FRIDAY'S LEADERS WERE ENERGY, MATERIALS, AND TECHNOLOGY -- GOOGLE, APPLE, AND MICROSOFT LEAD NASDAQ BOUNCE -- MSFT SHOWS NEW LEADERSHIP -- ADD FREEPORT MCMORAN COPPER AND GOLD TO METAL LEADERS -- S&P 500 REGAINS 50-DAY AVERAGE

ENERGY AND MATERIAL STOCKS HAVE STRONG WEEK... The stock market staged a modest rally on Friday. It was enough, however, to either keep some indexes (like the Nasdaq) above its 50-day average, or to push some others (S&P 500) back above it. The three strongest sectors on Friday were energy, materials, and technology. Chart 1 shows the Energy SPDR (XLE) in position to challenge its late-May peak. The rising XLE:SPX relative strength ratio (below chart) shows new energy leadership. The line above Chart 1 shows the price of crude oil starting to rally as well. Chart 2 shows the Materials SPDR (XLB) consolidating well above its 50-day line and near chart support at its late-May peak. Its rising relative strength ratio (below chart) shows material leadership. That's due largely to the recent upturn in commodity prices reflected in the CRB Index (above chart). We've been showing upside breakouts in several gold and silver stocks during the week. Chart 3 shows strong chart action in Freeport McMoran Copper & Gold (FCX). Although FCX produces both commodities, most of its profits come from copper. Chart 3 shows the stock on the verge of clearing its January/April resistance line. Its RS line (below chart) has been rising since last May. That's due mainly to the upturn in the price of copper (above chart) which has been one of the strongest commodities. That may actually carry good news for stocks in general (more on that later).

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Chart 1

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Chart 2

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Chart 3

GOOGLE LEADS NASDAQ 100 HIGHER... Chart 4 shows Nasdaq 100 Trust (QQQ) bouncing impressively off its 50-day average on Friday (although on lighter volume). The biggest reason for that rebound was the 12% jump in the price of Google (above chart) on huge volume. Two other big techies had strong chart action as well. Chart 7 shows Apple (AAPL) closing just shy of its all-time high at 365 on Friday. The tech leader rose above its first half resistance line last week. Its RS line (below chart) has already reached a new high. Microsoft also had a good week. Chart 8 shows Microsoft (MSFT) challenging its late April high near 27 and on the verge of a possible upside breakout. It just recently climbed back over its 200-day average as well. Its relative strength ratio (below chart) started rising at the end of May which shows new upside leadership. That may be worth watching since MSFT has been a market laggard for the last 18 months.

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Chart 4

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Chart 5

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Chart 6

MICROSOFT MAY BE FORMING BULLISH TRIANGE... It's usually a good idea to supplement one's daily chart analysis with a glance at a stock's weekly chart in order to get a better long-term perspective. Microsoft's improving daily chart prompted me to look at its weekly chart to see if something more serious was happening. And it may be. The weekly bars in Chart 7 show Microsoft in an apparent "triangle" formation since its April 2010 peak. A triangle pattern is formed between two converging trendlines as shown in Chart 7. The triangle is usually a "continuation" pattern which means that the stock will eventually resume the trend that existed before its formation. Since the prior trend was up (from March 09 to April 10), that favors an eventual upside breakout of the upper line. The relative strength line below Chart 7 also offers encouragement. It shows that MSFT has been a market laggard since the start of 2010. This past month's uptick in the RS line, however, is challenging its downtrend line which suggests that the eighteen month period of underperformance may be changing. In other words, Microsoft may be turning into a market leader.

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Chart 7

S&P 500 REGAINS 50-DAY AVERAGE... Friday's bounce was enough to push the S&P 500 back above its (blue) 50-day average as shown in Chart 8. It also found support at its 20-day average (green line). The fact that the SPX has retraced 50% of its June/July rally may also have attracted some buying. The jury is still out on whether Friday's bounce will hold, but the action was encouraging. One other postive factor the market may have in its favor is the recent rebound in commodity prices -- especially in economically-sensitive commodities like energy and copper.

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Chart 8

WILL RISING COMMODITIES BOOST STOCKS?... The positive link between stocks and commodities doesn't always exist as shown in Chart 9. There have been periods in the past when they've trended in opposite directions like the second half of 2006 (see box). Stocks also have a history of peaking before commodities. Chart 9, for example, shows commodities rallying throughout the first half of 2008 as stocks started to tumble. Commodities eventually peaked in the middle of 2008. Since then, however, stocks and commodities have been closely linked. That's been especially true since the spring of 2009 when both bottomed together (see arrow). Chart 10 shows the close correlation between the two markets that has existed since last August when both turned up. The chart shows both correcting together in early March and rallying through April before peaking together at the start of May. Both have bounced since late June. If the upturn in commodities is for real (and it seems to be), that may carry good news for stocks as well. That depends of course on two things. One is that commodities keep rising. The other is that positive link between the two markets remains intact.

Chart 9

Chart 10