A number of critical areas

Chart
2 below shows
(
USO |
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week to the upside. A move over the 55-56 level next week will confirm at least
a bear rally of shorts likely to continue in Crude Oil. Sentiment also got a
bit over bearish in oil during this decline, adding a bit of credibility to a
potential short-term rally at least.

Interestingly, at the same time oil has been hitting a support level and
starting to some signs of at least a technical bounce, gold stocks and gold have
also been hitting significant support. Chart 3 shows that the
(
XAU |
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proven significant support to gold stocks all year. A slight bounce off of this
support level has developed so far. It will be important whether this level can
hold price declines or if it gives way clearly on subsequent declines for the
outlook for gold and gold stocks. A weak and high volume close by XAU below
118-120 accompanied by a weak and high volume close by
(
GLD |
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PowerRating) under 55 would
suggest a further leg down in the precious metals. Conversely, the longer these
levels hold, and the stronger the price action off of them, the more likely that
at least an intermediate low is at hand. Let the market tell its tale.

The NASDAQ and
(
QQQQ |
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natural level of resistance at the same time some smaller cap indexes are doing
the same. A strong and high volume move by the QQQQ’s over 43.5 or so would be
a good indication that this market can run further. Conversely a close below
the steep up trend lines in QQQQ’s (shown in chart 4) as well as a break of the
steep up trend lines in the Naz and Russell small cap index would likely signal
the first real correction of the up leg since July was underway.

One
of the weakest and most critical sectors of the year has been housing. We’ve
mentioned the steep decline in the NAHB housing index and the likely
underperformance of housing stocks for some time. However housing stocks are at
some critical levels and decision points as well. Chart 5 shows the
(
HGX |
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just hit 38% retracement levels and bounced down a bit. This month the NAHB
index actually moved up from 30 to 31. In 1990 and 1994 when this index turned
up, housing stocks turned up and moved up sharply in the ensuing years. Does
this NAHB index up tick from recession levels indicate that housing stocks will
bottom in anticipation of a stabilization of housing down the road a ways, or is
this housing decline more significant and long lasting than those of earlier
periods? The HGX action can help us tell. A weak close on strong volume below
the up trend line shown on chart 5 after only a 38% retracement of the decline
since April would start to argue for more housing stock weakness than is normal
in a typical cycle. Conversely, a strong and high volume close above the 222
level AND above the 200 day ma by the HGX would be a first indication that
housing stocks may indeed be bottoming along the lines of a typical down cycle.
And a weaker housing group would argue for more economic weakness to come,
whereas an HGX able to rally significantly would argue for an economy that is
stabilizing at current growth rates.

We
still suggest less than aggressive allocation to global equities and would look
to add or accumulate
(
TLT |
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PowerRating) on this correction as we expect that the slowdown is
not over and that the Fed will not letup on a tightening bias until the slowdown
develops more clearly so that inflation does not reappear and get entrenched.
We like some pairs, and some select big-cap dominated groups along with the
small number of stocks meeting our criteria for below normal allocation to
stocks.

Since
a number of markets are reaching important levels, let’s sit back and watch how
the market behavior in some of these key groups will suggest markets should move
in the period ahead.