Jan 26 2009 9:51AM

Aside from seeing history in the making, Inauguration Day went beyond most expectations. There was a show of unity, emotion and hope not seen in many years. And by a margin of 3-1, people are feeling more optimistic about the future now that Obama is president. This is good news because positive sentiment will ultimately help the economy and the markets.

Nevertheless, the stock market suffered its biggest Inauguration Day fall in history. It then rebounded strongly and it still looks like a bottom is forming. In addition, the market is currently at a critical juncture based on Dow Theory.

This week, for instance, the Dow Jones Transportations broke below its Nov 20 low, but the Dow Industrials did not, which was a non-confirmation. If both indices now rise above their preceding peaks, it will signal that a new bull market is underway. If the Industrials break down, however, especially below the all important 7500 level, it'll be a negative sign that the bear market is going lower.

Considering how very oversold the stock market is and the more optimistic sentiment, an upside break-out seems more likely. If this happens, it’ll be very positive for gold and the economy since stocks generally lead the economy.

The U.S. dollar index rose more this week and while it's firm the longer it stays above 84.40, it still looks like a top is forming (see Chart 1).  Resistance areas for the dollar are 87 and 88.30.

If the Swiss franc can rise and stay above .8660 it'll be firm. The yen is also strong above 106.60. The euro is vulnerable unless it can close back above 1.3160, likewise for the Aussie above .6660 and the Canadian dollar above .8200. If oil and copper rise, however, these two currencies will rebound nicely.

As you can see, a weaker dollar will also be bullish for gold because they tend to move in opposite directions.

Meanwhile, gold is holding firmly above its 15 week moving average while the U.S. dollar rises, which shows strength (see Chart 1). If February gold now stays above $861, the A rise remains underway and gold will remain technically very bullish.

Silver and gold shares are looking good too.  Silver (basis March) is firm and a renewed rise is underway above $11.50. Silver could now jump to the $13.50 level.  The XAU gold share index is firm above 104 and it would be strong in a further rebound rise by closing above 124.  This is reinforcing gold’s strength.

Crude oil was close to testing its December low this week before bouncing up.  It looks like a bottom is forming and it's set to rise.  If it closes above $50, its 15 week moving average, it will be the first time since it began falling in July.  It could then jump up to $70. Again, that would be a good sign for gold and the economy.

Copper would be poised to rise further once it closes above $1.60. And if it does, that would also be another good sign because copper is the global barometer for the world economy.

Interest rates shot up this week with the Obama enthusiasm and they look poised to rise further.  The 30 year yield is firm above 2.80% and it could rise to 3.45%; the yield will be strong (bond prices weak) above 3.45% (see Chart 2). This too is a positive indication that deflationary pressures are easing, which is yet another positive for gold and the economy.

Although it’s still early, these are some of the first straws in the wind that things may improve in the months ahead. And since gold is also a leader, today’s very bullish action is reinforcing this as well.

Currently, most of the markets are at a critical juncture and these are some of the signs we’re watching. Time will soon tell how events unfold, but so far, so good.

by Mary Anne & Pamela Aden
January 23, 2009

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Mary Anne & Pamela Aden are well known analysts and editors of The Aden Forecast, a market newsletter providing specific forecasts and recommendations on gold, stocks, interest rates and the other major markets. For more information, go to www.adenforecast.com