Watch this key level in Gold for the next big move

Coming off of some stronger than expected economic numbers pre-market, the broad markets rallied hard yesterday, erasing Wednesday’s losses and turning in an accumulation day to boot. By 8:30am the tone was set with a raft of economic data that implied inflationary pressures are easing.

Consumer prices rose only 0.1% in October after vaulting 0.9% in September, a benign inflation measure that helped push pre-market S&P and Nasdaq futures into the double digits. Initial Claims also fell in an early report by the Labor Department, with 17,000 less Americans filing for first-time unemployment benefits in the week ending 11/26.

All of this positivity created a large gap up in the broad markets which never filled or looked back during the day. When the trending day was over, the Dow charged up 106.70 for a gain of 0.99%, the S&P surged by 15.19 for a gain of 1.22%, and the Nasdaq Composite heated up by a robust 34.35 points for a 1.54% increase.

Internally things were healthy as the market turned in a solid accumulation day as noted earlier. Overall volume on the NYSE increased by 5% and by 7% on the Nasdaq. Breadth was extremely strong with advancing volume trumping declining volume on both exchanges by better than 4 to 1 on the NYSE and a very strong 5 to 1 on the Nasdaq. Advance decline lines were similarly strong with 1806 more advancing than declining issues on the NYSE, and 1215 more on the Nasdaq. Along with overall volume its important to note internal readings such as breadth and advance decline lines.

Whenever the market has a very strong trending day to the upside its an added bonus when the aforementioned internal indicators are very strong in conjunction with the price rise. This was certainly the case yesterday as its generally assumed that breadth readings over 3:1 positive are very high and any advance decline readings over +1000 would be interpreted as same.

In addition to the strong internals, sector action was also biased strongly to the upside. Practically all sectors participated in the rally which was led by metals/mining, oils, oil services and semiconductors. Banks,
biotech’s, retailers and pharmaceuticals were relatively weak but even they closed in the green on the strength of the momentum in the broad market.

One of the factors contributing to the strength in metals and mining stocks was of course the new record highs set by gold futures yesterday. Gold for December delivery rose $7.90 per ounce yesterday to close at $502.50/oz on the New York Mercantile Exchange (NYMEX). This was the first time in 18 years
that gold had reached this key psychological pivot. This $500 area is a very key
technical barrier that should be the staging area for another strong move in
gold soon. The
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PowerRating) came very close to new 52-week highs, closing at 108.29, while
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PowerRating) (Streettracks Gold: the Gold Bullion ETF) closed at its highest level ever since its inception of trading on November 18th, 2004.

The weekly chart of GLD above shows just how much gold has taken off since breaking its downtrend on the weeklies in August of 2005. Morpheus has been successful on the long side before with this ETF and is currently stalking it for a future entry. After being up for almost four full weeks now, the yellow metal needs a little bit of consolidation before staging its next move higher. We will continue to keep our eye on GLD over the next few weeks to see how it reacts at this all important psychological $500/oz level.

With all the strength in the markets as of late, and the fact that we just closed the books on another month recently, it is fitting that we take at look at some monthlies of the broad market charts to see just how far this rally may go. Remember, we never try to predict anything. Rather, we move forward with the assumption that once technical resistance points are broken, the market will naturally move to the next resistance point. Like many things in nature, prices will simply move along the paths of least resistance. That being said, lets look at some monthlies:

S&P seems to be clear now to eventually move up to just over 1300 before finding some sellers. We know they are up there because if we look to the left on the chart we can clearly see that the last time the index reached that level in spring of 2001, it sold off strongly just afterwards. Therefore we must assume that there are many investors waiting in the wings up there to be “made whole” again and will be selling once they are.

Nasdaq is also in the clear here and should move freely to approximately 2300 within the next few months.

The Dow has shown relative weakness to the Nasdaq and S&P for most of 2005 and accordingly is left running in third place with with a little bit more overhead than the other two before in can reach the spring 2001 highs. It should be noted however that the pullbacks in 2005 were weaker than those of 2004 and resulted in higher lows. We have annotated 10,984 on the monthly chart above as the first resistance point that the Dow needs to take out before having a shot at 11,350 which was the spring 2001 high corresponding with the peaks in the S&P and Nasdaq.

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Deron Wagner is the head trader of Morpheus Capital Hedge Fund and founder of Morpheus Trading Group (morpheustrading.com), which he launched in 2001. Wagner appears on his best-selling video, Sector Trading Strategies (Marketplace Books, June 2002), and is co-author of both The Long-Term Day Trader (Career Press, April 2000) and The After-Hours Trader (McGraw Hill, August 2000). Past television appearances include CNBC, ABC, and Yahoo! FinanceVision. He is also a frequent guest speaker at various trading and financial conferences around the world. For a free trial to the full version of The Wagner Daily or to learn about Deron’s other services, visit morpheustrading.com or send an e-mail to deron@morpheustrading.com .