SPY STALLS NEAR KEY RETRACEMENT -- GOLD FORGES ISLAND REVERSAL -- GOLD MINERS OUTPERFORMING BULLION -- NEWMONT AND BARRICK SURGE -- DOLLAR FALLS AS EURO BOUNCES - BONDS NOT WORRIED ABOUT INFLATION

STOCKS FINISH POSITIVE IN CHOPPY TRADING ... Today's Market Message was written by Arthur Hill. John Murphy will return tomorrow. - Editor

Trading was rather choppy on Wednesday, but the major indices ended on a strong note and closed with modest gains on the day. In a nutshell, the materials and energy sectors led the way as commodities rebounded. The financial sector took a hit after a downgrade of American Express (AXP). The consumer discretionary sector advanced over 2% with strength coming from the retail group. Chart 1 shows the S&P 500 ETF (SPY) finishing with its third indecisive candlestick in a row. The last three candlesticks show little movement from open to close. Today's candlestick was a doji, which is the epitome of indecision. It looks like a plus sign. There is little change from open to close and the overall high-low range is small. It appears that the market is holding its breadth for something. On the price chart, SPY appears to be at a critical juncture. First, there is resistance in the low 90s from the falling 50-day moving average and the middle of the prior consolidation. Second, the advance over the last three weeks retraced around 62% of the November decline and a rising wedge could be taking shape. Both the retracement and the wedge are typical for corrective advances or bear market bounces. For now, the wedge is still rising to give the bulls the benefit of the doubt. A move below the lower trend line of the wedge would be negative and a break below the December lows would be bearish.

Chart 1

GOLD SURGES WITH SECOND GAP IN THREE DAYS... The streetTRACKS Gold ETF (GLD) forged a higher low earlier this month and surged with a big gap on Wednesday. Chart 2 shows GLD surging above minor resistance with a big move in late November. There was a pullback in early December, but the ETF held above its prior lows. Today's gap counters the 1-Dec gap to form an island reversal over the last eight trading days. This pattern formed with a gap down, consolidation and gap up. The two gaps cross each other to create an island that traps shorts with losses. Even though the bigger trend is still down, this island reversal bodes well and the next resistance area is centered around 87.5. The July trend line, falling 200-day moving average and Sep-Oct highs combine to mark resistance in this area.

Chart 2

Chart 3 shows weekly bars for the streetTRACKS Gold ETF. The trend for 2008 is clearly down with lower lows and lower highs over the last few months. Despite a clear downtrend, this decline could be a big correction of the prior advance (Oct 07 to Mar 08). With the bounce over the last few weeks, GLD established support near broken resistance and the 62% retracement mark. Furthermore, the falling price channel (blue trend lines) looks like a massive flag formation. Even so, the overall trend remains down as the ETF trades below the falling 40-week SMA. Look for a move above the upper channel trend line and this key moving average to break some key resistance levels.

Chart 3

GOLD MINERS LEAD THE MARKET ... Chart 4 shows the Gold Miners ETF (GDX) gapping up and closing over 10% higher on Wednesday. This is the second gap in three days. With this surge, GDX moved above its late November high and the ETF is actually leading bullion. In contrast to GDX, the streetTRACKS Gold ETF (GLD) has yet to move above its late November high. The bottom indicator window shows the relative strength comparative, which compares the performance of GDX against GLD. A higher low formed in November and the indicator broke its November high today. It is bullish to see the Gold Miners ETF leading the metal. Back to the price chart, the next resistance zone for GDX resides around 38-40. This stems from the falling 200-day moving average and the Aug-Sep highs.

Chart 4

NEWMONT AND BARRICK SURGE... Among the big gold stocks, Newmont Mining (NEM) and Barrick Gold (ABX) surged over 9% with above average volume. Chart 5 shows NEM breaking its 50-day moving average in late November, pulling back into early December and then surging again. This pullback looks like a falling flag and the breakout opens the door to the next resistance zone around 40-45. Chart 6 shows ABX with a similar pattern. The stock surged above its late November high with above average volume today. The next resistance zone is around 35-40.

Chart 5

Chart 6

FALLING DOLLAR BOOSTS BULLION... One does not need to look far to find a catalyst for the big advances in gold and other commodities. John Murphy featured the Dollar-Commodity connection on Monday and it played out again on Wednesday. The U.S. Dollar Index ($USD) fell and the Euro Trust ETF (FXE) advanced. Chart 7 shows the U.S. Dollar Index ($USD) hitting resistance around 88 over the last two months. Despite meeting resistance and moving lower the last few weeks, the big trend is up and the greenback has yet to actually break its 50-day moving average. A break below the 50-day line would argue for a deeper pullback towards the next support zone around 80-82. Chart 8 shows the Euro Trust ETF closing above its 50-day moving average for the first time since last July. The bigger trend is clearly down, but FXE has shown some strength the last three weeks. This means a bear market bounce could be in the cards. The ETF has been consolidating since late October with resistance around 131. An upside breakout would be positive and target further strength towards broken support around 139. Failure to breakout and a move below the November lows would be bearish.

Chart 7

Chart 8

DEFLATION GIVING WAY TO INFLATION?... In the food for thought category, the bullion bulls may see inflation on the horizon. Wait a minute! I thought the current worry was deflation? Chart 9 shows the Commodity Tracking Fund (DBC) over the last two years. DBC moved below its 2007 lows and this clearly favors deflation over inflation. However, the world is fighting deflationary pressures tooth and nail. The Fed has pumped enormous amounts of money into the financial system this year, interest rates are at historic lows and the US government is planning a big fiscal stimulus package. These efforts are not just limited to the US, but they can be seen all over the world. Such world stimulus efforts could light the inflationary fires again. For now though, there is no evidence of inflation in the bond market. Chart 10 shows the iShares 20+ Year Bond ETF (TLT) surging over 20% in the last six weeks, a truly incredible move. For reference, I marked some the more memorable moments of the 2008 credit crisis. Bonds loathe inflation and such strength would not be possible with whiffs of inflation in the air. Chart 11 shows the iShares Inflation-indexed Bond ETF (TIP) underperforming TLT. If and when inflation rears its ugly head, look for TIP to start outperforming TLT and for bonds in general to fall sharply.

Chart 9

Chart 10

Chart 11