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1) TLT is exhibiting the attributes of a classic double top. At the end of May TLT surged up to 130 on large volume. In July it hit 132 but on much lower volume. Over the last week it tested and held it’s 50 day ma of 127 but on increasing sell volume.

2) There is a bearish MACD divergence as TLT hit a higher high but the MACD hit a lower high. The same holds true for the RSI.

3) The RSI is below 50 and the stochastics are on a sell signal.

4) A drop below 124 will confirm the breakdown as TLT will be heading towards a minimum of 118.

On the weekly charts TLT closed the week of July 27th with an outside bearish candelstick and last week it closed with another bearish candlestick that hit a lower high. There is also a bearish RSI divergence as the RSI hit a lower high as TLT made a higher high.

If money is coming out of bonds it in all likelihood is heading into the stock market.

How can the stock market possibly rally in the face of a slowing worldwide economy? My guess is that the markets will rise in anticipation of worldwide QE provided by the world’s central banks. The stock market looks ahead 6-9 months and by then a ton of monetary liquidity will be pumped into the system.

Bearish sentiment on gold and miners is now unwinding and should provide fuel for this rally. The fact that oil has broken down from a flag formation is another positive sign as lower oil prices are positive for miners.

Oil has sold off because the U.S. and Europe have stated that they may tap into their strategic oil reserves in an attempt to keep oil prices down. This is a band aid approach that may help in the short term but in the long run it will not have a major effect on the price of oil. Oil is going up in the longer term but it may take a quick drop to it’s 200 day EMA at 98. Then again this could be a false break down and when the news wears off oil will be back in the 105-110 trading range.

I mentioned in my entry of March 24 that TLT bonds were having a counter trend rally and would hit resistance at the 115-116 area. Well TLT didn’t make it that far as it got hammered at 114. Friday’s action formed a bearish outside candlestick that encompassed the prior 3.5 days worth of gains. TLT may find some short term support at it’s 200 day EMA of 111.01 and the March 19th low of just under 110. but this looks like a broken trade. There is longer term uptrend support at about 95 and that is where TLT looks like it is headed.

My guess is that the 30 year bull market in treasury bonds is officially over. One way to play rising interest rates would be to buy TBT. While there can be pricing problems with double inverse ETF’s this particular one has formed a rounding bottom and with interest rates coming off almost 0 it looks like the only direction this ETF can go from here is up.

The dollar has not been exhibiting any great strength lately as many analysts had been anticipating. The Euro has in fact been slowly rising as the perception is that Europe has at least temporarily solved it’s debt crisis while the U.S. has a potentially larger one looming in the future. There are countries like Russia, China, India and Brazil that are actively working to undermine the dollar as the universl currency of exchange.

If a sovereign debt crisis were to hit the U.S. it seems unlikely that the dollar and treasuries would be the main beneficiaries of it as the entire fiscal system of the U.S would be under fire. I would anticipate that gold, silver and other hard commodities would be the primary asset classes that capital would flow into.

Conclusion: It looks like the rally in gold, silver and miners is underway. In any event some gold and silver should be a long term holding in any portfolio.

There was a breakdown of the rising head and shoulders pattern on GDX and the downside target of approximately 48 has been fulfilled. The minimum upside target of this run should be to the 200 day EMA at the 55-56 area. What happens past that point will depend upon the price action of oil and gold.

One way to play the rally in miners would be to buy Yamana Gold (AUY) either the stock or options. AUY has pulled back to the bottom of it’s well defined uptrend channel. The next move up should take it to the top of the channel at about 18.50.

Rising gold prices are good for miners but rising oil prices are not as they eat into the cost of production. Of course if the price of gold increases faster then the price of oil or the price of oil drops the 2 factors can negate themselves. Right now it appears that the price of both oil and gold are on the rise.

As I mentioned in my entry of February 22 GLD had broken through the neckline of an inverse head and shoulders pattern. That quickly reversed as JP Morgan apparently dumped a huge amount of gold on the open market. Any attempt at manipulation of the precious metals markets is doomed to failure as the laws of supply and demand will eventually win out. Central banks around the world are loading up on gold and China is an especially heavy buyer. China will be opening up it’s own gold exchange in June and the government is encouraging it’s citizens to load up on gold.

As a result of JPM’s actions there is an even larger inverse head and shoulders pattern forming on GLD. We have a left shoulder and head and the right shoulder is now forming off the 50 day EMA support line. If the pattern were to complete a successful break out of the neckline would bring gold to $2,100 per oz. With China opening up a gold exchange combined with the fact that Hong Kong will be opening up a silver exchange it seems highly likely that both gold and siver will be hitting new all time highs this year.

WTIC Oil has also formed an inverse head and shoulders pattern as evidenced by the monthly chart. The neckline has already been broken and the projected price target is 125.

Oil has been flagging since February as evidenced by the daily charts. Once oil breaks through the top of the flag formation it should make a quick run to 125.

As I also mentioned in my entry of February 22 bonds were in the process of breaking down but were taking quite some time to do so. Bonds as evidenced by TLT finally broke through critical support this past week and are now staging a counter trend relief rally. I expect TLT to hit stiff resistance at the downtrend of 116 or it’s 50 day EMA at 115.42. From that point on TLT should head lower and the stock market should continue to rally.

As far as the broader market is concerned the charts are indicating that we are in a powerful bull market.

The QQQ has been leading the market higher. Towards the end of 2010 the QQQ broke through the neckline of an inverse head and shoulders pattern with the neckline at $50. and a price target of $75. For all of 2011 the index swung between $50. and $60. In 2012 the index broke through the $60. level indicating that the market is poised to move higher.

The S&P 500 broke through it’s bear market downtrend from the 2007 market top and it is now trading in the upper half of it’s uptrend channel. A breakthrough of the midline generally leads to a run to the top of the channel. In the current time frame the upper trend line crosses at about 1500.

20 year treasury bonds as evidenced by TLT are in the process of breaking down. The breakdown has been taking awhile due to the lingering effects of the Eurozone crisis but it is now almost complete. TLT has formed a head and shoulders pattern with 4 right shoulders that are descending. The RSI is below 50 and the MACD has been steadily dropping and is below 0. Critical support is at $115.

The index is currently just below it’s 10 day EMA where it will in all likelihood find strong resistance. A drop below $115. should quickly bring TLT to it’s 200 day EMA at $110. This drop should coincide with another leg up in the stock market as the S&P is testing overhead resistance at about 1370. Since interest rates move inversely to the underlying security, it makes sense that interest rates should rise along with the improving economy.

Conclusion: The stock market is at a major crossroads. There are a lot of negative technical indicators overhanging the market and the shorts are piling on to positions. We are heading into October which is generally feared but the fact of the matter is that statistically September is the worst month for stocks and not October. The market also has a tendency to frustrate the multitude.

There has been some recent positive economic data coming out of the U.S. in regards to employment and the Chicago PMI which seem to indicate that the U.S. economy is not falling off a cliff. The fact that bonds have rallied to their 2008 highs while the U.S. stock market is still way above it’s 2008 lows is another positive indicator.

China’s growth rate has been reduced from 9.6% to 9.5%, hardly the indications of a meaningful economic slowdown. The Fed has already revealed it’s hand with persistently low interest rates, Twist and the statement that it might do further monetary easing if necessary. Therefore the focus is on Europe.

If Europe can get it’s act together quickly and construct a meaningful financial back stop for the sovereign debt crisis that is emanating out of Europe then there is the possibility of an upside market surprise. If the S&P can manage to break through 1230 the shorts will be forced to cover sending the market even higher. A break below 1100 however would be bearish and confirmation that we are in a bear market phase.

If you’re a trader one possible way to play this market would be to buy out-of-the-money calls above 1230 and out-of-the money-puts below 1100 dated at least through November. That way whichever way the market moves the overall position should be profitable.