PRECIOUS METALS ARE OVERSOLD AND BOUNCING -- STOCKS ARE TESTING SOME IMPORTANT RESISTANCE BARRIERS -- ANY SELLING FROM HERE COULD BOOST BONDS, WEAKEN THE DOLLAR, AND HELP GOLD

OVERSOLD PRECIOUS METALS STARTING TO BOUNCE ... Precious metals are starting to bounce from an oversold condition and potential chart support. Chart 1 shows the streetTracks Gold ETF (GLD) starting to bounce off potential chart support along its November 2007 high (horizontal line). Its 9-day RSI line (bottom of chart) is also in oversold territory below 20 for the second time in a month. Chart 2 shows essentially the same pattern for the Silver iShares (SLV). The SLV is finding some new buying near its November peak at 157. The Commodity Channel (CCI) Index also shows it to be in oversold territory. Most other commodities are also bouncing today, including crude oil which is trading at a new high. There are at least two ways to consider the impact of today's commodity rise on stocks and vice versa. The new high by crude oil is a negative for the stock market (but not for energy shares which are rallying). Strong energy prices (and a weaker stock market) may be pushing some money back into gold. The mid-March gold peak occurred as the stock market was bottoming. If the stock rally starts to stall around current levels (which it appears to be doing), money could start flowing back into gold and other commodities which have been correcting of late.

Chart 1

Chart 2

MOMENT OF TRUTH FOR STOCKS ... Charts 3 and 4 show the stock market testing some pretty important overhead resistance points. I'm using the Wilshire 5000 Index because it's the broadest measure of the U.S. market. Chart 3 shows the WLSH testing potential resistance at its November low and just below its 200-day moving average. Chart 4 shows the WLSH testing a down trendline drawn over its October/December highs and having retraced 50% of its October/March decline. That puts it (and the rest of the market) at a technical moment of truth. This would be a logical chart point for some new selling to emerge. Any serious stock selling could weaken the dollar which may explain why some money may be starting to flow back into gold and silver.

Chart 3

Chart 4

BONDS ARE TESTING SUPPORT... Another market that's at an important juncture is bonds. Chart 5 shows the 7-10 Year Treasury Bond Fund (IEF) testing potential chart support at its February low. Keep in mind that the bond pullback started in mid-March as the stock rally started. Any pullback in stocks could cause some money to flow back into bonds. That would push rates lower which would weaken the dollar and boost gold. A lot is riding on what the stock market does from here.

Chart 5

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