INFLATION HEATS UP -- COMMODITY ETFS ARE STRONG ACROSS THE BOARD -- GOLD BREAKS TRIANGLE RESISTANCE -- ANOTHER LOOK AT TIPS -- TLT HITS SUPPORT

COMMODITY ETFS CONFIRM CPI REPORT... Today's Market Message was written by Arthur Hill. John Murphy will return tomorrow. - Editor

Before the bell this morning, the Labor Department reported that the Consumer Price Index (CPI) rose .4% in January. Core-CPI, which excludes energy and food, rose .3%. Both were above expectations. Consensus estimates on Wall Street were for a .3% rise in CPI and a .2% rise in Core-CPI. Given the recent advance in commodities over the last few months, it is hardly surprising that the Consumer Price Index came in above expectations.

There is a full line of ETFs catering to the various commodity groups and now is a good time to cover some of these. Chart 1 shows the DB Commodity Tracking Index Fund (DBC) in a strong uptrend after a sharp advance from August to February. The ETF broke resistance in September and never looked back. This ETF represents a basket of commodities including crude oil, heating oil, gold, aluminum, corn and wheat. Chart 2 shows the DB Agriculture PowerShares ETF (DBA) with a gain of over 50% from the August lows. Even though the trends for these two are clearly up, they are also getting frothy and ripe for a pullback or consolidation. The pink line shows the 10-week moving average and a pullback to this area may offer a chance to partake in the uptrend. The 10-week moving average is equivalent to the 50-day moving average.

Chart 1

Chart 2

Chart 3 shows the United States Oil Fund ETF (USO) with a surge from August to November. The ETF found support around 68 and surged to resistance over the last three weeks. With another gain today, USO recorded a 52-week high and remains in an uptrend.

Chart 3

Chart 4 shows the DB Base Metals PowerShares ETF (DBB). This ETF did not partake in the August-November advance. Instead, DBB moved to new lows in December and January. However, the ETF surged above resistance over the last five weeks to play some catch-up.

Chart 4

Chart 5 shows the Natural Gas ETF (UNG), which began trading in April. UNG is lagging the other commodity ETFs, but looks poised to break double bottom resistance. The ETF found support around 33-34 in September and again December. The surge over the last three weeks carried UNG to double bottom resistance, a break of which would confirm the pattern. Chart 6 shows the performance of all five ETFs since January 2007.

Chart 5

Chart 6

GOLD SURGES AGAIN... With all this talk of inflationary pressures and rising commodity prices, we should check in on gold. John Murphy pointed out the symmetrical triangle in the Gold Miners ETF (GDX) yesterday. GDX is up again today and holding Tuesday's gap. Chart 7 shows weekly prices for the streetTRACKS Gold ETF (GLD). The ETF surged above 92 this week and hit a new 52-week high. Chart 8 shows daily candlesticks with a gap and triangle breakout over the last two days. The move signals yet another continuation of the uptrend.

Chart 7

Chart 8

MORE ON TIPS... In addition to the commodity charts and the Consumer Price Index, John Murphy noted signs of inflation hedging with the TIP:TLT ratio on Friday. This indicator showed that the iShares inflation-indexed Bond ETF (TIP) outperforming the iShares 20+ Year Bond ETF (TLT) over the last four weeks. Chart 9 shows these two ETFs over the last six months. They stayed pretty much together from September to December, but something changed in mid January when TLT dropped sharply. After further declines in February, TLT is already testing support from the December lows. TIP peaked at the end of January and also declined the last three weeks. However, it shows less weakness (relative strength) because it remains well above its December lows. The preference for inflation-indexed bonds over normal bonds reflects an increase in inflationary expectations.

Chart 9

TLT RECOVERS AFTER EARLY LOSSES... Despite the prospect of inflation heating up, the iShares 20+ Year Bond ETF (TLT) moved higher after a weak open today. Hmm...bonds managed to move higher after bad news on inflation. This is interesting price action. Perhaps the chart has some answers. Chart 10 shows weekly prices with support around 90. TLT broke resistance with an advance from June to January. Broken resistance turned into support with a successful test in January. With the decline over the last 4-5 weeks, TLT is once again testing support. Chart 11 shows daily candlesticks. TLT formed a spinning top on Tuesday and this shows indecision. After a weak open today, TLT rallied to form a long white candlestick. This amounts to a bullish engulfing pattern with TLT trying to firm at support. The blue trend lines show a falling price channel. Look for a break above the upper trend line to reverse the 4-5 week downtrend.

Chart 10

Chart 11