Chart 2 below shows (USO | news | PowerRating | PR Charts ) on a daily basis having broken out of a wedge formation this 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 | news | PowerRating | PR Charts ) 120 level has 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 | news | PowerRating | PR Charts ) 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 | news | PowerRating | PR Charts ) are also approaching the year’s highs, a 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 | news | PowerRating | PR Charts ) having 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 | news | PowerRating | PR Charts ) 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.