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The Thrust Oscillators are declining, which means a double top may already be in place. However, from a "technical point of view" it would take a daily close below 2240 by NASDAQ, and a daily close below 1258 by the SP500 for confirmation.
Summary Last week (1-27-06) we said, "We got the bounce and it carried throughout the entire week. Going forward the question is whether last week's action was the start of a new leg to the upside, or was it just a retracement of the previous week's decline? We suspect it was the latter, and here are reasons for thinking that way: 1) Our short-term probability models are indicating that the odds are nearly even between a decline with a magnitude of 4.5% (-/+1%) and an advance of the same magnitude (see charts below). 2) The trend indicators indicate that the intermediate trend is neutral. 3) Two of the short-term models are on a buy signal, but the suggested exposure to the long side is only 5%. At the start of intermediate term rallies usually we observe the following: a) The short-term probability models indicate that the odds favoring higher prices over the next 10-15 trading days are 2.5:1 -at minimum. b) The trend indicators turn positive. c) All of the short-term models go on a buy signal, and they indicate a minimum of 20% exposure to the long side. In other words, we are not seeing--at least not yet--the things that we ought to be seeing if the market was starting an intermediate term rally. Consequently, our conclusion based upon the current facts is this: there is a chance that the SP may rally to the 1295-1300 zone over the next 5-10 trading days, but if the underlying dynamics do not improve, the rally will fail at that level, and it will be followed by a decline back down to the 1240-1220 area. Commentary for the Current Week Last week we presented you with two possible scenarios for the next 5-10 trading days. In comparing the actual price action to the one forecasted by our probability models, it certainly looks that scenario #1 is unfolding. However, we want to caution that it would take a daily close below 2240 by NASDAQ, and a daily close below 1258 by the SP500, for confirmation. Unless we get confirmation, scenario #2 is still alive. Therefore, I urge both bulls and bears to exercise restraint. This is one of those times that experience can go a long way! Speaking about experience, I highly recommend that you examine the current market views of Mr. Alan Newman and Mr. Sherman McClellan.
Part Two: Final Comment On Gold This is my last public commentary about gold/gold stocks to non-clients until my yearly forecast is completed and the initial components of the strategy for our managed accounts is in place. I usually do my yearly forecast on gold and gold stocks in March, and this year will not be any different. Let's re-cap: 1) 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.
2) On 1/24/06 (see my archives) I said, "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" 3. As of 2-6-06, the 145-155 zone has proven to be a tough barrier for the XAU, and I see nothing in the current structure of the market, and in its underlying dynamics, to suggest that XAU will be able to overcome this barrier without first undergoing a period of consolidation. While this consolidation plays out 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. Ike Iossif
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