Weekly Update 12/24/04

Stocks:

Stocks continued upward, although with less enthusiasm as most professional investors left work for the holidays. The market momentum is slowing significantly; but, I am not sure if it is from lack of investors due to the holidays or if the dollars intended to be committed to this rally are already in place. If everyone has indeed jumped on board then there may not be new dollars to help continue the rally. The rally is now at its 97 th trading day and has exhibited a 55-trading day cycle out of the 5/17/04 , 8/06/04 move. The next 55-trading day low will fall on 1/11/05 give or take a day or two. We could see some market softness into the second week of January but the overall bull strength of this move should not be ignored and I expect any decline to be moderate. For the S&P 500 the 1164 level should hold with octave support at 1154.25. This represents a 3.5 to 4.5 percent drop from the current levels. However, the market like symmetry and the 55-day pattern going backwards from the August low produced a low preceded by a high. Coming forward from the August low we have seen low ( 10/25/04 ) and the symmetry would require 1/11/05 to be a high. The S&P could still easily reach 1232 before the up-move is exhausted. This is the more likely scenario.

S&P 500-- Daily

Bonds:

The 30-Year U.S. Treasury continues to soften as it moves predictably down the declining Gann grid line. The Gann grids will cross on January 3 rd . The volume continues to lighten as the price erodes but I suspect we will see profit taking until the cross is met. Our NFA system remains on a buy signal in that the upward trend is still intact. Any break below the rising Gann grid line, currently around 111, would put us out of this market. The RSI and the Stochastic oscillators continue to make lower highs indicating that a trend reversal is imminent. For the foreseeable future the bond may not be the best place for our funds.

30-Year U.S. Treasury -- Daily

Gold:

The Comex Gold corrected nicely from its decline stopping at its 23.6 retracement. However the XAU receded to it 38.2 percent retracement and showing less strength did not bounce up as expected. We closed our RYPMX position as the 9-day cycle line has reached over-bought.

Comex Gold (Yellow) XAU (Black)

I still expect a rally in the XAU. The daily cycles composite in over-sold territory and the rising weekly trend has stopped the decline. While we could expect some volatility over the next few weeks, I still believe a rally towards the 115 level is in the cards. We may have arrived a week too early and with our stop loss rules we were forced out but I think a buy signal is a week or less away. Furthermore, I believe that the Federal Reserve will continue to let the dollar decline giving more support to continuing the gold rally.

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