For the last couple of weeks we’ve been encouraging investors to focus attention on the potential breakdown in commodities and commodity stocks, some of the leaders of the bull market since 2003 in particular. As we suggested last week, the breakdown in commodities is for real and the levels we spoke of have been nearly universally broken.

The weekly chart of (GLD | news | PowerRating | PR Charts ), gold iShares, shows the open below the critical 60 level that marked a clear breakdown of its triangle, and the amazingly swift follow-through that has entailed thus far. The 60 week ma may provide some support along with GLD’s June lows around the 55 level. GLD could well reach anywhere in the 45-55 range before basing and still keep long-term trends intact. But until a new base is built and broken out of, the intermediate term trend in gold and commodities is now clearly down.




The weekly charts of the (GSG | news | PowerRating | PR Charts ) (Goldman Sachs Index iShares) and of the oil iShares USO follow, and show major technical breakdowns as we warned. (USO | news | PowerRating | PR Charts ) looks likely to ultimately test the 45-55 level before basing, with GSG likely to test the 35-40 level.



The market is so far taking the best spin on the decline in oil in particular. It is clear that inflationary pressures will drop off the primary concern if the economy keeps slowing and oil and commodities continue their fall. However we suspect at some point concern over the potential for the slowdown to wreak earnings damage and even possible concern over recession potential will cause uneasiness even in the big cap indexes, and even more so in the cyclical sectors and reflation themes. When a growth fear materializes and when the Fed’s primary concern shifts toward re-stimulating, THEN we believe a fantastic buying opportunity in reflation themes will be at hand, as well as a better risk/reward opportunity in most stocks. Until then we’re risk averse with only minor positions.

Certainly we stand ready to go with the up move in big caps IF breadth and internal strength picks up. But so far that is not happening with enough plurality to force a suggestion of strong allocation. Internal breadth is improving some, but is still below levels normally associated with a sustainable bull market move. We continue to rate the macro environment as not highly reliable (except perhaps for bonds and (TLT | news | PowerRating | PR Charts ), which are likely to beat cash as the US slows down and have broken out of a base recently). Investors should continue to skeptically let market action be the guide. Strong rallies in the major averages accompanied by high volume to create a couple more follow-through days would be the first sign of more upside ahead. The real excitement may not come until the breadth of Top RS new highs starts to expand broadly and stocks meeting our runaway up fuel criteria begin to break out with some plurality. Until then, we still suggest keeping your powder mostly dry. We continue to suspect that breaking above 1320-27 and making new highs will be difficult for the market to do unless better volume and breadth materializes. We continue to regard this as a TREACHEROUS ENVIRONMENT where CAPITAL PRESERVATION SHOULD BE PARAMOUNT. Don’t allocate heavily to anything that doesn’t scream at you.

Lots of bonds and cash seem prudent here until the environment becomes clearer. Long/short pairs can be sparingly participated in as well.

Our US selection methods, our Top RS/EPS New Highs list published on TradingMarkets.com, had readings of 11, 14, 15, 35 and 41 with 16 breakouts of 4+ week ranges, 1 valid trades meeting criteria, and no close calls. This week, our bottom RS/EPS New Lows recorded readings of 12, 11, 13, 7 and 5 with 6 breakdowns of 4+ week ranges, no valid trades and no close calls. The “model” portfolio of trades meeting criteria has some time back exited all positions and is 100% in cash.

Mark Boucher has been ranked #1 by Nelson's World's Best Money Managers for his 5-year compounded annual rate of return of 26.6%.

For those not familiar with our long/short strategies, we suggest you review my book "The Hedge Fund Edge", my course "The Science of Trading", my video seminar, where I discuss many new techniques, and my latest educational product, the interactive training module. Basically, we have rigorous criteria for potential long stocks that we call "up-fuel", as well as rigorous criteria for potential short stocks that we call "down-fuel". His website is www.midasresourcegroup.com.