All three major indexes closed down last week: The Dow Jones closed finished down 166 points, the S&P 500 finished down 22 points, and the Nasdaq finished down 29 points. Last week, several news items weighed on the market. In particular, the trade deficit widened more than expected, and crude oil also rose to a new high of $55.12. With crude oil rising to new highs, inflation is now becoming a real concern for the US Economy. However, inflation is far better then its polar opposite, deflation. The Fed. can fight inflation via raising interest rates and contracting the money supply. However, there is no easy way to fight deflation. The time period this country experienced deflation was during the great depression, and it took a world war to end it.

As you can see from the chart below, crude oil closed right at major resistance in the $55 range. A breakout would likely send oil to $60 plus a barrel, which would be bad for the economy and the general stock market. Of course, sector such as oil and natural gas stocks, was well as gold and precious metals would benefit because of inflation fears.

The problem with this chart is that it's bullish no matter how you slice it: Oil could either breakout here, or it may pullback and consolidate. Acutally, I would rather see oil breakout now, than pullback and consolidate. If oil breaks out now, the price run up would probably not be as strong if it pulled back on more time to consolidate. In other words, if oil pulls back, it may form a bullish cup and handle, which would cause oil to have a substantial price run up once it finally breaks out - which we do not want to see this occur.

With oil hitting new highs, and the US Dollar subsequently hitting new lows, the price of commodities / raw materials are going through the roof - at least in terms of US Dollars. However, there's also the 'China' factor and the huge and ever increasing demand for raw materials from the Asian countries that are causing supply and demand issues with commodities.

As you can see, the CRB chart is going vertical. The CRB is a composite of 17 commodities broadly divided into metals, tropicals, grains, meats, and energies. As the price of raw materials go up, so does the price of finished goods. Couple this with the huge increase of US Dollars that have been put into circulation over the past 8 years, and you have a recipe for inflation.

The long term chart shows us that the CRB entered a major bull market in 2003 and is now close to testing it's 1981 highs. Realize that this is not an inflation adjusted chart, therefore when you take inflation into account, commodities are still a long way from their inflation adjusted highs of 1981.

The 60 minute chart of the Nasdaq shows us that 2100 is the important resistance level. If this level can be broken on decent volume, then the Nasdaq will start a powerful rally and the market will begin another major up trend.

The next chart is the long term weekly chart of the Nasdaq. The Nasdaq has been in a cyclical bull market since early 2003, which is defined by the up trend line. This up trend line is very important to the Nasdaq and the general market. If this line is broken to the downside, then the cyclical bull market will be over.

The Nasdaq is strongly influenced by the Semiconductors. As you can see, the Semiconductor Index has well defined resistance at about 1200 which MUST be broken for the Nasdaq and the general market to rally. This chart is mega important, place it on your watch list.

The next chart is the ratio of the Nasdaq and the S&P 500 - this chart tells you how the Nasdaq is performing relative to the S&P 500. Last week, the down trend line was broken, which indicates that Nasdaq may now start to out perform relative to the S&P 500. This down trend line break could also be considered a buy signal for the Nasdaq 100 ETF QQQQ as well as the general market on a whole.

However, it's possible that this is a false breakout and buy signal, but we should find out very quickly, probably next week.

Zooming out, you can see that this indicator has been flawless at producing major buy and sell signals for the Nasdaq.

If one were to trade the QQQQ based solely on the indicator above, he/she would do very well. The question is, will the current buy signal generated last week pan out?

As I have been stating, the tech heavy Nasdaq has been under performing relative to the old economy S&P and DOW Jones. The S&P and DOW can only rally for so long without the help of the Nasdaq. Eventually, they will breakdown unless the Nasdaq can start to out perform and play catchup.

Last week, the under performance of the Nasdaq finally caught up with the S&P 500. As you can see, the S&P pulled back strongly and is forming what may be a bearish rising wedge. If the Nasdaq breaks down, so will this wedge.

Just like the Nasdaq, the S&P also has an important up trend line that defines the current cyclical bull market. This up trend line MUST hold, otherwise the S&P, as well as the general market will break down and the cyclical bull market will be over.

The 60 minute chart of the S&P 500 shows us an important trend line to keep an eye on for next week. As you can see, the S&P is right at the up trend support line.

The Volatility Index is inversely correlated with the S&P 500 i.e. when the VIX goes down, the S&P 500 goes up, and vice versa. Based on the VIX chart below, it's hard to envision the market beginning another strong rally that lasts any significant amount of time. As you can see, the VIX has positive divergence via the MACD and has strong support at 10.40.

In order for the S&P to rally significantly, the VIX would need to fall and break support to make new lows. This chart is one of the main reasons why I think the current cyclical bull market that began in early 2003 will end sometime this year - it could end now, or later in the year, but I think it ends this year.

Newsletter Correlation to Daily Watch lists:

SRP is listed on the High Short Interest section under Special Situations. SRP has a short ratio of 37 days, which means that it would take 37 days for all the shorts to cover SRP under average volume conditions! Also, SRB is an electric utility, which is also a strong sector. SRP could explode if the shorts are forced to cover

SRB is a component of the Electric Utility Sector. This sector is in a strong up trend with support near the trend line.

On the daily watch list, RNDC and NOK are in the Telecommunications sector. The chart below shows us that the Telecommunications sector has resistance just overhead.

The Retail sector is holding up and has resistance near the down trend line. NILE on the daily watch list is in this sector.

AM from the daily watch list is a component of the Publishing Index. However, if AM breaks out, keep an eye on the Publishing Index below because it is on the verge of breaking support.

MIMS from the daily watch list is a component of the Health Care Index. However, if MIMS breaks out, keep an eye on the Health Care Index below because it is in danger of breaking an up trend support line.

Miscellaneous:

In the fall of 2004, I stated that the Japan Nikkei index looked extremely bullish as an inverse head and shoulder was forming. Nothing has changed and this bullish pattern continues to form. Major resistance is about 12500, with the 1st target at about 14,500, and the second target at about 17,000.

Japan has been in a sideways secular bear market since the early 90's. It looks like it's time for the secular bear market to end and a new bull market to begin in Japan.

Please realize that an investment in the Nikkei will likely need to be held for 1 to 2 years in order to come to fruition. If you have the extra capital, such as in a 401k, then an investment in an fund that follows the Nikkei could be a great investment.

Ways to take advantage of a bullish Nikkei are: UJPIX (Japan Ultra Profunds), or the two ETFs, JOF and EWJ.

So how does one take advantage of this potentially bullish situation with the Nikkei?  One could buy one of the Japanese ETFs, symbols EWJ or JOF. However, the Profunds Ultra Japan offers more bang for the buck. For example, if the Nikkei goes to the first target of about 14,500, this would correspond to target of about $75 for UJPIX, a very nice return!

Realize that this will likely take a year or more to come to fruition.