DOW NEARS CHANNEL TRENDLINE - S&P 500 CHALLENGES OCTOBER HIGH - AIRLINES LEAD TRANSPORTS HIGHER - SOUTHWEST AIRLINES AND UNITED BOUNCE OFF SUPPORT - DOW THEORY REMAINS BULLISH - GOLD BENEFITS FROM WEAK DOLLAR AND INFLATIONARY EXPECTATIONS

DOW CHANNELS HIGHER... Video Link (click here) The medium-term trends are clearly up for the major indices - but a few are approaching potential resistance levels after sharp advances the last two weeks. Chart 1 shows the Dow Industrials with a rising price channel over the last few months. Notice how the Dow peaked just after forging higher highs in September and October. Also notice how the Dow peaked just after the 10-day gain exceeded 5% - also in September and October (red arrows). With a 10+ percent advance the last two weeks and a move above the prior reaction high - the Dow finds itself in the same position as mid September and mid October. The combination of short-term overbought conditions and potential channel resistance increases the chances of a pullback or consolidation. This is just a short-term consideration. I remain medium-term bullish as long as the November lows hold.

Chart 1

S&P 500 STALLS AT OCTOBER HIGH... While the Dow forged a higher high this month - chart 2 shows the S&P 500 has yet to exceed its October high. After surging above 1080 on Monday - the S&P 500 stalled with two indecisive candlesticks on Tuesday and Wednesday. At this point - two days of indecision represents a rest within the ongoing uptrend. We have yet to see a short-term reversal or any short-term weakness. Moreover - the index remains well above medium-term support (1020-1030). As with the Dow - the odds of a short-term pullback or consolidation are increasing. First - there is potential resistance at the October highs. Second - the early October rally and the early November rally occurred with relatively low volume. Notice how volume declined as the early November rally unfolded. Third - the S&P 500 is up over 5% in the last two weeks. This means it is short-term overbought. Again - I am not calling for a reversal of the medium-term uptrend at this stage. I am simply pointing out evidence that could lead to a short-term pullback or consolidation.

Chart 2

AIRLINES POWER TRANSPORTS HIGHER... The Amex Airline Index ($XAL) was one of the leading industry group indices on Wednesday. Chart 3 shows XAL surging over 2% and challenging channel resistance. The index surged from July to September and then corrected into early November. XAL found support near the August consolidation and surged over the last seven days. The index remains short of a channel breakout - but this weeks move off support shows promise. Within the group - Chart 4 shows Southwest Airlines (LUV) reversing above support and surging over 5% today. Chart 5 shows UAL Corp (UAUA) breaking the wedge trendline with a move above 7 today. Chart 6 shows the Dow Transports finding support around 3600 and surging to resistance this week.

Chart 3

Chart 4

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Chart 6

DOW THEORY REMAINS BULLISH... Even though another non-confirmation is brewing - the market remains in bull mode according to Dow Theory. Two weeks ago I featured Dow Theory as the Dow Transports broke below the early October low and the Dow Industrials held above its early October low. While the support break in the Dow Transports was negative - it was NOT confirmed by a support break in the Dow Industrials. With the rally over the last two weeks - the Dow Industrials moved above its October high - but the Dow Transports has yet to exceed its October high. Even though this amounts to another non-confirmation and it is potentially negative - it is not Dow Theory bearish. First - we should give the Dow Transports a little more time to exceed its October high. Second - the Dow Transports is up around 10% in the last two weeks and this shows strength. Third - and most important - both the Dow Industrials and Dow Transports need to break their early November lows for a Dow Theory sell signal. Moreover - the current bull signal remains in force until proven otherwise. Dow Theory hypothesizes that neither the length nor the duration of a trend can be determined. As Yogi Berra might say: It aint over until its over.

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GOLD, DOLLAR AND INFLATION... Gold surged to another 52-week high with a big move on Wednesday. As John Murphy noted on Friday - gold is attracting money because it is one of the best performing assets right now (asset allocation). In addition - gold continues to benefit from weakness in the Dollar and increased inflationary expectations. Chart 9 shows gold moving opposite the Dollar over the last 6+ months. The price plot for the Gold ETF (GLD) moved from the lower left to the upper right - a clear uptrend. This advance accelerated as GLD surged from 92 to 109 over the last three months. In contrast to GLD - the price plot for the DB Dollar Bullish ETF (UUP) moved from the upper left to the lower right - which is a clear downtrend. Although the decline in the Dollar seems to have slowed in recent weakness - we have yet to see any kind of breakout or trend reversal. Also notice that weeks in the Dollar and strength in Gold seems to benefit stocks.

Chart 9

Chart 10 shows the Gold ETF (GLD) with the Inflation-Protected Bond ETF (TIP). GLD advanced from 92 in mid August to 109 in mid November (right scale). TIP advanced from 99.5 in early August to 105 in mid November (left scale). Even though GLD is outperforming - there is clearly a positive correlation at work here. As the name suggests - inflation-protected bonds should perform well when inflationary expectations are rising - as should gold. In addition - the Dollar should come under pressure when inflationary expectations increase. After all - inflation erodes the purchasing power of a currency. While inflation is bearish for normal bonds and the Dollar - it is beneficial to gold and inflation-protected bonds. I would even go as far as to say that a little inflation is good for the stock market. The alternative - deflation - is clearly bearish for stocks. I can also easily see why inflation expectations are rising. First - Fed policy is accommodative with low interest rates. Second - the government is on a spending spree. Third - the G-20 voted to maintain the global stimulus. There certainly is a lot of money sloshing around right now.

Chart 10