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PART ONE: THE UNITED STATES OF AMNESIA!

On 11-29-05 we made the following comment: "We continue to believe that the market is not about to "collapse"--at least not now. We expect support to hold, or maybe marginally violated, but there is nothing on the radar screen to suggest that the party is over, yet. It's an outright silly party considering that the SP is near 1300 despite the head winds directly ahead, but the market has been known to be able to stay silly longer than most rational people would expect. Moreover, we are entering the period during which the "Bonus Defenders" will be most active driving the market higher--with your money--in order to make sure that they will receive their bonuses at the end of the year. Of course, sometime in mid- to late- January when disappointing earnings and guidance sink the market, there will be hell to pay, but who cares? It will be the investors who will pay--through losses--not the "Bonus Defenders."

Take a look at the article below that was posted on Yahoo on 1-11-06, and also take a look at the market action since earnings started to come out. Do I need to say anything else? Probably not, except one thing; I am not making today's remarks for the purpose of "bragging" how right I was, or how smart I am. I am making today's remarks to point out that somehow the United States of America has become the United States of Amnesia! Haven't the people of this fair land learned anything about Wall Street during the 2000-2002 debacle? Apparently not, because if they did, they would have continued to give their money to the "bonus defenders" to lose it on their behalf. A nation that stubbornly refuses to learn from history is always doomed to repeat it.

Wall Street Bonuses Hit $21.5 Billion
Yahoo! News - Business   Jan. 11, 2006

NEW YORK - Bonuses at Wall Street firms climbed to a projected record of $21.5 billion last year as revenue grew, according to the New York state comptroller's office.

Comptroller Alan Hevesi said Wednesday that 2005's bonus tally was $2 billion more than the old record, which was set in 2000. In 2004, Wall Street bonuses came to an estimated $18.6 billion.

Last year's average bonus was pegged at $125,500, also a record, Hevesi said.

Revenue at Wall Street firms rose 44.5 percent through the first three quarters of 2005, climbing to the highest level since 2000, the year when the stock market peaked, Hevesi's office said. The mergers-and-acquisitions business accounted for most of the surge.

"The securities industry had a very good year during 2005," Hevesi said.

Part Two: Brief Comment On Gold

I usually do my yearly forecast on gold and gold stocks in March, and this year will not be any different, but we are at a point right now that warrants a brief comment.

As you recall, in March of 2005 I held the opinion that the XAU would decline to 84-82, and then it would rally straight up to the 155-165 zone by the end of the year (see report for 3-29-05 and/or archives). The XAU bottomed at 78, and it rallied up to 145 during that time frame. Below is the chart I posted back then showing how I thought the price action ought to unfold if it happened; and underneath it is how it really happened.

Given that price, time, and pattern turned out to be correct so far, it means that the odds are better than even that the remaining of the forecast will also be proven correct. In that case--in the absence of an exogenous event that changes the dynamics of the market--we will see a pullback starting right about now that may last until April. Consequently, at this point it makes sense for intermediate term investors to protect profits on the long positions by buying some April puts, and for short term traders to exit some long positions and take some money off the table. The 145-155 zone is a dangerous one for the XAU.

Part Three: WEEKLY CHARTS

DJIA: Support at 10650 and at 10500. Resistance at 11050.

DJTI: Support at 4000. Resistance at 4250.

SP500: Support at 1250/46. Resistance at 1295/1300.

NASDAQ: Resistance at 2350; support at 2200 and at 2120.

HUI: Support at 300, 275 and at 250. Resistance at 325.

OIL: Resistance at $70 and at $72. Support at $62.50.

The sharp decline of the T.O.s suggests that we ought to look for further decline later in the week.

The trend is NEUTRAL for NASDAQ.

 
The trend is NEUTRAL for SP.

SUMMARY

Last week (1-13-06) we said, "One of the most important things when trying to decipher what the market is telling us, is to avoid getting fooled, which can happen rather easily! As we mentioned early on in the week, the markets could be at an "inflection point" and the rally could very well be over. However, both the current chart formation, and the pattern formation of the technical indicators, are identical to what we see right before either a rally termination, or right before a rejuvenation of the rally. Therefore, based upon the evidence at hand, it is early to make the determination with any degree of authority or certainty. If the first is true, we ought to see a close below last Tuesday's lows (Dow<10950, SP500<1283, NASDAQ<2300) sometime this week, followed by a subsequent close below support. If the second is true, we ought to see a close above last week's highs by mid-week. Stay long and keep half of your stops below Tuesday's lows, and the other half below support."

This week, the decline below the lows of the previous week, coupled with a close below support means that there is an 80% probability that the rally is indeed over. Given that some of the technical indicators are at their respective zero line, we may get a bounce early on in the week. However, the overall picture suggests that we ought to look for a further decline to the next support level. We strongly suggest that you stay in cash until there is evidence that the decline is indeed over; there is none now. Before you hit the "BUY" button, listen to what  Clint has to say about that.

Ike Iossif

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