STOCK RALLY RULES OUT HEAD AND SHOULDERS TOP -- FALLING DOLLAR BOOSTS COMMODITIES -- CHINA LEADS EMERGING MARKET ETFS -- THAT'S HELPING COPPER AND STEEL STOCKS -- CYCLICAL BULL MARKETS IN A SECULAR DOWNTREND CAN RALLY 50%

STOCKS TURN HIGHER ... It looks like you can throw out most of what I wrote last Friday. I was expecting a deeper market correction after most market indexes broke short-term head and shoulder "necklines" (and daily EMA lines turned negative). I also wrote about the possible threat from a rally in the CBOE Volatility (VIX) Index. It turns out I was wrong on both counts. Stocks rallied strongly and the VIX touched a new low. The 13- and 34-day EMA lines flipped back into positive territory. So did most of our daily indicators like the MACD lines in Chart 1. One thing I did get right was my Monday evening chart showing the S&P 500 closing back over its neckline (inspired by a big rally in financial stocks), and the observation that another day or two above that resistance line would negate the head and shoulders top. [In a valid head and shoulders top, prices should not close back above a broken neckline]. The circle in Chart 1 shows that upside breakout on Monday which has been followed by an upside penetration of the late June high at 930. Although some readers have asked if the current rally could be just another "right shoulder", I'm somewhat doubtful. A retest of the June high at 956 looks more likely. The fact that the technology-dominated Nasdaq market has already exceeded that high is also influencing a rising market. That doesn't rule out the possibility for a market correction later in the summer or the autumn. This week's upturn, however, has postponed that possibility for the time being.

Chart 1

DOLLAR SELLS OFF AS EURO HOLDS SUPPORT... Another market I got wrong was the dollar. I wrote that a dollar rally would most likely coincide with a stock pullback. The reverse happened. The dollar dropped as most foreign currencies rose (except for the yen). Chart 3 shows the Euro bouncing off chart support near 137.5 and its 50-day moving average. The Euro has the biggest influence on the dollar. The Euro has also had a positive correlation to stocks since March. The week's bounce kept its March uptrend intact which helped stocks as well. The Japanese yen (which rallied the previous week on safe haven buying) pulled back this week as stocks bounced. Chart 4 shows the XJY retesting its neckline near 106. A close back below that support line would be positive for stocks.

Chart 2

Chart 3

COMMODITIES BOUNCE OFF SUPPORT LEVELS... The falling dollar and rising stocks helped commodity markets bounce off support levels. Chart 5 (plotted through Thursday) shows the CRB Index bouncing off chart support along its spring highs near 230. Chart 6 shows the United States Oil ETF (USO) bouncing off a rising trendline drawn under its February/April lows. Gold bounced as well. The most impressive commodity group this week, however, was industrial metals. Chart 8 shows the UBS Copper ETN (JJC) moving up to challenge its June high. Copper is especially sensitive to global economic trends and has been closely linked to rising stocks since the spring. The rising trend of industrial metals also appears closely correlated with a strong Chinese stock market.

Chart 4

Chart 5

Chart 6

CHINESE ETF IS WORLD'S STRONGEST ... Emerging markets have been the strongest in the world since the spring bottom. China has been the emerging market leader. The red bars in Chart 7 show Chinese iShares (FXI) rising from a short-term consolidation pattern this week. The solid line is the price of copper. It seems that the trend of industrial metals is closely tied to the rising fortunes of the Chinese economy and stock market. That may explain why copper and steel stocks had an especially strong week.

Chart 7

FCX AND AK STEEL LEAD MARKET RALLY ... Two metal leaders this week come from the copper and steel groups. Chart 8 shows Freeport McMoran Copper & Gold (FCX) hitting a monthly high. Its relative strength (solid) line continues to show market leadership. AK Steel looks even stronger. That steel leader led material stocks higher on Friday. The stock has also competed a bullish "double bottom" that formed between November and March. Its relative strength (solid) line is rising as well. Both stocks may owe a lot of their strength to China's need for copper and steel.

Chart 8

Chart 9

CYCLICAL BULL IN SECULAR BEAR? ... With most most stocks trading over their 200-day moving averages (as well as most stock indexes), the prospect for a bull market has improved. The question is what type of bull market we're talking about. Stocks were in a "secular" bull market from 1982 to 2000. In a secular bull market, bear markets (which are "cyclical") are usually short and shallow. Cyclical bull markets, however, do less well in a secular bear market. The monthly S&P 500 bars in Chart 10 seem to suggest that the SPX is in a secular bear market. On average, "cyclical" bull markets in a "secular" bear market gain an average of 50% and can last as long as a year. A 50% recovery in the S&P 500 would put it at the 1000 level, which is still 6% above its current level.

Chart 10