12/17/06 Market Update

Stocks:

The Dow Industrial pushed to new high this week and in doing so manage to surpass the intermediate plus one octave level that had confined it over the past month. The intra-day high on Friday kissed the major octave level at 12,500. It also tagged just shy of one minor octave above this. The internal strength indicated by the RSI shows a deteriorating trend. The next intermediate level octave is another 312.5 point above and it is unlikely that the market will make a run for this in its present condition. The full octave at 12,500 is a very powerful resistance.

Dow Jones Industrial Average -- Daily

Additionally, the Dow Transports continue to diverge from the industrials in a controlled decline. These typically for tell the direction of future events for the business cycle and are warning of a slow down.

Dow Transportation Index -- Daily

Bonds:

The bonds retreated from the 78.1 percent Fibonacci retracement as yields climbed. The price also pierced the 113 level; retested it on Friday closing below. The weekly chart indicates significant room for a continued decline. Support is down at the 110 level and if this does not hold then the 106 level when the declining tops line meet the ideal cycle line on January 19th. We could see a decline through that time period. If so, this would erase almost all the bonds gains since July. This is not the likely scenario; but, a rise of this magnitude would also dampen the stocks, especially the gold stocks.

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

Gold:

Thursday’s price managed to close above 145. With this rise, it rebounded from the gap closure and showed the promise of 150 as the next target. Friday’s jolt brought the price back down to the 20-day simple moving average. Price found support, important support at this level and the 150 target remain the ideal. There is still room to drop, however, and major support comes in at the conjunction of the horizontal and rising trend line at the 141 level, still 2.45% lower.

As mentioned above, declining bonds could quickly put the nail in the coffin for the XAU rally. If interest rates truly start to rise, this would help support the dollar and ultimately quell inflation. Remember, the market usually dictates and the Fed usually follows.

XAU -- Daily

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