All major U.S. indices except the small-cap Russell 2000 closed higher last week, logging the third straight week of gains. However, the market still has some work to do if it’s going to pull this year out of the fire. With the exception of the tech-heavy Nasdaq, all major indices are still in negative territory for 2015.

All sectors of the S&P 500 finished in positive territory last week except for industrials and materials. Two of the strongest sectors were defensive ones, utilities and health care, which is not the ideal springboard for a sustainable market rally.

Moreover, Asbury Research’s own metric — which typically leads sector performance — shows the biggest inflow of investor assets over the past one-month and three-month periods was into utilities. Additionally, over the past one-week and three-month periods, the biggest outflow came from financials.

I view this as a subtle warning not to be overly optimistic about a fourth-quarter market recovery just yet. Continued outperformance by utilities and underperformance by financials would be characteristic of declining long-term U.S. interest rates amid a flattening yield curve, would indicate an apprehensive bond market.

#-ad_banner-#As I stated in last week’s Market Outlook, the bond market needs to “bless” the recent stock market rebound via rising long-term interest rates and a steepening yield curve for it to be sustainable.

An Emerging Market Bottom?

In last week’s report, I mentioned the recent rebound from major support levels in the German DAX and Dow Jones Industrial Average amid declining volatility as positive steps toward a Q4 market rebound.  

The chart below shows another potentially positive market factor emerged in the S&P 500 last week in the form of a bullish chart pattern. A double-bottom was confirmed by Friday’s close above the Sept. 17 intermediary high at 2,021 between the Aug. 24 and Sept. 29 lows.

This pattern targets a retest of the 2,135 May 20 high that will remain valid as long as the index’s 50-day moving average, currently situated at 1,985, loosely contains as underlying support.

Attention Wal-Mart Shoppers

A substantial drop in market bellwether Wal-Mart Stores (NYSE: WMT) was probably the biggest stock market story last week. I was interviewed by several national media outlets on the topic, including The Wall Street Journal.

After the retailer forecast a sharp decline in earnings next year, shares collapsed below their September 2008 and February 2012 highs near $63. But WMT is now closing in on formidable underlying support at $57.90 to $57.18.

I previously mentioned WMT as a stock to watch because of its long-term positive correlation to the Dow Jones Industrial Average, pointing out in late September that it had just started testing that key $63 support area.

My point was, and still is, that as goes Wal-Mart so is likely to go the Dow industrials. If WMT is able to hold the $57.90 to $57.18 support area and rebound from it, I will view this as more evidence that a sustainable broader market rally is emerging.  

On the other hand, a decline below this key level would warn that the August market correction may not yet have run its course.

Cautious Bond Market Means We Should Be Too

The stock market tends to trade from one data release to the next. And especially in the wake of the recent influence of high-frequency trading, the market has been throwing a lot of head fakes at investors lately. The recent spate of 200-point intraday swings in the Dow industrials is evidence of this. The bond market, however, is generally a more forward-looking, sober and reliable barometer of economic conditions. 

After peaking at 2.44% in mid-July, the yield of the 10-year Treasury note collapsed below its 200-day moving average, a major trend proxy.

It’s no coincidence that the stock market started to decline within weeks of the peak in long-term interest rates, which indicated the bond market saw some economic potholes ahead, including weakness in China.

So even though stocks staged a nice rebound over the past few weeks, I’m not going to feel comfortable until the yield of the 10-year rises and remains above its 200-day moving average, currently situated at 2.12%. This would indicate the bond market is betting much of the danger has passed.

Tenacious Gold Bulls Finally Make Some Progress

In the Oct. 5 Market Outlook, I pointed out the recent expansion in total net assets invested in the SPDR Gold Shares (NYSE: GLD). I said, “As long as this continues, it should fuel a sustainable rise in gold prices.”

The lower panel of the next chart shows these assets have indeed continued to expand while remaining above their 21-day moving average. This indicates a monthly trend of expansion that is characteristic of a healthy and sustainable price advance.

These expanding assets fueled the Oct. 9 breakout in GLD from 10 weeks of sideways investor indecision. A triangle pattern targets a rise to $117.50, which is 4.5% above Friday’s close. This will remain valid as long as the upper boundary of the pattern at $109.80 loosely holds as underlying support.

Putting It All Together 

An emerging bullish chart pattern in the S&P 500 amid recently decreasing market volatility and a rebound from major support in the German DAX suggests a fourth-quarter rally may be getting under way. Almost 60 years of seasonality data also supports this.  

However, I need to see market bellwether Wal-Mart hold and rebound from important underlying support at $57.90 to $57.18, the top of which is less than 2% below Friday’s close. Additionally, I want to see steadily rising long-term interest rates to help convince me that equities are truly out of the woods.

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This article was originally published on ProfitableTrading.com: The Market Isn’t Out Of The Woods Quite Yet