Commodities and stocks almost look ready for a rally or at least a relief bounce. The market is down over 5% and the normal pullback this year has been 4%. Using technical analysis and inter-market analysis, we can see that the market is reaching extreme lows and this usually means we are only a couple days away from a rally.

I work with several market technicians as we all analyze the market a different way and share our work with each other to gain maximum insight on the broad market moves. We analyze momentum cycles, magnetic cycles, volatility levels, support & resistance levels, volume analysis and inter-market analysis.

The past week in gold, silver, oil, natural gas and the broad market wasn’t anything to write home about. We are seeing controlled profit taking which is making the market choppy. Many traders are getting very bearish on the market which is a good thing in my opinion. According to my market internals, sentiment and volume analysis we should get a shake out (sharp dip) which would make traders exit their positions before the market continues higher.

Some traders say we are in a bull market, others say we are in a major bear market. Either way the trend is up on the daily and weekly charts and companies are making money. Buying on oversold dips has been very profitable this year. Until I see things drastically change, this is my strategy for the broad market.

Commodities so far this week have not changed much. But I can point out a few things for us to watch Thursday and Friday.

Precious Metals – Gold GLD fund – Silver SLV Fund – PM Stocks GDX Fund

Commodities continue to climb with several commodities making new highs for the year. The equities market continues to push higher with 3^rd quarter earnings coming in better than expected. This good news has aroused more investors to put what's left of their money back into the market and has fueled this recent rally in stocks.

Here is my concern:

Commodities and stocks have been on fire the past two weeks and I think it just may be time for things to take a breather. While I continue to stay long, taking some money off the table to lock in profits is a safe play.

Just from a quick glance at the charts we can tell the odds are pointing to some type of pause or pullback in the coming days. I figure any day now we could see some profit taking.

Commodities have and continue to be a fantastic trading vehicle for those who can stomach volatility. After last year's market crash most commodities pulled back to normal if not lower than normal trading ranges. This allowed us to enter the market at 10+ year lows for natural gas.

If we look at the weekly chart for gold, silver, oil, natural gas and the CRB commodity index we can see that commodities in general look ready to skyrocket higher approximately 34% on average in the next 4-12 months.

The market continues to whipsaw traders out of positions as volatility rises. I have put together a few charts to show you where each of our commodities are trading along with the S&P 500 Index (SPX).

My Gold Stock Breakout Model – Monthly Chart

Yesterday we had a reversal day for the broad market, US dollar, precious metals and oil. The market is over extended. We have seen the market rally 20% since the July low.

Inter-market analysis is important to understand because everything is related in some way. The next month will be very interesting with the US dollar trying to rally, which will put pressure on precious metals, stocks and commodities.

Gold is back in the spotlight as it flirts with the $1000 per ounce level. This closely watched commodity looks as thought it will rocket higher because of the multiple trading time frames indicating breakouts.

I mainly focus on trading the daily chart but I always refer back to the longer time frames which are the weekly and monthly charts. Knowing the momentum and trend on these long term trading charts allows me to identify the strength of the rallies and sell offs on the daily chart. I use this analysis for determining how large of a position to take, and where to place profit targets and stop loss levels.

How to trade hot commodities like natural gas, oil and gold? We should see big moves in the coming weeks as gas bottoms, and oil and gold breakout or breakdown. A lot of money is going to be exchanging hands quickly and the key is to be on the receiving end of things. Below are some charts showing where these commodities are trading.

How to Trade Gold – Weekly Chart

While gold was extremely popular the past few years, I think it’s safe to say crude oil is unbeatable for popularity, as it’s a resource which almost everyone uses on a daily basis and it affects all of us in the wallet when oil prices rise as fuel, shipping costs and petroleum products start to cost more and more. This is the first time I have REALLY noticed everyone is following the price of oil. When kids start talking about it, then you know it's being watched like a hawk from all types of individuals and traders.

When crude oil peaked at $147.90 back in July, people were starting to panic. The increase on fuel alone was really taking a toll on commuters and shipping costs went through the roof, which hurt almost every business in some way. That being said, oil is now back down at support and looking ready for a bounce. Let’s take a look at the charts.

I find from time and time that gold stocks tend to lead the price of gold during extreme times and as I mentioned in last week's report the HUI index has warned us up to 7 days in advance, before gold made a sizable drop. Well, this week is a perfect example in my opinion.

It’s all too easy to lose yourself and your position under emotional strain.

Let’s face it, it’s hard to think straight when a voice inside your head is screaming get me out of here!

The DB Gold Double Short ETN (DZZ) is a relatively new way to take advantage of gold price action. This gold fund provides double the movement that the GLD ETF or the price of gold does, providing bigger opportunities in the gold sector. I have just recently started to use DZZ ETN for trading and have found it to be very useful, which you will see in the charts below.

A Couple of Benefits of DZZ

The secular bull market in gold investments corresponds directly to the secular bear market in financials. We explain below why this trend will continue and why a short-term buying opportunity in gold presents itself.

Central Banks are in all sorts of a pickle. 

With the Stock Market Panic behind us - for now - we are settling in for a range bound, relatively calm, second half of ’08. Junior Gold Stocks should finally start to benefit as the wet blanket smothering equity markets lift.

The New York Stock Exchange indicator for new lows reached an extreme of 1304 on Tuesday, July 15th. That was even worse than the 1100 new lows reached on January 22nd. Such extremes spell one thing: P-A-N-I-C.

Searching for the 'Golden Goose'?

For years we have been speaking and writing about the massive bind the Fed now finds itself in. With price inflation rising – read as food and energy skyrocketing -- and little hope for nominal interest rate increases – read as housing too weak for higher rates – negative real interest rates (nominal rates less inflation) looks set to persist for some time.