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The BSEs are at the zero line. From this point, the rally will either accelerate or experience a premature death.
SUMMARY Last week we said, "The indices are quite overbought and at near resistance. Consequently, the odds do favor a pullback in the next few trading days. How the indices handle the overbought condition will give us important clues about the current market environment. If we are still in a bull market, the indices will stay above support despite their overbought condition. Any upcoming pullback will be short and shallow, and it will be quickly followed by higher prices. However, if we are in a bear type of environment, most indicators will turn negative within the next 2-3 days and the indices will revisit the first downside targets (see table below) within the next 5-7 trading days. We would be taking profits on 20% of our longs at current levels, we would liquidate 40% on a close below support, and 40% on a close below the first downside targets." For the week of 8-28-06, most of the indicators we follow have turned down, while the Volatility Indexes are near the bottom of their most recent range. Therefore, the odds favor additional short-term price weakness. However, strangely enough, sentiment (see RYDEX chart below) is near levels that in the past 7 years have marked major bottoms. Consequently, the extreme negative sentiment ought to provide a "floor" for the major indices either at support or at the first downside targets (see table below). If the indices can defy the odds and they close above resistance by Tuesday or Wednesday, then the picture will turn rather bullish, and we ought to expect a further advance up towards the first upside targets. (Please read also "Upside Surprise."
Ike Iossif
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