I remain bullish on tech for the short to intermediate term, and I believe the Nasdaq Composite (COMP – 1915.3) will continue to strongly outperform the Dow Industrials (DJIA – 9674.7). The charts below speak for themselves, but my call here has not been a pure "trend in motion" momentum play.

The techs, as represented by the COMP, are a classic case of positive price action juxtaposed against bearish or skeptical sentiment. Put open interest and short interest on tech remains at extremely high levels. And how many times have you come across the term "echo bubble" in reference to the tech rally? As long as this term is widely used to describe the action in tech, you can feel reasonably safe that the rally has legs. The initial rally off a bear market bottom is characterized by disbelief, and it is only when the crowd begins to accept the rally that the danger of a top begins to loom.

On the other hand, the blue chips, as represented by the DJIA, remain over-loved, over-owned, and carry major downside risk along with limited upside potential. The "safety" theme that you were bombarded with in the financial media at year-end 2002 ("buy blue chips and avoid tech") has been exactly wrong, yet it remains the preferred scenario on the Street.

The next time your broker cautions you about "echo bubbles" or touts names like Pfizer, Home Depot, Johnson & Johnson or General Electric, do him/her a favor and pull out the chart below. Yes, the Nasdaq "bubbled" into its peak vs. the DJIA from 1998 to early 2000, but tech then proceeded to crash vs. the blue chips into the bottom in late-2002. Note per the bold line across this chart that, assuming an unchanged DJIA, the Nasdaq would have to rally by an additional 47.5 percent just to retrace 50 percent of its loss vs. the DJIA from the 2000 peak to the 2002 bottom.

My target for the Nasdaq remains in the 2200 zone, which represents about a double from its October 2002 low and is also the site of long-term resistance at its 80-month moving average.

While Wall Street continues its efforts to scare you out of tech, here are some genuinely scary "blue chip" long-term relative-strength charts that are being studiously ignored.

And while we're on the topic of vulnerability, take a look at the following chart of 10-year Treasuries (TY) vs. the S&P 500 Index (SPX – 1038.06). Treasuries look to me to be a "top in progress" relative to stocks, with some added negative impetus from the break of the key 20-unit moving average.

Weakness in Treasuries should be no surprise given the ugly action in the U.S. Dollar Index (DX/Y), which has broken below all conceivable long-term moving average levels and recently took out its October 1998 lows.

But what about gold (GC)? Its recent action can also be characterized as "ugly," as it failed once again at resistance in the $380-$400 zone despite ongoing dollar weakness. My response is along the lines of a "yes, but." Note in the chart below that the long-term price action in the gold futures remains quite constructive.

The gold futures do show some signs of tiring a bit relative to the SPX.

And the gold stocks (as represented by the AMEX Gold BUGS Index [HUI]) could use a bit of a breather, as they've spiked in recent months relative to the gold futures.

So what's my bottom line on gold and gold stocks? I continue to believe that gold shares should comprise an aggressive 15-20 percent of your equity portfolio (my Master Portfolio currently has a 17-percent allocation). As is the case with tech, gold is experiencing the skeptical sentiment that is characteristic of the early stages of a bull market (see HUI and Nasdaq charts below). But the gold shares are subject to gut-wrenching pullbacks that can test the mettle of the most adamant bull. So I'd suggest that you don't chase rallies and look for pullbacks to establish or add to gold stock positions.

As for the gold futures, there is a confluence of technical resistance at $380-$400. In this zone is the 50-percent Fibonacci rally off the 1999 low at $260, round number resistance at $400 that turned back rallies in 1991 and 1996, and the 50-percent Fibonacci correction of the decline from the 1987 top at $500 to the 1999 bottom at $260. In addition, there is heavy call option open interest at the $380 strike and higher that poses a challenge for rally attempts. My sense is that a takeout of $380-$400 will be followed by an extremely sharp and extremely rapid rally, but until then patience will be the order of the day.

It's getting to be crunch time for the Dow Jones Industrial Average (DJIA - 9468.50), and 9400-9500 is the "crunch zone."

After peaking at 9500 on August 22, the DJIA managed five consecutive closes above this level but has now posted three consecutive closes shy of the mark.

What's so special about 9400-9500? Let us count the ways.

1. The 50-percent correction of the decline from the DJIA top at 11750.30 to the low at 7197.50 is at 9473.90. The DJIA closed at 9471.60 on Friday.
   

2. The DJIA's 80-month moving average is at 9400 and is slowly rising. The DJIA found support at this important long-term trend line in September 2001, broke below it in July 2002, and then closed below for 13 consecutive months before breaking this streak in August. Another such positive close in September would be encouraging; a close back below the 80-month would support the bear-market case.
   

3. The DJIA peaked at 9412.60 on July 12, 1998, ahead of a plunge of more than 2000 points.
   

4. In March and April 2001, the DJIA briefly and unsuccessfully dipped below 9500 before a rally of nearly 2000 points.
   

5. On September 10, 2001, the DJIA reached a low of 9493.60 before closing at 9605.50. It then plunged by nearly 1500 points in the aftermath of September 11.
   

6. And the break below 9500 in June 2002, which was followed by two unsuccessful retests, preceded a very rapid plunge of nearly 2000 points.
   

That said, I continue to view the risks in this market as being in the blue chips, and the opportunities being in the techs. The Nasdaq Composite (COMP - 1854.1) continues to steadily outperform the DJIA, yet the financial media is teeming with warnings about the "overvalued" and "risky" tech sector (see "Heard on the Street" in today's Wall Street Journal as well as the most recent issue of a major financial weekly). Strong sectors become vulnerable when their strength becomes widely embraced in the investment community, which, in this case, would also mean capitulation by the various hedge funds who are heavily short the tech sector and who are providing the media with a steady dose of fodder for bearish articles.

And what of this so-called "echo bubble" in tech? Per the chart below, COMP would have to rally by an additional 57 percent relative to the DJIA just to reach the midpoint of the correction from its peak vs. the DJIA in February 2000 to its nadir in August 2002.

Finally, let's also note that the DJIA, as of Friday's close, is off 19.4 percent from its all-time high, while COMP remains a whopping 63.9 percent from its peak.

Three weeks later, the DX/Y has still been unable to successfully take out resistance at the 10-month, below which the index has been declining since early last year. The 10-month currently hovers near the 100 mark, which adds another tier of resistance in the form of a psychologically important round number. What's more, the index is now poised to violate, yet again, its 160-month trendline.

It is not unusual to see a sharp bounce higher after the initial penetration of a major long-term moving average such as the 160-month. However, another breach of this trendline after this bounce failed at the 10-month could be toxic for the dollar.

So what are the implications if the DX/Y does retreat solidly below the 160-month? It is bearish for bonds and ambiguous for stocks. One group that will certainly benefit by continued weakness in the greenback? Gold stocks. In the recent past, I've discussed how the gold market will flourish amid weakness in the dollar index. My opinion has not changed. Look to this space shortly for a follow-up to my views on the precious metal. For now, keep a close eye on the DX/Y and its 160-month moving average.

The combination of strong price action and skeptical sentiment that has helped propel the Nasdaq remains in place, but it's time to examine some levels at which we might see a pause in (or perhaps a termination of) this tech-based rally. And for this purpose I'm going to focus on the Nasdaq-100 exchange traded fund – the QQQ (QQQ - 34.41).

The three major rallies in the QQQ over the course of this bear market rang up gains of 54.6 percent (in April-May 2001), 57.7 percent (September-December 2001), and 45.7 percent (October-November 2002), for an average gain of 52.7 percent over the course of an average of 41 trading days. Based on Friday's close of 33.94, the QQQ has gained 44.2 percent off its March 2003 bottom. A 50-percent rally would take the QQQ to a new annual high of 35.31 (4.0 percent above Friday's close); a 52.7-percent rally would boost the index to 35.94 (5.9-percent above Friday's close).

Is this all we can expect from the QQQ on this leg up? Perhaps, if in fact it is a "garden-variety" bear-market rally. The case for this QQQ rally being something other than garden variety is bolstered by several factors. First, the rally has been in place for more than 100 trading days, well over twice the average length of its three predecessors. A steady, plodding rally is much more indicative of bull-market action than are the short, explosive moves that characterize bear market rallies.

Second, QQQ short interest continues to set records per the table below. The positive implications from this heavy short interest are twofold. Buying pressure in the QQQ has been able to surmount the selling pressure created by the 90-percent increase in short interest since April. And the accumulated short interest of nearly 290 million shares can serve as a major source of short-covering buying pressure should this rally carry far enough to create major fear among the short sellers.

In addition, activity in QQQ put options continues to be much more intense than that in call options, as reflected by the high (and increasing) ratio of open puts to open calls set forth in the table below. These put/call ratios hover at or near their highest levels over the past 52 weeks.

Here is what I'll be asking in my attempt to determine if the QQQ is capable of rallying above expected resistance should it reach the key 35-36 area:

1. Are we beginning to see churning-type price action in this zone that is indicative of a potential top?

2. Is the short interest no longer growing and, worse yet, is it beginning to decline significantly?

3. Is call activity beginning to increase relative to put activity? And are strike prices with heavy put open interest beginning to be penetrated?

4. Has the tech theme in the financial media changed from "this is a doomed rally reflective of an echo bubble rather than being based in the fundamentals" to "the techs have been rallying for good reason". We've already experienced a small taste of this from recent articles in a major financial weekly and in an international business daily.

If we take out 35-36, the next QQQ resistance area would be at 39-40. Yes, this is a round number zone. But perhaps of greatest importance is the fact that 39.52 is double the QQQ bear-market low of 19.76 and major rallies often pause or terminate at double a major low.

And if QQQ takes out 40? I'd then be looking for resistance at the peaks in late-2001 and early-2002 in the 43 area and at the 80-month moving average at about 45. At those levels my guess is that memories of the 2000-2002 tech debacle will have substantially faded. And as a consequence, the contrarian case for being long on the tech market will have equally faded.

Recent action in the CBOE Market Volatility Index (VIX – 19.71) is supportive of the case that the S&P 500 Index (SPX – 1000.30) is about to sustain an upside breakout from its excruciatingly narrow two-and-a-half-month trading range.

Note the following from the chart below:

1. The rejection of the brief foray below 20 on July 25 and July 28, which was followed by a surge higher that culminated in the "spike" peak at 25.88 on August 6.
   
2. The three consecutive daily closes we've now experienced below the 20 level.
   
3. The "head and shoulders" type pattern over this period, with 20 as the "neckline," that suggests further downside in the VIX.

In addition, per the following chart, the 10-day historical volatility of the S&P 100 Index (OEX – 501.89) has just broken below its prior 2003 low of 15.10 percent to reach a new low for the year at 13.29 percent. This tells me that the VIX, which is first and foremost an estimate of the future volatility of the OEX, has room to decline further - perhaps into the mid-teens.

Of course, one can certainly make a bearish case for a VIX below 20. And as you can see from the next chart, forays by the VIX below 20 since 1997 have been brief and have occurred at or near market tops.

But the VIX environment from 1992-1996 was significantly different, and over that period the low end of the VIX range was 10 rather than 20 (forget the April 1994 low of 5.05, as this was a bad data point). Note also that VIX peaks tended to occur in the 25 zone.

My conclusions?

1. The current pattern of VIX price action suggests further downside.
   
2. Further VIX downside would almost certainly be accompanied by a rally in the SPX.
   
3. The greater the number of consecutive days the VIX closes below 20, the stronger the arguments in #1 and #2 above.
   
4. There is no VIX "floor" at 20, as evidenced by the VIX action prior to 1997. On the other hand, brief moves by the VIX below 20 have been consistent with market tops since 1997. The bull vs. bear argument thus reduces to whether post-1997 or pre-1997 VIX patterns will prevail.
   
5. The heavy focus in the financial media in recent months on the low VIX as a bearish indicator (featured most recently on CNBC yesterday) has bullish contrarian implications. Once a previously arcane indicator becomes widespread in its use, it becomes safe to conclude that the market has already discounted the implications of that indicator.
   
6. I'd focus on a close by the VIX above 25 as a sign that the 20 level is going to be rejected once again, which would have bearish implications for the SPX.