LACKLUSTER VOLUME -- NASDAQ AND NY COMPOSITE BREAK FLAG RESISTANCE -- FED STATEMENT WEIGHS ON BONDS -- DOLLAR FIRMS AS RATES RISE -- GOLD RISES ALONG WITH THE DOLLAR

VOLUME FAILS TO INSPIRE... Today's Market Message was written by Arthur Hill. - Editor

Despite a big advance on Wednesday, Nasdaq and NYSE volume levels were uninspiring. Chart 1 shows the Nasdaq surging 3.55% with average volume. Chart 2 shows the NY Composite surging 3.5% with above average volume. Actually, it was barely above average. Even though NYSE volume was slightly above average, it was well below the levels seen in September, October and November. In addition, volume was well below last week's peak. Given the opening gaps, the sizable advance and the strong close, I would have expected volume to be much higher. Such uninspiring volume raises a yellow flag. Charting Note: I am using the symbol $NYTV for total NYSE volume.

Chart 1

Chart 2

Despite uninspiring volume, the Nasdaq and NY Composite are sporting flag breakouts on the daily charts. The January decline was indeed steep, but both held above their late November lows. With the surge over the last 3-4 days, both broke flag resistance and exceeded their 50-day moving averages. Price action (sans volume) looks bullish at this point. The early January highs mark the first resistance level to watch. The November highs mark the second resistance level. Taken together, I would mark a resistance zone between the January and November highs. These flag breakouts are valid as long as they hold. Look for a move below Monday's lows to erase the recent surge and call for a reassessment.

FED STATEMENT WEIGHS ON BONDS... While stocks fluctuated at high levels after the FOMC policy statement, the bond market was truly rattled. In its prior statement, the Fed hinted at the possible purchase of long-term treasuries to help stimulate the economy. Such purchases would drive rates lower and decrease the cost of capital for businesses. This is also known as quantitative easing. With the Fed Funds rate near zero, the Fed is running out of options. However, the policy statement did not offer a concrete plan to purchase treasuries. This news sparked selling pressure that drove the iShares 20+Yr T-Bond ETF (TLT) to its lowest level since late November. Chart 3 shows TLT falling rather sharply over the last five weeks. After an even sharper advance, some sort of correction can be expected. Yes, this looks like a correction within a bigger uptrend. First, the decline is tracing out a falling wedge. Second, TLT retraced 50-62% of the prior advance. Third, RSI is nearing oversold levels. These three features suggest that the correction may be closer to its end than its beginning. With Wednesday's sharp decline, TLT established resistance at 110 and this is the first level to watch for a breakout. For reference, Chart 4 shows the 10-Year Note Yield ($TNX) rising over the last five weeks.

Chart 3

Chart 4

DOLLAR FIRMS AS RATES RISE... The Fed policy statement also boosted the Dollar on Wednesday. Yesterday's surge in interest rates made the Dollar more appealing versus other currencies. After trading around 25.38 at statement time, the US Dollar Index Bullish ETF (UUP) shot above 25.65 after the statement. This may seem like a small move for a tech stock, but it is a pretty big move for a currency ETF. Chart 5 shows the US Dollar Index Bullish ETF finding support near the December trendline and 16-Jan low. With a weak open and strong close, UUP affirmed support at 25.3 on Wednesday. Watch this support level for a break down and reversal in the greenback.

Chart 5

GOLD HOLDS BREAKOUT... The streetTRACKS Gold ETF (GLD) moved higher early Thursday with an advance above 88. This is impressive because the Dollar was also slightly higher at the time. As John Murphy noted earlier this week, gold may be benefiting from safe-haven status as stocks moved sharply lower in early trading Thursday. John also noted that gold could benefit from the immediate threat of deflation. Chart 6 shows the United States Oil Fund ETF (USO) sinking over 2% early Thursday. The ETF is testing support from the Dec-Jan lows and needs to clear the 50-day moving average to show signs of life.

Chart 6

Moving back to gold, chart 7 shows the streetTRACKS Gold ETF (GLD) breaking above its December highs and holding this breakout. The ETF also broke above the 200-day moving average last week. Not many ETFs or stocks can make this claim. Gold is showing relative strength and this is bullish overall. The indicator window shows the streetTRACKS Gold ETF with the US Dollar Index Bullish ETF. The relationship is not perfect, but the streetTRACKS Gold ETF and the US Dollar Index Bullish ETF enjoy a largely inverse relationship. However, this relationship has become a bit strained as both GLD and UUP shot higher over the last two weeks. Both are up again today. As John noted on Tuesday, it is a bit early to call for a decoupling, but this relationship bears watching over the coming days.

Chart 7