METALS & MINING SPDR TESTS KEY SUPPORT ZONE -- BASE METALS ETF FORMS BEARISH CONTINUATION PATTERN -- GOLD HITS CRITICAL JUNCTURE AS SILVER BOUNCES -- A BULLISH CONTINUATION PATTERN TAKES SHAPE IN TLT -- NON-MANUFACTURING INDEX FAVORS ECONOMIC EXPANSION

METALS & MINING SPDR TESTS KEY SUPPORT ZONE... Link for today's video. The Metals & Mining SPDR (XME) fell back at the end of September, but managed to hold support in the 36 area and firm the last six days. Chart 1 shows XME hitting resistance from the April-May highs in the 39 area. The ETF then broke the late June trend line with a decline below 37 in late September. Despite this warning sign, the ETF has yet to break key support and forge a lower low to signal the start of a downtrend. Notice how XME held support near 36 twice in August and early last week. In addition to this key support zone, chartists should also watch the Shanghai Composite ($SSEC) for clues on XME. The indicator window shows XME rising and falling along with the Shanghai Composite the last six months. There is a clearly a positive correlation between these two.

(click to view a live version of this chart)
Chart 1

BASE METALS ETF FORMS BEARISH CONTINUATION PATTERN... Even though the Metals & Mining SPDR advanced the last few months, the Base Metals ETF (DBB) remains near its summer lows and has yet to challenge its resistance zone. Chart 2 shows the DBB within a long-term downtrend on the weekly chart. The ETF broke support in the 17.5-18 area and this support break held as the ETF remained below the break. The 2011 trend line and summer highs now mark long-term resistance.

(click to view a live version of this chart)
Chart 2

(click to view a live version of this chart)
Chart 3

Chart 3 shows DBB forming a rising flag/wedge over the last few weeks. These are bearish continuation patterns. A break below 16.4 would signal a continuation lower and argue for a move below the summer lows. The indicator window shows MACD hovering above its signal line, but in negative territory overall. A downturn and signal line break would be negative.

GOLD HITS CRITICAL JUNCTURE AS SILVER BOUNCES ... The long-term and medium-term trends for gold are both down, but the yellow metal is at a critical juncture on the daily chart (medium-term). First, let's look at the long-term picture with a three year candlestick chart. Chart 4 shows Spot Gold ($GOLD) breaking a big support zone around 1550 in April and plunging to 1200. This is a big move that looks like the third wave of an Elliott wave sequence. In fact, many Elliott practitioners look for a third wave and then work their wave counts around this big wave. Personally, I am challenged to fine a waves one and two on the left, but we could be seeing an "abc correction" evolve as wave four. Notice how gold is finding support in the 1300 area over the last three weeks. An advance from here could be wave c of an abc correction and the entire wave could be wave four of a five-wave decline. The target for wave c would be in the 1550 area. Broken support, the 61.80% retracement and channel trend line mark resistance here.

(click to view a live version of this chart)
Chart 4

(click to view a live version of this chart)
Chart 5

The current outlook for gold is bearish and I am looking for what would change this outlook. Chart 5 shows the Gold SPDR (GLD) with a falling wedge forming on the six month chart. This wedge defines the six week downtrend with resistance marked at 130. GLD is at an interesting juncture because it got a small bounce off the 61.80% retracement the last four days. A follow through breakout would reverse the six week downtrend and signal a continuation of the July-August advance. Chart 6 shows the Silver Trust (SLV) bouncing off broken resistance and challenging the trend line extending down from early September.

(click to view a live version of this chart)
Chart 6

A BULLISH CONTINUATION PATTERN TAKES SHAPE IN TLT... Treasury bonds are getting a bid as stocks weaken and the 20+ Year T-Bond ETF (TLT) is on the verge of breaking flag resistance. Chart 7 shows TLT finding support in the 102 area in August and September. With an advance above 106, TLT actually exceeded the late August high and chartists could consider this a double bottom, albeit a relatively small double bottom. TLT edged lower after breaking 106 and formed a falling flag the last two weeks. A falling flag is a bullish continuation pattern that is confirmed with a breakout. A move above 106.50 would break flag resistance and argue for a continuation higher. Chartists can add the September advance to the flag low for an upside target in the 110-111 area. The indicator window confirms a bullish bias because Aroon Up has been trading above Aroon Down since mid September. Chart 8 shows the 10-year Treasury Yield ($TNX) breaking support and holding below this break.

(click to view a live version of this chart)
Chart 7

(click to view a live version of this chart)
Chart 8

NON-MANUFACTURING INDEX FAVORS ECONOMIC EXPANSION... The long-term trend for the S&P 500 is up and two key economic indicators support this uptrend. Even though economic indicators can lag the stock market, there are long periods when both trend in the same direction. Signs of economic expansion support a long-term uptrend in stocks. Government published economic data is on hold because of the government shutdown so chartists must rely on non-government data, such as the ISM Manufacturing Index and ISM Non-Manufacturing Composite. Both of these were reported last week and both point economic expansion.

Chart 9

Chart 9 shows the ISM Non-Manufacturing Composite Index falling to 54.4 for September. Despite this decline, the three month average is above 56 and the indicator has been above 52 since mid 2010. Non-manufacturing activities, or services, account for around two thirds of GDP. Long-term, the trouble does not start until this key barometer moves below 50.

Chart 10

Chart 10 shows the ISM Non-Manufacturing Business Activity Index moving above 50 in September 2009 and remaining above 50 for four years now. With the business activity gauge often leading the ISM Non-Manufacturing Composite, the most recent reading above 55 suggest economic expansion for the rest of the year. Note that these indicators were created with user-defined indexes in a StockCharts Pro account

MANUFACTURING ACTIVITY REBOUNDS... The manufacturing side of the economy tripped up a few times in the past year, but the ISM Manufacturing Index has been largely positive since the middle of 2009. Chart 11 shows the index dipping below 50 a few times from July 2012 to June 2013, and then surging above 55 the last two months. The index hit its highest level since early 2011 and this surge justifies the new highs seen in the Industrials SPDR in mid Septmeber. Chart 12 shows the ISM Manufacturing New Orders Index surging above 60 the last two months. The new orders portion acts as a leading indicator for the ISM Manufacturing Index and points to continued strength into yearend.

Chart 11

Chart 12