With the markets having been on a tear since Labor Day, our Domestic Trend Tracking Index (TTI) has advanced at a very steep angle. The reason for that is that this indicator includes an interest rate sensitive component, which has, due to lower rates, exaggerated the slope.

Let’s take a look at an enlarged portion of the TTI to the left.

Upward momentum caused a break-away gap in the chart (see arrow) recently, which means that the previous week’s high was lower than the next week’s low. As I have written before, these gaps will always be “closed” eventually when prices decline again to a point that represents the beginning of the gap.

The timing of it is the unknown. Take a look at the left side of the chart and notice the exhaustion gaps during the selloff in 2008. They were eventually closed as the prices rose above them in 2009. It works the same in reverse.

Over many years of studying charts, I have found that accelerated up moves, such as we’ve seen recently, will very likely be followed by equally sharp moves to the downside. Just because a gap has occurred, however, does not mean the eventual downside reversal will stop there; it merely serves as a point of reference.

To me, it’s a sure thing that a pullback through at least the gap level is in the cards. When that will happen is anyone’s guess. All you can do is be prepared via your sell stops to deal with it, should a reversal turn out to be more than just a temporary correction in a bullish trend.

As announced in last Friday’s weekly update, I will be travelling to Germany over this weekend and will not have a chance to update the blog. Regular posting will resume this coming Monday at the usual time of around 6 AM PST.

My latest No Load Fund/ETF Tracker has been posted at:

http://www.successful-investment.com/newsletter-archive.php

Despite a terrible jobs report, the major indexes closed to the upside.

Our Trend Tracking Index (TTI) for domestic funds/ETFs moved above its trend line (red) by +6.88% (last week +5.78%) and remains in bullish mode.

The international index has broken above its long-term trend line by +6.77% (last week +5.43%). A new Buy signal was triggered effective 9/7/10. If you decided to participate, be sure to use my recommended sell stop discipline.

It’s amazing that obvious bad news does not send the market into a tailspin. This was the case yesterday as bulls and bears exchanged punches with no clear winner apparent.

Causing some upheaval was the ADP National Employment report, which pointed to falling private employment during September. To be exact, U.S. companies shed some 39,000 positions in September after having added 10,000 in August. Expectations were an increase of 18,000; surely a disappointment.

This is only a precursor of what is to come on Friday when the big jobs report will be released. It’s hard to imagine what ammunition the bulls might use to drive this market higher, should those numbers come in worse than expected. However, these days you never know. Maybe all this strength is simply because father Fed has promised to put a floor under the U.S. economy and save it from an early demise.

While the markets meandered in response to yesterday’s news, the dollar dropped while gold rose again. Bonds rallied indicating to me that more economic weakness lies ahead.

Of course, none of this matters if the jobs report comes out to be half way decent, or is interpreted as such. In that case, you could see the bulls attempting to attack the Dow 11,000 level and subsequently head for the S&P; 1,200 milestone.

Monday’s slippery slope in the markets turned into a foundation, which formed a base on which a solid global rally erupted on Tuesday.

It was set off after the Bank of Japan unexpectedly cut its key interest rate to almost zero. With the yen being at a 15-year high, concerns kept mounting that Japanese exports will be suffering severely. Since every country wants lower currency values to boost their exports, some sort of trade/currency war seems to be almost a sure thing. Let’s hope that cooler heads prevail.

Encouraging news from the Non-Manufacturing index, which jumped from 46.5 in August to a reading of 58 (indicating expansion), helped the market sentiment and the major indexes went off to the races.

As the chart above shows (courtesy of MarketWatch.com), there was no looking back, and we closed at the best level since May.

What bothers me is that we have the happy trio (gold, stocks and bonds) rallying in sync, a condition which can’t last forever. While gold is a great hedge against uncertainty, continuously lower interest rates identify a slowing economy, while the uptrend in stocks would indicate an expanding economy. One of these two will be wrong and will move in the opposite direction—eventually.

If I had to guess, I’d say bond market is right, and the stock market will end up being the whipping boy. However, right now, that does not seem to be much of a concern, so let’s enjoy the ride.

Questions about slowing economic growth along with profit-taking pulled the markets off their lofty levels yesterday. After the euphoric run up in September, the fundamentals will now have to play catch up via earnings and other reports.

One fly in the ointment was that analysts cut back their earnings forecasts for the S&P; 500 index, which has not happened in over a year. How much of a drag that will be on stock prices remains to be seen until the hard numbers come out.

The non-manufacturing index today can very well accelerate the current trend reversal or provide a floor until the all important jobs report on Friday will make its presence felt.

While the markets have been showing weakness during the past week, a B of A analyst expects stocks to fall sharply this month with a decline of as much as 10% to 12% from these levels. Again, this is just one opinion, and forecasts like that can be as accurate as the ones issued for the weather.

Nevertheless, markets do not go straight up forever, and a correction is overdue. To what extent it will happen is everyone’s guess. Be prepared by having your stop loss points in full view and execute when necessary. The time to get your exit strategy in order is now, and not when the market heat is on.