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Longer-term picture shaping up for bulls even though futures are lower

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Some of the charts below have us believing that longer-term a new bull market may be on the horizon, but right now, we need to deal with the task at hand. Equity futures are looking lower this morning with S&P futures off 7, NASDAQ futures are down 38 and Dow futures are lower by 50. Fair value today is $17.08 with buy programs kicking in at $19.22 and sell programs at $14.94. Yesterday traders may have started to assemble a list of "tax- loss selling" bounce candidates and those traders would love to see the broader markets pull back today. Be patient and monitor your list throughout the session. We've identified a few stocks that look like good candidates, but we felt that some of them had moved a little higher than our liking and presented less upside. If they pullback today, that could make for some good trades near the close today, or later tomorrow afternoon.

Some Index charts portend economic expansion.

Chart junkies as well as "economic theorists" might look at the following charts and say economic expansion. We've talked about some of these indexes in great detail the past couple of months and what the MARKET may be trying to say. The pieces of the puzzle are starting to fall into place, and its starting to look like the market thinks the economy will continue to grow. Here's a look at some of the major indexes, starting with some of the more cyclical indexes that usually lead an advance.

S&P Chemical Index Chart - last eleven months.

The S&P Chemical Index (CEX.X) recently broke a downward trend and a nice "double bottom" has formed near 340. We've added a short-term upward trend (thick green) from the recent bottom. The "big test" for this index is the long-term downward trend near 470. A break above that trend in the future could be one piece of the "economic expansion" puzzle falling into place.

Forest & Paper Products Index Chart - last eleven months.

The Forest/Paper Products Index (FPP.X) broke a long-term downward trend back in November. We then began putting in place horizontal levels of resistance to monitor this indexes progress. Yesterday the FPP.X took another leap by closing above the April and May highs of 334!

Morgan Stanley Cyclical Index Chart - last eleven months.

In early November, the Morgan Stanley Cyclical Index (CYC.X) broke a long-term downward trend (thick red) and then began finding support on that trend. We've added some horizontal levels that might serve as hurdles and levels for traders to judge this indexes strength. Yesterday, this index made a bold move higher and might be picking up speed.

S&P Retail Index Chart - last eleven months.

Yesterday, the S&P Retail Index (RLX.X) jumped better than 4%. Now that the holiday shopping season is behind us, we can begin to eliminate the "seasonallity" from this index and get a better feel for what the consumer is doing. Somebody is doing some buying in the retails and we will be watching the 200-day MA (thin red) very closely at 856 and our horizontal blue level of resistance at 860. If this index moves higher over time, it should be a sign the MARKET thinks the consumer is healthy and spending money, thus consuming goods.

Bond Yields could be the ULTIMATE predictors!

Subscribers that have been with us awhile will recognize this chart and the impact it could have on the equities markets going forward. If you've been around these markets for more than two years, you remember well what happened soon after the Fed started cutting rates in October of 1998 during the "Asian Flu" crisis.

30-year Treasury Yield Chart - weekly interval, last 4 years.

The above chart of the 30-year Treasury Yield (TYX.X) is a weekly interval. We wanted to show this chart once again so that traders can get a historical look at yields for this bond. We like to show the "downward trends" in green as they represent support for the price of bonds. Trillions of dollars are currently stashed away in this bond and that has driven yields to their lowest point in two years. Isn't it interesting how yields climbed when the Fed was cutting rates? Notice how yields have dropped, even though we've yet to have a Fed cut since they started tightening rates sometime ago? Further proof that the market usually knows well ahead of time what will be taking place down the road.

Final note

It's never easy to try and predict the future. We'd rather just trade the trends that develop and try to "swim" with the current or prevailing trend. If the MARKET is predicting a good economy down the road, will you recognize the trend? Will you have a plan in place to capitalize as/if it unfolds? What we're pointing out in the above charts is that there is some definite signs that the MARKET looks like it is buying some of the deep cyclical sectors that often move ahead of an economic expansion. For many technology stocks, it the companies that make up the above sectors that spend billions of dollars on new technologies that eventually create efficiencies that eventually let more money flow to the bottom line. It may take SIX to NINE months for some of the above industries to start spending capital (increasing budgets) on new technologies, but they're more likely to do it when their stock is headed higher than at 52-week lows! Most institutional analysts are "fundamental" and make recommendations to institutional clients based on these fundamentals. We're traders and use charts to detect changes in trend and track money flow. The above charts say that money is flowing into the deep cyclicals, as downward trends are being broken left and right. Eventually the trends will change in some of the technology indexes. There will be time to jump on board and play some upward trends. Don't limit all your trading to technology stocks/indexes. If it does take 3, 6, or 9 months for fundamentals to start improving, there looks to be some nice upward trends in other groups/industries. Remember that the trend is your friend, trade it!

Jeff Bailey
Staff Analyst

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