StockCharts Blogs - ChartWatchers

STARTING OFF WITH A BANG

The 2012 trading year has begun with a "bang" to be sure. In terms of the S&P 500, we find that 16 of the 23 trading sessions have traded to the upside, with no losing session down more than -8 points or -0.6%. This is rather "one-sided", and it gives rise to thoughts that a correction must be forthcoming. Really, how could a rather sharp correction not take place given the European fiscal and debt crisis and the slowing the Chinese economy. There are so many negatives in front of everyone, there can't be any way the market should trade higher. However, one must try and understand the power of "money printing liquidity" provided by nearly all of the world's central banks.

We'll be the first to admit - we've been rather wrong-headed about this rally. There have been ample signs that this is nothing more than a counter-trend rally in a bear market, but then again there are technical signs it shall go further and farther than most believe. The question, is where do the probabilities lie in regards to this, and we look upon them in this blurb from the monthly perspective.

Quite simply, the risk-reward is to the upside given the October-2011 trade formed a bullish monthly key reversal to the upside - a signal that new highs were a higher probability than previously thought. Certainly given the European fiasco, one would have thought prices would trade lower; but when they did - it was only for a very short period. This is reminiscent of the pattern seen during the Russian debt crisis in 1998, when prices traded lower in October-1998 - only to trade over +40% higher in the ensuing 18-months. Frankly, the current technical pattern seem eerily similar from a corrective and MACD point-of-view - which would lead one to surmise that new highs in the S&P are forthcoming - in all probability into the 1600 area. But having said this, even if new highs develop, we would this as a bear market rally in much the same manner as those were in the 1970's trading range that broke to new highs only to falter massively in the months thereafter.

This is change in tenor for us; and one that we've held out for as long as we could. We are a "bear" with a bull hat on for the moment. The fact of the matter is that the S&P has broken above, and extended above all the necessary moving averages - which puts the risk-reward to the upside. There are other markets as well breaking out on a monthly basis such as Brazil, India and other Latin American countries - although China is not yet done so, or is even close for that matter. We've been bearish, and we've been rather wrong. Our outlook going forward will be for a weakening rally, with Energy, Healthcare and Gold/Silver shares leading the way. Moreover, we see an increasing potential for a "melt-up" to develop as rotation takes place out of bonds and into stocks. The low volumes associated with the markets at present certainly provide for this context.

So, the craziness continues...and we are left in humble stead to play "catch-up" until its time throw everything away again.

METALS STILL BULLISH

Since the beginning of the year, we've seen both Gold ($GOLD) and her sister metal Silver ($SILVER) rally; but we've seen Gold under-perform during this rally. This is exactly what should take place in a metals bull market. But that said, the Gold/Silver Ratio remains at a very critical area in our opinion, for up to this point - it has tested its overhead 600-day moving average and turned lower. Again, this supports a metals bull market, for silver is the leader; and history bears this out.

But what if this changes,? Rightly or wrongly, we are concerned about whether this is simply a correction from the 600-day, upon which another assault and perhaps breakout above this level is about to take place. If so, then the current good bullish feeling in the metals market shall dissipate rather abruptly, with traders running for the hills as the probability would be higher that Gold would then test the $1300-$1350 zone where the 150-week moving average crosses (this dynamic was shown in the CWW publication two weeks ago).

Therefore, in taking into account where Gold prices are today at $1665, and the position of the ratio - we would need to see gold rally strongly over the 30-week moving average at $1687 - AND - we would need to see silver outperform. If these two circumstances were to take place, then we would expect new highs in both Gold and Silver in the months ahead.

Good luck and good trading,
Richard

DOWNSIDE VIOLENCE IN THE GOLD MARKET

The downside violence in the Gold market as abated for the the time being given the reallocation and repositioning for the New Year. There are many the recent drop is sufficiently of the cathartic-type that will send prices to all-time highs, for we all know that "all the current roads lead to inflation - at some point" as the worlds' central bankers continue to print money. However, we are of the opinion that gold prices have further downside work to do before a strong bottom is formed that will indeed be sufficient for higher highs.

Our opinion stems from the gold chart, and the fact that gold has clearly broken below its 30-week moving average. In the process of doing so, a "head & shoulders" top pattern was confirmed, which now measures lower into $1280-*to-$1300 zone. This is currently where the 150-week moving average, which is where the 2008 correction feel to and then turned prices higher. Another interesting historic technical metric, the percentage below the 30-week moving average in which gold generally bottoms is between -12% and -17% below it - which would put prices in the range of $1476 to $1392. This zone was not tested on the most recent decline, so there is likely more downside forthcoming. .

Therefore, we are most interested in the 150-week moving average, and where it trades as time goes forward.

SILVER POISED TO OUTPERFORM AGAIN

Last week, the world's stock markets cheered the coordinated central bank efforts to supply dollar liquidity to the world banking system via lower than market rates. This clearly resulted in a "risk-on" trade across the board, and we expect more to follow in the weeks ahead as the ECB lower rates, and China moves quickly to halt its declining economy.

Our interest in this new round of money printing and stimulus stands in the precious metals again such as gold, silver and platinum. We can make a very bullish case for each at this point, but we'll focus on the "high-beta" silver futures contract. All healthy precious metal bull markets are led by silver; and we sense that silver is now poised to outperform once again - with new contract highs forging above the $50/oz level.

The techncials of the trade are rather simple: silver has traced out a rough 9-month bullish "flag pattern", which tends to resolve itself in the direction of the major trend, which is higher given the pattern of higher lows. Also, we point out that the 20-week stochastic is back to levels that in the past have coincided with rather major bottoms. The only caveat is the rolling over 250-week moving average, which on many occassions has shown its bullish and bearish worth. We are of the opinion, that once the 250-week is violated to the upside at $35.50 - this a rally of massive proportion shall be upon us. Lest we not add that that Wednesday's daily trade put in place a key reversal higher - which in our mind is sufficient to consider long positions at current levels.

Good luck and good trading,
Richard

BULLISH CONSOLIDATION FOR LIGHT CRUDE

Over the past three months, we've seen the West Texas Intermediate Crude Oil futures ($WTIC) rise from low of $75/barrel to a high of $102/barrel, which is a rather large move in a very short period of time in what many consider to be a modest "risk-on" environment. Certainly the other commodity complexes have no responded in such a violently higher manner. This begs the question as to what is going on fundamentally and from a sentiment point-of-view. We can't find much that is fundamentally bullish; thus we must attribute this to simply more buying than selling and the ongoing Middle East "Spring" for lack of a better descriptor.

Technically speaking, we see the monthly $WTIC chart forming a rather large bullish consolidation that suggests in the months and years ahead that $WTIC will move to new highs above the $147.27 level. If trendline resistance is clearly violated on a $WTIC move above the $115 level - then we'll be rather confident that the highs will come into view rather quickly...with the possibility of a super spike higher.

Under this premise, we should note that many of the energy-related stocks are trading in bullish patterns not far off their lows and below their representative 200-day moving average levels. This presents an interesting opportunity for oil stocks to "catch-up" to the rise in $WTIC is a very violent manner. Be prepared.

Good luck and good trading,
Richard Rhodes

SUSTAINED RALLY IN THE FUTURE?

Quite simply, the past 5-week rally has been breathtaking, but it remains to be seen whether it has "legs" of whether it does not. It is of our opinion, that it "does have legs", and it does so given the Financials (XLF) are rallying...but more importantly - the Homebuilders (XHB) are leading the rally. And, we think the XHB shall continue leading and actually do better than anyone anticipates at this juncture.

The "head & shoulders" bottom on the weekly chart is very clear; although it is not yet confirmed. However, the 30-week moving average is on the verge of being given, with the 20-week stochastic turning higher through it's trigger point. Again, in the past, this has resulted in a sustained rally - and if neckline resistance is violated as we believe it shall be - then targets in the range of $27.50 to $37.50 come into view. This is certainly not the consensus view, but as they say - "every dog has its day."

Therefore, any weakness broader market in the days ahead can be used to consider long positions.

HAS GOLD REACHED ITS PEAK?

The month of September has not been kind to Gold; and the question before everyone is whether or not gold has seen its highs for an intermediate period or whether a brief pause before higher highs are forged. We are of the opinion of the former rather than the latter, but we remain gold bulls – but from probably lower levels than most are looking for at this juncture in the cycle.

From a technical perspective, we should note that Gold has forged a “monthly bearish key reversal” pattern to the downside. Now, monthly reversals tend to much more important than daily or weekly varieties and we think of this one as no different. Having said this, many analysts are looking for Gold to hold the $1535 lows forged recently, but we are looking for something a bit lower – to perhaps between the 20-month and 40-month moving averages at $1382 and 1164 respectively. In doing so, this would not destroy the bull market whatsoever, but it would be a “gut wrenching” period for the “super gold bulls”, of which we know many. The last major correction took place under the aegis of the 2007-2009 bear market for stocks and commodities, and saw gold prices fall over the course of 9-months from $1053 to $681 or -35%. And putting pencil to paper and using the recent highs at $1924…and dropping prices by -35%...we get a round number of $1250…which is square within our target range.
 
Therefore, while we do like Gold long-term – there is a technical case to be made that a larger correction is unfolding upon which we can be aggressive buyers sometime next year. But for now – it would seem wise to stand aside and allow the market to wreak havoc upon those late longs.

CURRENT S&P 500 RALLY IN TROUBLE?

Over the past 6-weeks, we've seen the S&P 500 trade in a large sideways pattern between 1220 and 1100; we find this eerily reminiscent of a bearish pattern that will resolve itself to new lows. Certainly this is our viewpoint; and we believe the supporting technicals in the US Dollar Index ($USD)confirm our belief.

Quite simply, the USD rises when there is "stress" in the world as market participants move towards safety. Over the past year or more, USD has been in a downtrend, but that downtrend now appears to be over. Note the wide girth bullish wedge coupled with the breakout above the 200-day moving average. Our real focus is upon the 200-day, for history has shown that breakouts or breakdowns of this important, yet simple standard moving average - indicate a change in trend. This is what we see on the chart now, and thus it begs many questions?

Certainly the first should be that given the Euro is roughly 60% of the USD, then what should we make of the European debt crisis and shall it spiral out of control far worse than anyone is expecting at this point given the USD looks poised to make another run towards the 87-89 zone? Those trading USD now have the wind at that back from a technical perspective. This has negative implications for the stock market - regardless of last week's 5-day rally.

Thus, the current S&P 500 rally looks in trouble; and one must look to be aggressive in short positions.

Good luck and good trading,
Richard

THE BEGINNING OF A BEAR MARKET?

The recent volatility is enough to make one step back, put your money aside - and reassess. In fact, this is what both institutional and individual investors have done over the past 3-weeks as money withdrawn from funds has significantly increased - even more so than at the March-2009 panic low. Perhaps this is part and parcel of the "death of equities" genre that is needed for the next bull market to begin; but for now...the pullout appears prescient.

Technically speaking on the S&P 500 index, we should point out that two of our longer-term moving averages were violated in bearish fashion - the 15-month and 45-month moving averages. In fact, there are only two occurrences of the 45-month moving average being broken since 1980, which rather interestingly occurred during the past two bear markets - which suggests a bear market has indeed begun. In each of the previous cases, the S&P 500 bottomed -27% and -33% below this level. At present, the S&P stands a mere -4% below this level, which would lead one to believe that another 20% to 25% decline is in order. This is serious stuff to be sure.

Therefore, rallies are to be sold until further notice. If we are wrong, then we would use a breakout above the 15-month as a sign that new highs are ahead. But that isn't the preferred viewpoint at present.

THE BEAUTY LIES IN THE RELATIVE TRADE...

Last week, and so far this week the stock market has traded rather dismal to be sure, with the S&P 500 trading lower in 8 of the past 9 trading sessions. However, regardless of this weakness, we've begun to see slow, but sure movements beneath the surface that warrant our trading attention. To wit, the S&P Energy sector appears ready to resume its upward trend against the S&P Consumer Discretionary sector. In other words, Energy is expected to outperform Consumer Discretionary. As for our chart target: we could very well see the ratio trade upwards of 2.3 to 2.4 in the months ahead.

From a technical point of view, let's note that prices have consolidated in bullish fashion since January-2011, and have done so with prices faltering from the longer-term 130-week moving average and back into the more medium-term 40-week moving average. Moreover, this bullish consolidation implies higher prices ahead towards the 2.3 to 2.4 level beneath trendline resistance, especially given the ratio continues to hold at the 40-week moving average. But the gains could be even more material given prices will have broken out above the larger 130-week moving average, solidifying the trend higher for months and perhaps years ahead. Lastly, the 20-week stochastic has turned higher in bullish fashion through its trigger point; confirming momentum is rising.

Therefore, given the developing evidence: we believe being equal buyers of energy stocks and equal short sellers of consumer discretionary shares makes sense...regardless of market direction. The beauty lies in the relative trade.

Good luck and good trading,

Richard Rhodes

MAJOR INDICATORS FLASHING "CAUTION" FOR RUSSELL 2000

At times, it is best to step back and take a longer-term viewpoint of the markets; and today we'll examine the Russell 2000 Small Caps (RUT). Quite simply, RUT has having difficulty moving past its all-time highs forged in October 2007; and in the process - have caused the major indicators to flash "caution" as the 9-month RSI hit above the 70-level, while the distance above the 30-month moving average rose to above 20%. In the past, these types of indicator readings have allowed for "mean reversion" lower processes to take place back to the 30-month moving average, while the RSI trades lower towards the 50-level. This would be a normal correction in a bull market; and it may be the "pause" that refreshes before the next leg higher unfolds. But make no mistake, a mean reversion exercise would mean nearly a -20% decline from current levels...very scary, but sufficient to put the bull back on firmer footing.

NATURAL GAS LOOKING TO PLAY "CATCH-UP"

In the past 10-months, the commodity markets have rallied rather substantially on the back of the QE-2 campaign. But, we would be remiss if we didn't point out that Natural Gas did not participate, with prices below the August levels extant when Fed Chairman Bernanke announced that QE-2 was a probable event. However, recent price gains in "natty" have given us reason to believe that it shall play "catch-up" in the weeks and months ahead, with money coming out of higher priced commodities and going into this laggard.

Technically speaking, the inverse "head & shoulders" bottom was confirmed last week with a close above neckline resistance. This level has proven its merit in recent weeks, thus the breakout is considered material. This, when considering the high probability of a 120-week exponential moving average breakout - all argue for sharply higher prices towards the $7 to $8 range from a current $4.74...or a gain between +48% to 70%.

Therefore, one can either use the Natural Gas futures or the Natural Gas ETF (UNG) to participate in the rally. Our choice at present is UNG.

NYSE COMPOSITE IN CORRECTIVE MODE

Since the end of April, the broader market as defined by the NYSE Composite Index has been in a corrective mode. However, the question remains as to whether this corrective process will continue in the weeks and months ahead, or will it come to a halt with the materialization of higher highs. We stand on the side of a correction in the months ahead.

To this end, the NYSE monthly chart illustrates a simple, yet elegant reason for the corrective process to continue: the 50-month and 12-month moving averages are converging. In the past when this has occurred - note the 2004 convergence - prices began to falter in the months leading up to these moving averages actually crossing. The very same circumstance is occurring today, and it also occurs with the 14-month RSI hitting very close to the very same level as in 2004. Moreover, we should note that the 12-month moving average is very rarely not tested at anytime during a year, which given the market has completed nearly 5-months of trading...gives us 7-months for it to be tested. At present, it stands a bit more than -10% current market levels, and we could very well see prices and the 12-month converging by late-summer of early fall.

Therefore, the risk-reward is skewed towards lower prices in the months ahead, which fits nicely with the seasonal patterns. But at this point, we only look for this correction to test moving average support before prices move higher - perhaps in response to a need to QE-3 if the economy continues to falter such as it is today.

GOLD STOCKS ETF (GDX) POISED FOR SHARP MOVE UP?

The recent gold price rally to new highs has paled in comparison with silver's seemingly parabolic move higher. While many "johnny come latelys" play in the silver pit, we are rather interested in the manner in which the Gold Stocks ETF (GDX) has performed relative to Gold itself. And we what we see is that GDX has lagged the gold rally badly. However, we believe this is about to change and perhaps on a very material manner.

The GDX:GOLD ratio chart is very instructive, for this weekly chart shows a very well built and very bullish "pennant formation", which generally resolves itself in a sharp thrust higher. If this were to occur, then GDX could outperform GOLD by 2-times, which would be similar in nature to the move off the late-2008 lows into the late-2009 highs before the pennant began to take shape. Of course, this chart would resolve itself in the manner anticipated, with GDX moving lower, although not to the same extent as GOLD prices. So, while we do believe GDX is poised to move higher - it could simply consolidate lower as GOLD prices moved sharply lower.

Good luck and good trading,
Richard

BANK INDEX - THE "CANARY IN THE COAL MINE"?

Questions about regarding the quick/sharp rally off the March 16th low. They are numerous, and they consist of a number of troubling circumstances that call into question the veracity of the rally. One of the areas that is troublesome is the Banking Index ($BKX), for any rally worth its salt much have the banks/financials as a strong backdrop. Therefore, we must consider whether the BKX will prove to be the "canary in the coal mine" for impending broader market weakness, or whether BKX is simply lagging at this point and will play catch up and outperform. We view the former as the more likely outcome.

Before looking at the weekly BKX chart, we should note that BKX is up a mere +0.3% YTD versus the S&P 500 +6.7% gain. Quite a bit of under-performance to be sure, and certainly troublesome as noted before. Moreover, the weekly BKX chart shows prices are weakening off its February high in tandem with the overbought 20-week stochastic turn lower. This would suggest further weakness towards the 130-week moving average support level. If a decline such as this were to develop in full, then the resultant loss would be on the order of -15% from current levels. Certainly the broader market would be in throes of a decline for this to materialize.

In ending, a lower outcome is likely in BKX given the weekly technicals; and also given that out of all the S&P sectors, only the Energy and Industrial sectors are out-performing the S&P 500 this year. This generally comes during the latter stages of a market recovery. Therefore, broader market caution is advised.

CORRECTIVE PROCESS IN FULL BLOOM FOR RUSSELL 2000

Over the past several weeks, we've seen the market leader Russell 2000 Small Cap Index ($RUT) falter modestly given Middle East/North Africa and Japanese concerns. Commonsensically speaking, this would have been expected, but certainly on a longer-term basis RUT was ready to decline from a technical perspective due to a number of reasons. They are:

1. RUT has rallied sharply off its low in a very short amount of time and back into the 2007 highs; long-term previous high resistance almost also proves difficult for a few months.
2. As resistance was tested, the 9-month RSI moved above the 70-level, which in the past has roughly marked a very overbought condition that has ultimately led to a corrective process that carries the RSI back towards a more neutral 50-level.
3. The distance above the 30-month moving average hit the 20% level; this is shown as a function of PPO. When this occurs, the the probabilities favor a multi-month corrective process.

Therefore, while world events hit the headlines, the Russell 2000 was certainly ripe for a correction anyway; and while many pundits will speak that the market is oversold on various short-term measures - it is not on longer-term measures. So this simple means we are sellers of rallies as they develop, with several more months before a bottom is to be found.

SILVER AND GOLD

The recent gold price rally to new highs hasn't been impressive when compared to silver's sharp rally; but then again, the race may not always go to the rabbit. And it is this thought that has prompted us to consider the horridly lagging gold stocks (GDX). They haven't been able to get out from under their own weight, and they stand not too far off their respective 200-day moving averages, and haven't moved to new highs with gold. This is a rather large divergence, and one we don't believe shall remain in place for very long as gold shares (GDX) appears poised to breakout sharply versus gold prices.

Turning to the weekly GDX:GOLD ratio chart, we find the sharp rally off the late-2008 lows to have consolidated in bullish pennant fashion for the past two-years. This is quite some period of time to consolidate, and classical technical analysis will tell you that the longer the consolidation...the more powerful and extended the breakout. As such, we'll be monitoring this chart carefully for a breakout similar to that seen in 2003 that pushed the ratio from .05 to it highs at .07. Our penannt target measurement is a rough one, and we'll call it the highs at .07 again...with a chance at new highs. But before ending, we should note one important caveat: we've simply noted that GDX appears ready to breakout against GOLD...we  don't have a view on GOLD...therefore GOLD could very well move sharply lower, while GDX simply stands in place. It's certainly a risk, but we will consider buying GDX while it is above its 200-day moving average and cut our losses below it.

RICHARD ON HIATUS

Richard Rhodes is on hiatus this week.  His article will return in the next issue of ChartWatchers.

EMERGING MARKETS SHOWING WEAKNESS

While the US markets power towards higher highs – although in a weak manner we might add, we’ve begun to see outflows of funds from the Emerging Markets. Ostensibly, this is due in large part to the Egypt uprising, but there are other issues the emerging markets are facing such rising inflationary pressures and rising food prices. Many believe these circumstances to be transitory; but perhaps they shall be with us longer than anyone anticipates, and the impact upon the emerging market stock markets should not be dismissed so easily.

To this end, we find it instructive to look at the monthly charts of various emerging markets, and Brazil in particular. What we see is that the rally off the 2009 low is rather sharp at over 100%, and we find that Brazil’s BOVESPA follows its 16-month moving average rather nicely. What concerns us is that prices have now broken through sufficiently to call this a new bear market, but we need to see whether prices shall remain below it and close below it by month’s end. If not, then it shall prove support and new highs would be forthcoming. But when one looks at the 5-month RSI divergence, then one gets the sense prices are indeed going into a bear market.

Therefore, if a bear market is indeed underway – then we would be naïve to believe that the US can escapes significant weakness in the face of emerging market weakness since it was the emerging markets that led the US out of its bear market.

Good luck and good trading!

RALLY TIME!

The recent rally in the broader stock market has begun to correct; and it shall likely correct for the next several weeks. We view this decline much in the same manner as the Jan-2010 to early Feb-2010 decline, which the S&P lost roughly 106 points or nearly -10%. Certainly our momentum models are turning lower, and now we view the VIX as a confirming indicator that perhaps has higher prices in mind than anyone is prepared for at this juncture. But at this point, we view any decline in stocks as transitory prior to perhaps a larger high in the 2nd quarter.

To wit, the weekly chart shows major support at the 16-to-18 zone is holding once again, and has for all practical matters back to mid-2007. This is reasonable, and one could very easily note once the VIX turns higher, then it generally "spikes" higher. If that is the case here, and the probabilities do favor such an outcome - then minor trendline resistance at 19 should be taken out. This would argue for a 200-week exponential moving average mean reversion exercise that would carry prices upwards to 24.56 or even slightly higher. At that point, quite obviously the technical landscape would need to be reassessed, for further gains would put the declining trendline off the 2008-to-2010 highs into play, and we fear what a breakout above this level would mean to stocks and the US economy in general.

Cons. Discrectionary/Retail In Decline?

As the 2011 trading year unfolds, it is rather clear that the consumer discretionary sector and retail in particular are showing a tendency towards declining rather than rallying with the overall broader market. This is change from the past 2-years, where the consumer discretionary names have out-performed rather than handily. Therefore, this interests us from a trading perspective, for although we may not want to outright short these names, then we certainly want to be under-weight them and/or short them versus another sector such as Energy.

To this end, we've illustrated the S&P Energy/S&P Consumer Discretionary ETF ratio. And what we see is rather interesting and bullish. Interesting in the fact the ratio is trading at mid-2006 levels, which was at the height of the housing-bubble home equity extraction period that fueled large amounts of frivolous buying. Thus, given today's challenged consumer environment, then it would appear the discretionary stocks are a bit overextended in absolute terms, and overvalued versus energy. But given the chart is XLE/XLY, then it means that XLE should gain rather nicely against XLY in the weeks and months ahead.

Hence, we are buyers of the ratio, and we'll do so via the individual shares in each group as it is far easier to put on given the ability to find XLY shares to be short. But for our interests, the ratio clearly illustrates our point.

MARKET POISED TO CORRECT

Happy Holidays!

The recent rally off the late-August low has begun to encounter sluggish internals, which leads one to believe that the market shall be poised correct in the weeks and perhaps even months ahead. To this end, we should note the CBOE Volatility index or VIX has moved sharply lower back to levels previously consistent with trading highs in the S&P 500. Moreover, the 20-week stochastic is at oversold level further consistent with a turn higher as it eventually always does. This leads us to believe that a 200-week moving average mean reversion exercise can't be too far in the offing, which would put the VIX back to the 25-level - which would further suggest just a small nasty correction in an ongoing bull market. However, a breakout above this level would suggest a much larger decline is underway.

In layman's terms, while this doesn't prevent the VIX from moving lower and the S&P higher - it simply illustrates that the risk-reward dynamic has now changed to more "risk" in chasing this rally. At the Rhodes Report, we are looking for a trading high near current levels, and are deploying capital to taking advantage of any decline.

Good luck and good trading,
Richard

FINANCIALS AND BANKS TO BE A "SURPRISE PERFORMER"?

The past several day market rally has caught many "flat-footed" to be sure as traders head into year-end. Moreover, the prospects for further gains are rather high; hence we're likely to see many traders attempt to play "catch-up". This begs the question as to what sector may be one of the "surprise performers" and offer both absolute and relative performance. To us, the Financials and the Banks in particular are "under-loved" and quite "under-owned" - hence they fit the bill for those traders looking for leverage.

Technically speaking, the Banking Index is on the precipice of breaking out on an intermediate-term basis above its bottoming 130-week moving average. In the past, this moving average has served as a fulcrum point, and if this current bullish technical setup extends higher - then we'll see higher banking stock prices in the near-and-intermediate term. We think this is an "out of consensus call", which given the potential inflows of capital into the beleaguered sector - could result in outsized gains in the weeks and months ahead. Our favorite bank stocks are JP Morgan (JPM), PNC Financial (PNC), US Bancorp (USB) and First Horizon (FHN).

Good luck, and good trading!

DETERMINING "RISK-ON/RISK-OFF" TRADE

Happy Thanksgiving!

We view the ratio between stocks and bonds as a barometer for the "risk-on" or "risk-off" trade. Therefore, the recent upward movement in the ratio has our attention, and so too should it have our readers as it on the precipice of breaking out into a full-fledged "risk-on" bull market in stocks vs. bonds as the 170-week moving average looks to be violated to the upside given 40-week stochastic is turning higher in bullish fashion. This simply means that stocks shall gain at the expense of bonds, and more importantly - given the bond market has harbored the "risk-off" crowd, they will be forced into becoming buyers of stocks as they shall not want to see capital losses associated with falling bond prices/rising yields.

This is what the Fed Chairman wants; and he said so very eloquently in his November 3rd Washington Post Op-Ed piece. Those who bet against the Fed's unlimited balance sheet do so at their own peril.

A LONGER-TERM LOOK AT THE NASDAQ COMPOSITE

With the "troika" of the US mid-term elections, FOMC meeting decision on QE-2,  and the US Employment Situation Report having been digested by the markets, we thought it instructive to step back and take a longer-term viewpoint of the NASDAQ Composite. Perhaps by looking at the Composite, we can infer whether or not QE-2 will be successful in terms of raising asset prices in the coming year or years. Certainly the Composite has been a relative laggard since the bubble days of 1998-to-2000, that is until the past year. Thus, it piques our long-term interest, and perhaps more importantly...it will clear and discernible impact our trading strategy.

Turning to the monthly chart, we find the multi-year bullish triangle of which trendline resistance is clearly being given - which would argue for new highs years down the road. Certainly recent dour economic prognostications related to money printing et al should be the type of environment in which this should occur. But the fact of the matter is that support levels are holding, while resistance levels are being violated - the hallmark of a bull market. Moreover, the probability for prices extending their gains is rather good the 35-month moving average support level has time and time again over the course of 4-months held up admirably to assault. We are rather impressed by this; and our readers should be too.

Therefore, as long as the 35-month moving average provides support - then one must consider using sharp corrections upon which to accumulate technology shares. Once it does fail, then we'll be inclined to be aggressively short...but not until then. The final fact of the matter is that QE-2 may have some very real long-term unintended consequences - meaning very sharply higher asset prices or "bubbles" once again. And who doesn't like sharply higher asset prices? So...here's three cheers to the "good ole' days" of the 1998-to-2000 NASDAQ rally!