WEAK ECONOMIC NEWS BOOSTS BONDS BUT SINKS STOCKS -- BOND/STOCK RATIO STILL FAVORS BONDS -- THE DOLLAR FALLS TO A RECORD LOW AS COMMODITIES HIT RECORD HIGH -- CONTINUED FED EASING SUGGESTS THOSE TWO TRENDS WILL CONTINUE

BOND YIELDS FALL AS COMMODITIES RISE ... More bad news on the economy triggered a reasonably predictable intermarket script. Bond prices jumped sharply as yields fell. Chart 1 shows the 10-Year T-Note Yield failing a test of a resistance line drawn over its October/December highs. While that was good for bond prices, it was bad for the dollar which hit another record low against the Euro (Chart 2). The weaker dollar kept the commodity rally going strong. The CRB Index jumped eight points to another record. Gold and oil hit record highs as did several other commodities. Commodity stocks were the only big winners today. The Market Vectors Gold Miners Index (Chart 3) gained 2% and closed at a new high. A 3% jump in the AMEX Natural Gas Index led the energy sector higher (Chart 4). The top percentage gainer in the S&P 500 was EOG Resources which surged 18%. Other natural gas leaders were Devon (+5%), Apache (+5%), and XTO Energy (+4). All four closed at new records. I've written several bullish articles recently on natural gas stocks. Outside of commodity stocks, however, the market had a rough day

Chart 1

Chart 2

Chart 3

Chart 4

NASDAQ TRIANGLE REMAINS INTACT ... I received a lot of questions about the bearish Nasdaq triangle I desribed in a previous message. As you can see in Chart 5 (using hourly bars), it remains intact. I've had to widen the two converging trendlines a bit, but the basic pattern is still there. Since a triangle is a consolidation pattern, and the prior trend was down, odds still favor an eventual downturn. Rather than focusing on the two lines, however, it's probably a better idea to use the two nearest support and resistance points for some resolution. A Nasdaq close below 2265 would, in my view, be a bearish signal. A close over 2376 would negate the triangle. The fact that the Nasdaq continues to lag behind the rest of the market is also a negative sign.

Chart 5

S&P 500 BACKS OFF FROM RESISTANCE... I received a number of questions about the "upside breakout" from the "triangle" in the Dow and the S&P 500. I'm skeptical of that interpretation. As I explained recently, a triangle usually shows three declining peaks. That's clearly seen in the Nasdaq, but not in the other indexes. I'd place more importance on the action of the S&P 500 around its 50-day moving average and chart resistance at 1400 (Chart 6). It backed off from its 50-day line today (just as bond prices bounced off their 50-day line). If the market bounce is going to fail, this is where it should happen. It's too soon to say for sure if that's the case, but the intermarket scenario still looks negative for stocks. The fact that consumer discretionary (homebuilders and retailers) and financial stocks led the day's decline isn't a good sign either. (Chart 7).

Chart 6

Chart 7

AIRLINES PULL TRANSPORTS LOWER... The Transports caught my eye today because of their -1.5% drop which was one of the day's biggest. Chart 8 shows a couple of other reasons why the transports are running into trouble. The recent upturn has taken the Dow Transports to its 200-day average and a trendline drawn over the October/December highs. Another problem is the falling black line which is the Airline Index. It fell 4% today and is starting to pull the whole group down with it. Record high oil prices are another negative for the group, especially the airlines.

Chart 8

BOND/STOCK RATIO SURVIVES TEST OF SUPPORT ... Earlier in the week, I wrote about the bond/stock ratio pulling back to test its 50-day moving average. That was caused by a pullback in bond prices (to their 50-day line) and a bounce in the S&P 500 (to its 50-day line). That put both markets at a critical juncture. Bonds won the battle today. Chart 9 shows plots a ratio of the 7-10 Year T-Note ETF (IEF) divided by the S&P 500. The trend in this ratio has been up since last summer. Chart 9 shows the ratio bouncing off its 50-day line today. We'll need to see more follow-through tomorrow, but today's jump in the ratio suggests that bonds are still a stronger asset than stocks.

Chart 9

FED CAN'T STOP COMMODITY RALLY... I also wrote earlier in the week that more Fed easing (and a steeper yield curve) are usually bad for the dollar. And that's certainly been the case this week. Chart 10 shows the US Dollar Index falling below a triangular formation to hit a new record low. That keeps the Fed in a bind. It's announced its intention to keep lowering rates to support the economy and the stock market. Problem is falling US rates are bad for the dollar. A falling dollar is helping keep the commodity bull market alive, which is potentially inflaltionary. Unfortunately, there's nothing the Fed can do to stop that from happening. That's giving a green light to dollar bears and commodity bulls.

Chart 10

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