Stocks Rally As Gold Falls

02/26/2009 11:00 am EST

Focus: MARKETS

Mark Leibovit

Chief Market Strategist, VRTrader.com

Mark Leibovit, chief market strategist for VRTrader.com, says Tuesday’s rally may be the beginning of a short-term move up, while gold may be due for a little rest.

After the big decline Monday and last week, stocks had a strong rally Tuesday, which is being dubbed the "Bernanke Bounce" [as] Federal Reserve Chairman Ben Bernanke said the recession may end this year.

That's not saying much, since it leaves plenty of room for him to be wrong. The Dow Jones Industrial Average gained 236.16 to 7350.94, the Standard & Poor’s 500 index rose 29.81 to 773.14, and the Nasdaq Composite index rallied 54.11 to 1441.83.

The market internals were very strong: Breadth was strong with 14-to-1 up volume over down volume on the New York Stock Exchange, and all nine market sectors are trading higher. Volume was up over Monday, but down from Friday.

The stock market had a true “Turnaround Tuesday.” [But despite] the gaudy numbers, I remain skeptical [as] broad-based Positive Volume Reversals (tm) were not formed.

The action in bonds did not back up a normal, healthy flow of funds into equities. Normally equity rallies are sustained by bond players selling those positions to move up the risk ladder into equities. That didn't happen Tuesday.

Nevertheless, we're due for a significant rally at some point, and it might be a couple of thousand points in the Dow Industrials. It will only be a bounce in a bear market, but hopefully tradable and, hopefully, another opportunity to put on short positions (actually, inverse ETFs).

Precious metals were down sharply as traders converted their gold into cash to commit to equity positions. Additionally, gold tried and failed to break through the $1,000 area the last few days, resulting in some selling.

I warned that when Jim Cramer on CNBC became bullish on gold last Friday, we may have witnessed a significant contrary indicator at work. Just too many bulls, I suppose. If we fail to hold support first at $930 and then at $890, then we're in for some rough riding until the next up wave catches steam.

The US Dollar index is again testing and failed off the key 88 resistance level, hitting 88.129 on Friday before pulling back. Back in November, the index spent six weeks trying to break through the 88 price level, hitting a high of 88.463, but never being able to stay above that mark. I'm still inclined to give the upside the benefit of the doubt with potential well into the 90s.

Remember, the US Dollar Index has been acting as a pure flight-to-safety trade. If markets around the world continue to fall, expect to see the dollar rally. If stocks rally or even if they simply stay put, the dollar will likely drop as traders unwind their flight to safety trades.

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