09/08/06 Market Update

Stocks:

The first cracks of this top revealed themselves this week. Although the market ended on a positive note, we witnessed the signs of weakness and sit at serious resistance. As I wrote last week, the market is in range for its secondary and lower top. The weekly McClellan Summation Index below gives a very good picture of the broad resistance. The left most peak here is the rally off the 3/12/03 low. As we can see the index has made a series of lower highs and is now again within the broad brush area of resistance.

McClellan Summation Index – Weekly

The daily NYSE Composite also retreated from the Fibonacci 78.6% retracement, outside of a double top -- usually the last stopping point for a corrective rally. We can also see Friday’s rally pushed back up to the underside of the 61.8% retracement line, now resistance. A short term rally or not occurring, the likelihood of a continued decline outweighs the rally potential. If a break can occur here though, then the market would be clear to rally into a double top. This is not my guess; but a complete capitulation into the 4-year low is not my guess either. Although we most likely will see a decline into mid or late October, I doubt this will represent the 4-year low as most expect.

NYSE Composite – Daily

The broad based Value Line Geometric Index below with the addition of the 24-month, 48-month oscillators and the 12,26 month Moving Average Convergence Divergence (MACD) velocity indicator suggest a more downward sideways action for the time being. The MACD indicates a loss of upward velocity and the beginning of a longer (intermediate) term decline. The current 24 and 48 month oscillators though are at odds with the 24 now over-sold and the 48-month just tuning down from over-bought. The more violent declines like the 1987 crash and 1998-1999 drop (highlighted ellipses) occurred when these oscillators coincided in state. When they diverge as in the 1993-1994 (highlighted square) the decline is milder.

Value Line Geometric -- Monthly

Although we are in the window for the 48 month peak, as I think the May top represented for some of the indexes, the low can extend out as far as April to September of 2007 or up to 60 months as this cycle expands and contracts similar to the 1987 expansion. I expect to see a slow, water torture, type decline with rallies and dips pulling investors in and out at just the wrong time. This becomes an oscillator trading market or better an exit to the sidelines for those who can not or do not trade frequently.

Bonds:

The long bond in the 30-Year U.S. Treasury bond price chart appears to be running out of steam. While last week’s rally pushed back above the declining Gann grid line and the oscillator turned up, the advance shows a deeper decline and relative weakening of the internal RSI indicator. The NFA Government bond system generated an interim buy signal which we followed; but, this rally will probably come to an abrupt end. A careful eye and swift movement will be necessary when this comes about.

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

Gold:

The XAU made a quick retreat to the bottom of the rising oscillator triangle and through the support of the price triangle to the Gann grid line. This pushed prices 8 percentage points lower in three days. This is why I always suggest reading the weekly update. Our systems are primarily velocity based and thus cannot pick up the subtleties of previous resistance or chart patterns such as the triangle this market has been working through. In the update, I can better explain the risk associated with any current signals. This can help determine the amount, if any, exposure that should be considered on any questionable signal.

The XAU will probably rebound off the oscillator support; but, it has shown its hand as to the ultimate breakout or should I say breakdown direction from this pattern. Our Gold system issued a rare “Open Short” signal on this decline. This is a signal for the aggressive investor only. For the short or inverse fund trader and as we stated in last week’s update, the time frame and distance of the next move should be close to a two months.

XAU –Daily

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