NEGATIVE CORRELATION HOLDS FOR DOLLAR/GOLD -- GOLD NEARS RANGE RESISTANCE -- AD VOLUME LINES ESTABLISH SUPPORT -- NET NEW HIGHS DIP SHARPLY S&P 500 %ABOVE 50-DAY SMA REMAINS BULLISH

NEGATIVE CORRELATION HOLDS FOR DOLLAR/GOLD... Link for todays video. The long-term trend for the Gold SPDR (GLD) has been up since the breakout in early 2009. Chart 1 shows two modest corrections and one consolidation within this uptrend (pink lines). The uptrend continued when GLD broke falling wedge resistance levels in May 2009 and March 2010. Currently, the ETF has been trading sideways the last four months. Most recently, GLD bounced off support from the trendline extending all the way back to January 2009. This move reinforces support from the October-February lows and keeps the long-term uptrend alive.

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Chart 1

The indicator window shows the US Dollar Fund (UUP) for comparison. Notice how gold moved from the lower left chart corner to the upper right (uptrend). Conversely, the Dollar moved from the upper left chart corner to the lower right (downtrend). There were a few Dollar rallies along the way, but there is no denying an overall downtrend here. John Murphy notes that these classic intermarket relationships may go astray for a few weeks or even months, but they usually hold over the longer-term. Looks like the negative correlation between gold and the Dollar is holding over the last 2 1/2 years.

GOLD NEARS RESISTANCE FROM FOUR MONTH TRADING RANGE ... Since first clearing 134 in mid October, the Gold SPDR has been range bound with resistance around 139 and support around 128. Trading was choppy in November-December and then two sharp swings formed in January (down) and February (up). The swing within this range remains up with first support just below 136. Given the long-term uptrend, the odds favor an upside breakout in bullion.

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Chart 2

The indicator window again shows the US Dollar Fund. Figuring out the correlation on a day-by-day or even week-by-week basis can get confusing, but the correlation over the last five months looks pretty clear. Both the Dollar and Gold have traded flat since mid October. GLD has trading on either side of 134 and UUP has traded on either side of 22.7. A directionless Dollar led to sideways trading in gold. The Dollar is currently near the low of its range, while Gold is near the high of its range. A support break in the Dollar could lead to a resistance break in gold.

AD VOLUME LINES ESTABLISH IMPORTANT SUPPORT LEVELS... The AD Volume Lines for the Nasdaq and NYSE both recorded 52-week highs last week, which means they are clearly in long-term uptrends. As with any price series, technical analysis can be applied with this indicator to ascertain the overall trend and strength of the trend. Chartists can even apply indicators to the AD Line. A basic uptrend is in force when higher highs and higher lows persist, which has been the case since the September breakout. Chart 3 shows the NYSE AD Volume Line and chart 4 shows the Nasdaq AD Volume Line. Short bouts of heavy selling pressure produced sharp declines in November and January (blue arrows). These were short-lived as the indicators quickly rebounded and moved to new highs. Heaving selling pressure pushed these two indicators sharply lower this week, but they remain well above support from the late January lows. It would take a move below these levels to reverse the current uptrend in these key breadth indicators.

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Chart 3

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Chart 4

The AD Volume Lines are cumulative indicators of Net Advancing Volume, which is the volume of advancing stocks less the volume of declining stocks. The NYSE AD Volume Line represents Net Advancing Volume for stocks traded on the NYSE. This includes Citigroup, Bank of America and a few other big finance sector stocks that seem to dominate volume. Even though this indicator may seem imperfect because of the outsized influence of Citigroup and Bank of America, its basic trend is positive correlated with the NY Composite ($NYA) trend. Net Advancing Volume represents net money flow and the AD Volume Line is a running total of net money flow that should be monitored.

NET NEW HIGHS DIP TO NOVEMBER-JANUARY LEVELS... Also keep in mind that the AD Volume Lines are just two of many breadth indicators available at StockCharts.com (Click here
to see the others). It is prudent to monitor a few varied breadth indicators before jumping to any conclusions on the state of the market. I also like to follow the number of stocks recording new 52-week highs and new 52-week lows via the Net New Highs indicators. Net New Highs is simply new 52-week highs less new 52-week lows. Clearly, the bulls have an edge when new highs dominate, while the bears have an edge when new lows takeover. With intense selling pressure this week, Net New Highs dipped to their lowest levels since the pullbacks in November and January. Chart 5 and 6 show the Net New Highs Ratios and the Cumulative Net New Highs Lines for the Nasdaq and NYSE. The ratio is simply Net New Highs divided by Total Issues. The cumulative lines are a running total of daily Net New Highs. The red arrows show the Net New Highs Ratios dipping into negative territory in mid November and nearing zero in mid January. As with the AD Volume Line dips, these dips were short-lived and Net New Highs quickly rebounded. A moment-of-truth is upon us as these indicators test the zero line.

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Chart 5

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Chart 6

The Cumulative Net New Highs Lines tell the real story here. The NYSE Cumulative Line has been above its 10-day EMA since mid July, while the Nasdaq Cumulative Line has been above its 10-day EMA since mid September. Even with the November and January dips in Net New Highs, these cumulative lines did not break their 10-day EMAs. It takes more than just a week of selling pressure to produce a break here. Look back to the May-June period for clues on how a period of weakness may evolve with these indicators.

PERCENT ABOVE 50-DAY SMA REMAINS BULLISH... The previous indicators were based on the broad market or the exchanges (Nasdaq and NYSE). The next two indicators narrow the focus to stocks in the S&P 500 and Nasdaq 100. We can judge the internal condition of these indices by looking at the percentage of stocks that are trading above a specific moving average, such as the 50-day, 150-day or 200-day. Your choice of moving average depends on your time horizon for the trend. The shortest, %Above 50-day SMA, will be the most sensitive and generate the most signals. The longest, %Above 200-day SMA, will be the least sensitive and generate the fewest signals. Chart 7 shows the S&P 500 %Above 50-day SMA ($SPXA50R) and chart 8 shows the Nasdaq 100 %Above 50-day SMA ($NDXA50R). Instead of relying on simple crosses above/below 50%, I set buffers for the indictor signals. A move above 55% is bullish and remains bullish until a cross below 45%, which is bearish. Both indicators crossed above 55% at the beginning of September and exceeded 80% a few times over the last few months

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Chart 7

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Chart 8

Despite strength overall, the indicators have been showing less strength in 2011. While the S&P 500 and the Nasdaq 100 zoomed to new 52-week highs in February, these indicators formed lower highs. Fewer stocks were above their 50-day SMAs in February than in January. In other words, participation narrowed a bit on the latest leg up. Also notice that Nasdaq 100 stocks are weaker than S&P 500 stocks. The $NDX indicator dipped to 55% this week, but the $SPX indicator held around 63%. Despite narrowing participation in both and relative weakness in the Nasdaq 100 stocks, both indicators have yet to cross the 45% line, or even the 50% line for that matter. From a trend following standpoint, a move below 45% in both would show underling weakness and argue for an extended pullback.

Users can plot lines for the percentage of stocks that are above the 50-day, 150-day and 200-day moving averages for seven difference indices. These include the Dow, Nasdaq, Nasdaq 100, NYSE, S&P 100, S&P 500, and S&P/TSX Composite. Search in the symbol catalog for stocks above or click here to see a symbol list.