05/19/06 Market Update

Stocks:

The market managed to give up most if not all of its year to date growth by week’s end. The thrust, or advancing issues minus declining issues, plunged downward indicating the energy of the decline. Below is one measure of this breath of advance/decline in the McClellan Summation index.

McClellan Summation Index – Daily

The McClellan Summation reveals the market’s internal health has been progressively weakening since the February 1st top. It is typical for the Summation to top out earlier than the price and this is where we often see two to three divergent tops between the price and the Summation index. I have written about this continued weakness over the last few months and now we can see the indexes retreating. Regularly, the longer the divergence continues, the more violent the price correction.

The amount of downside power signified by this week’s thrust suggests that this decline has much farther to go. I would not be surprised to see the October lows challenged and surpassed. The OTC Composite chart from last week’s update now stands at double its head and shoulders minimum expected decline. Below, we can also see the oscillator in a clear breakdown from support. Prices crashed through the 39-Week moving average and rebounded intra-day off the low rising trend line support on Thursday and managed to get above the horizontal closing prices of December/July previous highs by Friday’s Close.

OTC Composite – Weekly

No doubt that the short term oscillators are oversold. The market should have some upward consolidation of the decline over next week. A retest of the 39-week MA and the head and shoulders neck line could be in order. Look for resistance to increase as these price demarcations near or the oscillator’s declining trend line is approached.

Bonds:

As stock prices plunged, the flight to safety caused bond yields to retreat. The 30-Year U.S. Treasury price managed to break above of its declining Gann grid channel that has defined the decline since early April. The oscillator has also created a healthy rising structure of higher lows and higher highs. However, as last week’s stock decline fueled the rise in bonds, next weeks snap back should cause a bond reversal on the short term. Moreover, there is overhead resistance just above from the February/March declining tops line. This being the most likely reversal resistance.

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

A correction to the recent rise appears certain; but, the bottoming structure I have written about over the last few weeks should remain intact. Consider any pull back a buying opportunity or to cover current shorts.

Gold:

Like the stocks the XAU suffered for the week. This index too, is short term over-sold and could see a bounce in the coming week. The vertical red 18-T Day cycles line shows May 25th as the next likely turning point. In this state of over-sold the prices the XAU could climb into the date before resuming their down trend. The longer term cycles, however, still suggest rising prices on the XAU. So, after some more brief consolidation, I suspect the uptrend to resume. As your stomach permits, buy into this decline.

XAU -- Daily

Back to Members Area Index >>