GOLD AND SILVER GET A BOUNCE -- OIL AND COMMODITIES HOLD UP -- OVERSOLD BOUNCE COULD EXTEND TO BROKEN SUPPORT LEVELS - ESTIMATING RESISTANCE WITH KEY RETRACEMENTS

GOLD AND SILVER SURGE... Today's Market Message was written by Arthur Hill. John Murphy will return next week. - Editor

The streetTRACKS Gold ETF (GLD) and the Silver ETF (SLV) surged this past week. On the commodity exchanges, gold broke back above $900 and silver moved back above $16. Precious metals got a triple adrenalin shot this week. First, the big 0.75% cut in the fed-funds rate and discount rate pushed the U.S. Dollar Index lower. Second, the interest rate cuts lowered the borrowing costs to hold commodities. Third, the economic stimulus package and interest rate cuts ramped up inflationary pressures. On Chart 1, GLD found support at 85 this week and moved above 90. The ETF is a bit overbought at current levels, but remains in a clear uptrend. Moreover, GLD is a market leader that shows good relative strength. On Chart 2, SLV formed a falling flag over the last few weeks and broke flag resistance this week. I also find SLV a bit overbought, but there is no denying the current uptrend and overall strength. Chart 3 shows the U.S. Dollar Index ($USD) surging above 77 early Tuesday. However, the greenback failed to hold its gains and moved back below 76 by the end of the week. With this week's failure, a triangle is now taking shape. Inflation dilutes the value of the dollar.

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COMMODITY ETFS HOLDING UP... With the U.S. Dollar weakening and gold strengthening, it is little surprise that the United States Oil Fund ETF (USO) perked up this week (Chart 4). Crude also benefited from hope that the economic stimulus package would spur demand. USO hit support mid week and bounced the last two days. The ETF forged a higher high in early January and has yet to forge a lower low (break support). By definition, the overall trend remains up. There is a support zone around 67.5-70 with key support at 67.5. A break below this level would forge a lower low and start a new downtrend for oil. If the price of oil is tied to the economy (demand), then a support break would be bearish for the stock market. Chart 5 shows the Commodity Tracking Fund (DBC) holding up quite well over the last few weeks. In fact, the ETF hit a new high in early January and bounced off support at 30 this week. Watch this level for signs of weakness and also signs of slowing demand for commodities.

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OVERSOLD BOUNCE TO BROKEN SUPPORT?... A basic tenet of technical analysis is that broken support levels turn into resistance. The converse also holds. Broken resistance levels turn into support. With the sharp January decline, many support levels were broken and these now mark the first resistance hurdle.

Why does broken support turn into resistance? Support marks a demand line where buyers are present. In addition to pushing prices higher, demand (buying) prevents prices from breaking through support. If supply exceeds demand, then selling pressure forces prices below support. A support break represents a victory of supply over a demand. When prices return to this victory point (broken support), the forces of supply are still there and ready to make a stand. Hence, broken support turns into resistance.

With this in mind, let's look through a few charts to define resistance zones. The Dow Industrials ETF (DIA), S&P 500 ETF (SPY) and Nasdaq 100 ETF (QQQQ) all broke below their November and December lows this month. These broken support levels now turn into resistance (red lines). The yellow shaded area represents a resistance zone. The stock market is in the midst of an oversold bounce that could extend to these zones, provided it can overcome Friday's sell-off. Next week will be most interesting with the Fed making its policy announcement on Wednesday and the employment report on Friday.

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ESTIMATING RESISTANCE WITH KEY RETRACEMENTS... Looking at key retracement levels is another way to estimate resistance levels. This is based on the zigzag nature of extended moves or trends. In a downtrend, a decline is often followed by a counter-trend rally that retraces a portion of the prior decline. Typical retracements are 38.2%, 50% and 61.8%. For example, a 10-point decline followed by a 5-point advance would yield a 50% retracement. The next three charts show retracement estimates for the Internet HOLDRS (HHH), Networking iShares (IGN) and Retail SPDR (XRT). All three declined sharply from October to January. There were consolidations in December, but not much of a bounce. Therefore, I am measuring my retracements from the October high to the January low. The yellow shaded areas show the retracement zones, which could act as resistance.

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These retracements can also be used to affirm other resistance levels, such as the broken support levels on DIA, SPY and QQQQ. You can use the Fibonacci Retracements Tool in ChartNotes to estimate retracements. (Click the "Annotate" link beneath the main chart to open ChartNotes.) The 38.2% and 61.8% retracement levels stem from the golden ratio, which is 1.618 (1.618 -- 1 = .618 or 61.8% and 1 - .618 = .382 or 38.2%). Google Leonardo Fibonacci and the golden ratio for some interesting weekend reading.