05/12/06 Market Update

Stocks:

The market finally decided that the Federal Reserve will probably raise interest rates until it forces a slow down in the economy. And what this really means to the market is that the Fed. will over raise interest rates until it causes some real economic and ultimately market damage. It’s no news flash to say stocks had a tough week. It’s on every market news show this weekend. But, if you listen carefully, you will hear the same spin the “insiders” put on at the top in 2000. Most, as usual, are spouting the healthy minor correction and good time to scope up those bargains that were missed on the upswing.

The 4-year or 49.2 month cycle tells a different story. Rather than a “minor” correction the market should stair step its way down into the 4-Year low, due between September of this and January of next year.

On the short term, the market has quickly made some important measures and could find support. The OTC Composite below displays the head and shoulders formation with the minimum downside objective. Within the same week, this index plunged to the neck line and down to the minimum 60 point projection obtained by the distance from the Head to the Neck Line.

OTC Composite -- Daily

The market likes symmetry. If the symmetry can continue then we could see three or four zig zags between the current levels and the neck line above before the market breaks further. With this in mind, we will look for the oscillator reading to give over-bought and over sold signals until the RSI shows at least three divergent lower tops.

Bonds:

The 30-Year U.S. Treasury could not hold it 106 support low which indicates that a drop to 104.5 is in order. If you remember, this has been the expected target since the March end update. Our buy signal issued off the 106 low bounce; with this support broken, a new short signal is created. If Monday’s price rebounds to test the underside of 106 now resistance, this will be the best opportunity to close and go short. A break back above 106 and change negates the short trade.

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

Gold:

While gold managed an up day on Friday the XAU stocks sympathized with the market and plunged. The decline was halted for the price and the oscillator at their perspective lower parallel rising trend line and lower horizontal. There is a good chance the XAU will bounce back towards the declining Gann grid line at 167 but then oscillate as the rising trend-line and declining Gann grid come to meet.

XAU -- Daily

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