THESE RETURNS ARE ALMOST TOO GOOD TO BE TRUE

Before we get to the Market Outlook…

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All major U.S. indices closed in positive territory for the second consecutive week. This broke the recent pattern of alternating positive and negative weekly closes, which has been the norm this quarter. Last week’s gains were led by the Nasdaq 100, up 0.8%, and Russell 2000, up 0.7%. I view this as a good sign heading into this week as technology and small-cap issues typically lead the broader market both higher and lower.

It is disappointing that three of last week’s four strongest market sectors were defensive ones: consumer staples gained 1.2%, health care was up 1.1%, and utilities rose 0.7%. This defensive leadership is a reminder that, despite last week’s overall strength, there is still some investor apprehension to overcome before another healthy and sustainable leg higher emerges.

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2 Indices are Key to Market’s Direction

In last week’s report, I pointed out that the Nasdaq 100 had just tested, held and rallied from 4,347, a level I first identified back in the Jan. 12 Market Outlook as being critical to the direction of the index. Per last week’s report, as long as this level continues to hold as underlying support, I am looking for an eventual  rise to 4,600.

This week’s first chart, of the Russell 2000, is the companion chart to that of the Nasdaq 100. Since I highlighted the Russell 2000’s Feb. 17 breakout higher from a year of sideways investor indecision, I have been stating that as long as the index remains above the upper boundary of this indecision area at 1,213, it targets a move to 1,320.

The 1,213 level was most recently tested on May 5, after which the index aggressively rebounded just as the Nasdaq 100 did from 4,347. 

These are the two most important charts to watch for at least the rest of this month. As long as these support levels hold, my upside targets remain valid. That being said, there are some problems brewing overseas that investors need to be aware of because, if they persist, they could eventually put some downside pressure on U.S. markets.

Beware of More Weakness in Germany

The next chart plots the German DAX daily since January, along with its 50-day and 200-day moving averages, widely watched minor and major trend proxies. I am interested in the DAX because of its tight and stable positive correlation to the S&P 500 over the past 20 years.  

A bearish head-and-shoulders pattern was confirmed on April 29, as the index declined below its 50-day moving average after failing to establish fresh highs. This pattern targets a decline to 11,000, about 4% below Friday’s close. This will remain valid as long as the 50-day moving average, currently situated at 11,826, contains as overhead resistance.

Selling in the DAX could put some indirect downside pressure on the U.S. markets, including the Nasdaq 100 and Russell 2000. Conversely, a sustained rise above 11,826 would negate the 11,000 downside target and could help propel these two U.S. indices to my aforementioned targets.

Strengthening Gold at Major Inflection Point

In mid-April, I pointed out that gold prices may be basing, according to my analysis of the SPDR Gold Shares (NYSE: GLD). Since then, the ETF is up 2.4% and is now testing and edging above major overhead resistance at its $117.19 200-day moving average.

A sustained move above $117.19 by GLD between now and month end would suggest that a major bullish trend change is emerging. It would also clear the way for a move to the next important overhead resistance level at $125.58, the Jan. 22 high, which is 7% above Friday’s close.

Thus far in 2015, the U.S. stock market has been characterized by an odd combination of malaise and resilience. It has been unable to sustain a significant advance, but it has also managed to stubbornly remain above key underlying support levels that are keeping the market’s upward bias intact.

In the market-leading Nasdaq 100 and Russell 2000, these levels are at 4,347 and 1,213, respectively. As long as they continue to hold, it suggests the potential for further upside before the larger Q4 2014 stock market advance runs its course.

Meanwhile, as investors slowly start to accept the inevitability of the Federal Reserve’s first rate hike, regardless of whether it’s in June or later this year. Market expectations for an eventual cycle of rising interest rates can also indirectly be seen in the recent strength in commodity prices, including gold, as the market begins pricing in the inflationary effects of years of near-zero interest rates.

This article originally appeared on ProfitableTrading.com: The 2 Most Important Charts to Watch This Month​