There is an unhealthy mix of technical factors that are speaking volumes about the long term bearish disposition of the stock market and economy. Ignore them at your own risk. You cannot pick your poison but if you could, would you want higher interest rates or higher commodity prices? Since late 2001, the market has offered us a consistent dose of one or the other (and sometimes both). As illustrated in the long term ratio chart of the CRB to 30-year bond price, if it hasn’t been higher interest rates (lower bond prices), it has been higher commodity prices. This is not a healthy situation for the stock market or the economy.
 
Chart 1 – CRB to 30 Year Bond Price Ratio

What’s worse is that this uptrend is a secular one that is relatively young and linear and does not appear to be changing any time soon. If anything, the linear trend is accelerating.
 
If oil is substituted for commodities in the ratio chart, a similar relationship is apparent; complete with accelerating trendline. This is shown in Chart 2.
 
Chart 2 – Light Crude Oil to 30 Year Bond Price Ratio

A look at just the 30-year long bond yield in Chart 3 shows that it is at a critical long term stage where it is at the top of a long term series of lower highs.  A decisive break of this down trendline would clearly begin a new secular trend of higher interest rates that would not be good for an economy largely dependent on consumers’ spending money they do not have.
 
Chart 3 – 30 Year Bond Yield, Long Term

Perhaps the trend toward higher interest rates can be somehow turned aside; but this would likely result in higher commodity prices as illustrated in Chart 1. So which poison would you prefer?
 
From a short term perspective, the long bond is also at a critical stage as shown in Chart 4. A break of the June high (in price) would suggest more bullish action and lower interest rates. It looks like a relatively low risk trade to short the long bond ETF with a stop at a close above 86.
 
Chart 4 – 20+ Year Treasury Bond ETF

Contrary to the long term trend, in the shorter term, the price of the long bond has been rising while the price of oil has been falling. Yet as shown in Chart 5, below, the price of light crude may be stabilizing as the short term downtrend appears to have lost its momentum. It appears that there is short term support at about 73.75, and there is a low risk short term trading opportunity for oil bulls.
 
Chart 5 – Light Crude Continuous Contract

The short term favorable trend toward lower interest rates and lower oil prices has apparently fueled a one week stock market rally. But both the short and long term charts suggest such a favorable mixture is not sustainable, even in the short term. And perhaps the un-sustainability of this trend is showing on some key “fast money� charts in the stock market such as Google and small capitalization stocks. Google is at a critical stage whereby it is threatening to break an uptrend that is almost a year old. (Google has traded publicly for less than 2 years.) Also, the triangle pattern in the Google price action, reaches its apex this fall.
 
Chart 6 - Google
 

We’ll see if the Google triangle holds up any better than that of the Retail Holder’s ETF.
 
Chart 7 – Retail Holders ETF

Similar to Google, the small capitalization, Russell 2000 is at a critical stage. Will it get back into the uptrend, or will it break below 670 thereby breaking a 2 month old support level?
 
Chart 8 – Russell 2000

Another Unhealthy Factor
 
The volatility indices are, well, volatile. And for this reason, it is sometimes difficult to track the more important longer term trend. But by focusing on the long term moving average, it becomes apparent that the trend toward increasing volatility is probably one additional unhealthy factor in the stock market. If volatility were a stock, it would be a “buy� from a long term technical perspective.

The 200-day moving average is a smooth trendline that has now turned upward after a multi-year downtrend.
 
 
Review of the HUI
 
The daily action in gold and gold stocks has been wild and the down days, severe. It pays to look at the long term view as illustrated in the chart of the gold bugs index ($HUI), below. In Elliot terms, the HUI is in Wave 2 of Wave III. Wave 2’s are corrective or counter to the long term trend which is up. The corrective patterns tend to be irregular and tricky, and this describes the daily action in the $HUI. Since Wave 1 lasted about 5 months, it would be expected that Wave 2 would likely last longer than its current age of about 1 and ½ months. It is possible that the approximate 50% retracement (to about 275) was the low price within the Wave 2 correction of Wave 1.

Once Wave 3 gets started, this will be Wave 3 of Wave III and this wave promises to be quite rewarding to gold stock bulls.
 
For long term investors, the evidence suggests that gold stocks are likely to be good places to preserve wealth or even prosper, because an unhealthy mix of technical factors abound.
 
Today’s Market
 
The action in the Russell 2000 today was perhaps one of the most important in today’s stock market as the Russell attempted to get back to its old uptrend, but appears to have failed. Now it will be important whether the Russell 2000 breaks below the support that has occurred over the last 4 or 5 weeks.
 
Also teetering on the brink is the Dow transports where an important neckline has been gashed, but not yet slit open. The Point-and-Figure chart tells the story of the dreaded descending double bottom breakdown along with the breaking of a long term trendline. Will this index be “taken in hand�?

There was also interesting action in the Dow Jones utility index where last October’s high was just barely kissed before it was turned away in today’s daily trading. 

Oil was up a little, as were commodities, bonds down a little, Google broke the lower end of the triangle a little, the $VXN was up a little. The HUI began up but finished down for the day. This is typical tricky action within its current counter trend correction.
 
Former leaders are lagging. Today’s market was led down by biotech, Nasdaq, transportation and small cap stocks. An unhealthy mix of technical factors abound!
 
Martin

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Martin has a Master's Degree in engineering and is a Professional Engineer who successfully manages money for his friends and family. His stock market commentaries have been found in many publications and web sites around the world including Barron's. He is an affiliate of the Market Technicians Association.

Martin appears monthly with Ike Iossif on www.marketviews.tv

Email Martin at mdelmgoldberg@comcast.net