01/27/06 Market Update

Stocks:

The market catapulted off the short term cycle low. The Value Line Geometric, below managed a close above its long term average trend line. The short term oscillator made it below the 40 level accomplishing the 90/40 over sold rule. Even the AD line made a healthy showing for the week.

Value Line Geometric -- Daily

The Russell 2000 held strong through the brief decline, out performing the other majors. Now though, it is in a more vulnerable position than its counterparts. We will lighten our allocation for stronger alternatives on Monday.

Russell 2000 -- Daily

The NDX cycles and oscillator suggest that this index may be the domestic leader for the next short term up move. It should also be the fastest on the decline side when this move is over. Any positions must be held with an upward moving stop.

NDX 100 – Daily

The OTC Composite, as well as most other averages, is showing a strong negative divergence on this recent up move (see the blue trend lines on the charts below). I have been writing about our expectations for this and why I did not yet think we had seen the top over the last few weeks. Now, this has all the symptoms of a market top, even the public is enthusiasm is back. This is the final element as it is almost impossible to have a top without the individual investor clamoring to buy.

The Prediction Point matrices and the cycles table point to February 6th plus/minus 3 days as the most likely topping area. This window starts on February 1st which is in the middle of next week. Be vigilant as the first leg of the new trend can fierce.

Bonds:

The lack of participation in the U.S. Treasury auction last week caused bonds across the board to decline in earnest. The leverage Rydex U.S. Gov’t Bond fund accentuates the moves in this market. Now, it has perfectly reached its 4th wave decline target and the zero oscillator reading. We should see it final rally up over the new few weeks. Dollar for dollar this may be the best trade available with a 5 percent up move expected over the near term.

A word of caution though, this should be the last up move before the intermediate trend reverses. Like the stocks, the first down leg should be significant and swift. If you own government bonds, protect them with mental stops, especially as the previous high is surpassed.

Gold:

The XAU continues to push upward; however, from the oscillator below (sub-graph), we can easily see the divergence growing. The oscillator did manage to make a new high on this up move so I do not believe the intermediate move is near its end; never the less, it is time for a correction. As in stocks, the cycles tables and prediction points suggest an early February trend change. The next 81-trading day high is next due on February 11th. The standard deviation for the top to top cycle is about 7 days. This makes the February 6th top for stocks a viable date for the XAU as well. Remember, in a precipitous decline, the XAU, made up of gold stocks, tends to act more like stocks they are than the actual metal they mine and usually move with.

XAU – Daily

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