200-DAY AVERAGE DETERMINES MARKET'S MAJOR TREND WHICH IS DOWN -- BONDS DON'T LEAD STOCKS ANYMORE -- GOLD CORRECTION IS PROBABLY NOT OVER -- NYSE BULLISH PERCENT INDEX STILL IN DOWNTREND

200-DAY AVERAGE DETERMINES MAJOR TREND... One of our readers asked if the 200-day moving average is more important than the 50-day moving average. Yes, certainly. That's because they measure two different trends. The 50-day (or 10-week) average measures the "intermediate" market trend, while the 200-day (or 40-week) average measures the market's "major" trend. Of those two, the major trend is the more important. Chart 1 applies both moving average lines to a daily chart of the S&P 500 over the last year. The blue line is the 50-day average. In an uptrend, price dips below the 50-day line represent temporary downside corrections to the major uptrend. That was case until the fourth quarter. During a downtrend (like now), an intermediate rally occurs when prices close decisively over the 50-day line. At the moment, that initial resistance line is being challenged. The ability to close over the 50-day line separates "short-term" bounces from "intermediate" ones. Even if the 50-day line were breached on the upside, the market's major trend would remain down as long as prices remain below the 200-average (red line). There are two other factors in Chart 1 that makes the moving average lines more bearish. First, the 50-day average has fallen below the 200-day. Secondly, the 200-day average itself has turned down. That suggests that any bounces would have to be considered bear market rallies.

Chart 1

BONDS DON'T LEAD STOCKS ANYMORE... Another reader asked about the old idea of using bond prices as a leading indicator for stocks. The second (2004) edition of my book on Intermarket Analysis emphasized that the relationship between bonds and stocks changed dramatically after 1998. Instead of trending in the same direction (with bonds usually turning first and acting as a leading indicator for stocks), the two markets started trending in opposite directions. That's still the case. Chart 2, for example, shows bond prices (green line) rising over the last year as stocks (red line) dropped. Chart 3 shows bond prices peaking in 2003 when stocks bottomed and turning up in 2007 when stocks peaked. Again, their inverse relationship held. Bonds are no longer a leading indicator for stocks. In fact, they compete with each other for investor funds. In times of economic stress (like now), bonds are usually stronger than stocks. During an economic expansion, stocks outperform bonds.

Chart 2

Chart 3

GOLD CORRECTION PROBABLY NOT OVER ... A third reader asked if the downside correction in gold and gold stocks was over. I doubt it. Chart 4 shows the streetTracks Gold Trust (GLD) plunging on heavy volume last week. Its RSI line fell below the 50 level for the first time in six months. The daily MACD lines have are the most negative in three months. That doesn't mean that the major bull market in gold is over. It does mean, however, that the recent correction probably isn't over either. I suspect that it's going to take more time for the gold market to regain its footing. There may be another downleg in store after the short-term bounce runs its course. Or gold may just tread water for awhile. The same is true for gold shares. Chart 5 shows the Market Vectors Gold Miners Index (GDX) falling back toward its 200-day average (also on big volume). I suspect there's more backing and filling needed there as well.

Chart 4

Chart 5

BULLISH PERCENT INDEX IMPROVES... Another reader asked for an update on the NYSE Bullish Percent Index. [The BPNYA measures the percent of NYSE stocks in point & figure uptrends]. Chart 6 shows the line version of the BYNYA. The good news is that the indicator is bouncing from oversold territory below 30, and has formed a pattern of rising bottoms since January. That has helped inspire the market's short-term bounce. The bad news is the trend is still down. The next thing the BPNYA needs to do, however, is to exceed its February high at 43. Chart 7 is a point & version of Chart 6. It shows the BYNYA having rebounded by 10% (5 boxes) since the start of March. That's a good first step. The p&f version, however, needs to reach 44 to signal a more substantial market bounce.

Chart 6

Chart 7