07/21/06 Market Update

Stocks:

The market witnessed a one day rally. Federal Reserve Chairman, Bernanke hinted at pausing interest rate hikes on Wednesday. That was enough to blast the markets through our stops and caused us to cover the shorts. There was, however, no follow through and the “Short” signal is reinitiated. Our broad market, intermediate cycle Russell 2000 system remains on a sell signals but has yet to issue its own “Short” signal; so any participation in the decline will be minimum a position.

The market still rests at or near support and at relatively over-sold levels on the weekly basis. The Russell 2000’s price, however, did slightly penetrated its parallel trend line projected from the August 2004 and April 2005 lows and created a lower low for this down move. Any rally that follows should be contained by the downward sloping June 2, July 3 trend line.

Russell 2000 – Daily

We may see another bounce before the lower trend lines are forcefully penetrated. If principal protection is important and you haven’t yet sold then this will probably be your final chance.

Bonds:

Bond prices managed to hold their upside penetration through out the week. The weekly oscillator also managed to break above the over-sold threshold. Bonds have a clear chart up to the 109 mark and we may see an acceleration of the rally.

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

The daily oscillator is still over-bought so the rally may have to wait for now with price action very similar to last week’s slightly positive gyrations. This might continue until the oscillators become in sync.

Gold:

For the XAU, the daily and weekly oscillators are sitting mid range with a downward bias. The weekly close price is wedged at the cross over of the declining and rising Gann grid line. The Head and Shoulders neck line rest at the 125 level or slightly below. I expect this line to be challenged and penetrated. It may happen on this move down or the next. The market likes symmetry and the previous neck line touches have been signals verses double or triple touches. So penetration is more likely now than later.

XAU – Daily

On the daily chart the Friday’s price penetrated the declining Gann grid line and there is a vacuum below until the rising grid line at 127 on Monday. We initiated a short position on Thursday and will hold as long as price remains below Thursday’s close.

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