weakest. That commodity strength is displayed in Chart 1, which shows the DB Commodities Tracking Index Fund (DBC) moving up to challenge its summer highs. The rising relative strength line (bottom of chart) shows that commodities have been doing better than the S&P 500 over the last three months, and since mid-July in particular. Among commodity groups, energy has been the strongest with precious metals in second place. Let's take another look at energy.

Chart 1

NATURAL GAS STARTING TO RALLY... With crude oil prices trading over $80 for the first time in its history, it's not surprising that energy stocks have maintained a leadership role. In a recent article on the energy sector, however, I pointed out that the one group that was lagging behind was natural gas (with the strongest group in oil services). That may be changing. Natural gas prices have started bouncing this week which is lending support to stocks tied to that commodity. The stock improvement is reflected in Chart 2, which shows the AMEX Natural Gas Index (XNG) climbing over its 50-day average for the first time in two months. Several of the larger stocks in that index are doing the same.

Chart 2

XTO ENERGY IS BIGGEST AND STRONGEST ... For the first time in awhile two natural gas stocks have made the day's energy leader board -- Apache and XTO Energy. XTO was also the top energy performer for the week with a gain of 7% through Thursday. [XTO is also the biggest stock in the XNG]. Apache came in fourth with a weekly gain of 4.7%. Chart 3 shows XTO Energy having broken through its 50-day average on Monday and closing over its early August peak near 60. The stock's relative strength line has also jumped sharply over the last week. Chart 4 shows Apache breaking its 50-day line on Wednesday. Its RS line has turned up as well. Two of the larger natural gas stocks that have also exceeded their 50-day lines are Devon and Noble Energy. Chart 5 shows the relative strength ratio for Noble already at a new high. Although oil service remains the strongest part of the energy patch, the recent upturn in natural gas stocks may offer a cheaper entry into the energy rally.

Chart 3

Chart 4

Chart 5

EBAY POWERS INTERNET HOLDERS ... While semiconductors took a beating this week, Internet stocks were market leaders. In fact, Internet Holders (HHH) were the top performing ETF on Friday and for the week. Chart 6 shows the HHH rallying for a test of its 2007 highs. The relative strength ratio (below the chart) has already broken out to a new high. Although most Internet stocks bounced this week, the main driver behind the HHH is EBAY. Not only is EBAY the biggest stock in the HHH, it's also the strongest. Chart 7 shows the Internet leader achieving a new 52-week high this week. Its relative strength ratio did the same. The monthly bars in Chart 8 put the EBAY breakout in better perspective. It shows the stock having broken a two-year down trendline earlier this year and trading at the highest level since the spring of 2006. Its relative strength ratio has also turned up. That makes for absolute and relative strength which is a healthy combination.

Chart 6

Chart 7

Chart 8

POINT & FIGURE SIGNALS ... One of our readers asked what it would take to erase some of the negativity surrounding the stock market and put it on sounder footing. One sign of improvement would be upside breakouts on point & figure charts. The next three charts show p&f boxes for the Nasdaq Composite, the Dow Industrials, and the S&P 500. Each box is worth 1% of the value of the index. For those not familiar with these charts, the x and o columns alternate. X columns represent rising prices, while o columns show down columns. A short-term sell is given when a o column falls below a previous o column (which breaks a previous support low). All three charts show sell signals being given during August in the Nasdaq and Dow and during July in the S&P. [The red numbers show the start of a new month]. To reverse the sell signal, an x column has to exceed a previous x column (an upside breakout). Despite the recent improvement in the short-term trend, no short-term buy signal has yet been given. But the charts show where that would happen. The Nasdaq Composite needs a close at 2650 or higher to give a p&f buy signal. For the Dow, a buy would take place at 13553 or higher. The S&P 500 needs a close at 1503 or higher. [Although p&f charts use intra-day prices, I add a requirement that prices "close" at the breakout point or higher]. Even those upside breakouts (if they occur) wouldn't guarantee the start of a new upleg. But they would reverse previous sell signals and might be enough to shift the market from a "bearish" to a more "neutral" posture.

Chart 9

Chart 10

Chart 11

MOVING AVERAGE SIGNALS ... Another sign of an improving trend would be the ability of the 13-day EMA to cross back over over the 34-day EMA. I've written before about the stellar track record of this moving average combination. A short-term sell signal was give in late July when the faster blue line fell below the slower red line. Although that's still the case, the negative spread between the two lines has narrowed considerably over the last two weeks. [In fact, they're only one point apart at the moment. The 13-day EMA is 1470 while the 34-day is 1471]. That puts the two lines at a critical juncture. A close by the S&P over its early September peak would be enough to turn the two EMAs positive. The line below Chart 12, which measures the spread between the two EMAs, is testing the zero line. A move above zero would be a short-term positive signal and would reverse the downside crossing that took place in late July (red arrow). The ability of the blue chip indexes to close over their 50-day averages (and stay over them) would be another positive sign. These positive moving average signals would be triggered if and when the point & figure breakouts decribed in the previous paragraph take place.

Chart 12