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The State of the Trend

After retreating briefly back within the megaphone pattern the DJIA is challenging its upper boundary once again:

Dow Jones 30 Monthly Chart
Larger Image

While we do not subscribe to the literal '29 parallel story line, it can't be overstated that should the rally stall at these levels, the stakes will be very high. Previous rallies which have lasted longer than the current one (red dot) with greater than 100% advances were followed by declines lasting on average (red dot) 500 days, accompanied by an average 40% decline:

Dow Rallies and Declines Chart

Therefore, if the DJIA is unable to maintain its uptrend trajectory, and break above 16,000, strong defensive action will be warranted.

In the meantime, market breadth suggests that a period of consolidation should be expected. And the reason is that, while weekly liquidity readings are just starting to turn up, the daily readings are nearing overbought levels. As mentioned before, strong moves occur when the daily and weekly trends move in unison from oversold levels, just as it happened at the recent February '12 bottom:

Weekly Liquidity Chart

Weekly Liquidity Chart 2
Chart courtesy of OddsTrader

Gold and silver were able to break above their most recent downtrending channels and are bouncing against key resistance levels. If gold is able to break above the 50% retracement level, that will give it another strong technical boost:

SPDR Gold Trust Shares Weekly Chart
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iShares Silver Trust Weekly Chart
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