While U.S. economic releases last week hardly painted a positive picture of the economy, and the Euro gained sharply against the dollar, there were a couple of developments that reminded us that many economic reports are "rear view mirror indicators" and that in the big picture we are still in a bear market in commodities and a bull market for the U.S. Dollar.

Interest Rates

Despite most analysts agreeing that the Fed will again put off raising interest rates in June, the yield on U.S. 10-year Treasuries jumped from 1.91 to 2.11 last week - that may not seem like much but it is actually a 10% move-- see Figure 1.

(click to enlarge) To see article w/ charts click on the link below
Figure 1. Daily Chart of the U.S. 10-year Note Yield

After carving out a higher low in April the yield on the 10-year notes rallied into position last Friday to potentially reverse its 50-day pattern this week and put in a higher high - a higher high in a downtrend equals a market reversal.

We interpret higher interest rates in the face of slower than expected economic numbers for March twofold. Number 1: while March's economic performance may have been disappointing, April's won't be. And number 2: while consumers had not spent as much as estimated in the 1st quarter of 2015, savings rates, along with home prices, are up strongly, and so is consumer confidence.

Gold

Despite the weaker dollar throughout last week the Gold market slumped badly - see Figure 2 -- begging the question "why?" Gold is a leading indicator of economic fear, and does well when the economy experiences uncertainty, which is what the March data, from job growth, to manufacturing, to retail sales, was showing.

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Figure 2. Daily Chart of Gold Futures

We see the sell-off in the gold market last week as confirmation of a positive U.S. economic performance for April, which will be seen in the May releases; and as a reflection of a marked improvement for household balance sheets given the healthy uptick that U.S. home prices are currently experiencing.

The Trade

The question following the analysis is how can we profit?

Higher U.S. rates are supportive of the current long-term trends in place: a U.S. Dollar bull market and a bear in commodities. So the advantage of a trade based on this higher interest rate theme is it will be in-line with the current dominant trends.

After going back and analyzing market performance during the most recent jump in U.S. rates in the 2nd quarter of 2013, the most obvious correlation to higher interest rates was lower gold prices- see chart.

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Figure 3. Weekly Chart of U.S. 10-year Treasury Yield & Gold

When 10-year interest rates rose a full percentage point in the second quarter of 2013 -- chart on the left -- it spelled a quick and violent end to the previous bull market in gold. From this perspective we believe another leg higher in U.S. rates, this time sanctioned by the Fed, would finish the job started in 2013 and push gold below $1000.

Should U.S. rates continue to uptick the risk /reward on a short gold trade looks to be the best trade on our screen today.

Jay Norris has written two books on trading which were published by McGraw-Hill. To see Jay highlight trade set-ups and signals in live markets this Thursday go to Live Market Analysis and click on the "free trial" option.