04/07/06 Market Update

Stocks:

If you could know where the top of the four year cycle would be within a month from the top, would you consider the information valuable? Well, I would, and all signs point to the current time frame. Yes, I know I’ve been saying this for at least three weeks and while Thursday’s close may have been it; it may not. The important point is that we are close. And it would be healthier for our portfolios to overall reduce our position instead of adding to them.

Thursday’s peak has the makings of a classic top. Below is the daily Russell 2000 which has led the advance since the 2/28/06 low. Although it is hard to see here, the price has slipped below the upper channel line. The velocity (red and blue plus marks, sub-graph 1) peaked on 3/31/06 and accelerated with Friday’s decline.

Is this the top? We don’t know yet. The 81-day %R indicator (magenta, sub-graph 2) is still in trend mode and the short term cycles oscillators are heading into over-sold territory; while the cycles composite offers plenty of room for decline and very little for growth.

Russell 2000 -- Daily

The Weekly chart of the same, tells a more negative story. Again, the price has dipped below the upper channel and the velocity has turned down; but here the shorter term cycles oscillators and the cycles composite are over-bought and weight only downward.

Russell 2000 -- Weekly

My most likely scenario is some sort of top is in and a continued down slide early next week until the short term oscillators move over-sold and bounce allowing the price to rally for two to three days and retest the underside of the rising channel line. The resistance line will hold and the daily, weekly and monthly declines will resume. A confirmed move above the rising channel line negates the previous top.

Bonds:

Still in decline! The price on the 30-Year broke below significant supports on Friday. On the first chart below, we can see the declining channel support breach. This line is a parallel of the red declining bottoms line. It has acted as a pivot point in the past for resistance and support. Now penetrated, it becomes overhead resistance and the lower channel lines becomes the most likely target.

30-Year U.S. Treasury Price -- Daily

The horizontal support provided by the red channel line has also been penetrated and the conjunction of these support lines come not until the 104 area.

30-Year U.S. Treasury Price -- Weekly

At the present, daily, weekly and monthly price oscillators are extreme over-sold levels. A snap back action towards these penetrations is likely but not guaranteed. If this occurs, use the rally as a chance to liquidate longs or establish shorts positions.

Gold:

A technically perfect retest of the rising trend line has taken place over the last few weeks. Loyal readers have known in advance the XAU most likely course. Now, that the retest is complete the decline should start in earnest. The first downside target is the rising Gann grid line at 135. Once achieved, we will have a better idea if the decline will continue. My guess is it will.

XAU -- Daily

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