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The TOs are rising, which means the indices ought to bounce higher during the first part of the week. However, the triple negative divergence implies that the upside potential is limited to 0.5%-1.0%.
SUMMARY The week of 09-22-06 we said, "Last week's price action was quite important because it gave us plenty of information with regard to the "set-up" going into next week. Knowing the "set-up" allows us to determine--at least for the short-term--whether the underlying trend remains intact, or there has been a change under the surface. So, let's examine the "set-up" at hand as we see it. First of all, the chart pattern of the SP/Dow/NASDAQ is the type that three out of five times results in one more marginal new high. Second, if you look at the table below, you'll notice that price is very close to support for all the major indices. At the same time--as we already pointed out--most indicators are near their respective support levels as well. In other words, the chart pattern, the price level, and the technical indicators all suggest that going into next week we have a "bullish set-up" and thus, the major indices ought to find support by Monday/Tuesday and reverse to the upside for one more rally towards the first upside targets which are roughly about 2% above current levels. On the other hand, if support is violated both by price and by the technical indicators, it would mean that the markets were unable to take advantage of the "bullish set-up." Such outcome is usually indicative of a change in the short-term trend--at the very minimum--and perhaps in the intermediate-term trend as well. In summary going into next week, if the markets stick to the "bullish set-up," the odds will favor some minor weakness on Monday followed by a reversal on Tuesday and a rally of about 2%. If the markets can not take advantage of the bullish set-up and they break support, then the odds will favor a further decline towards the first downside targets. If that turns out to be the outcome, then look for a failed bounce to go short. Until that happens, it is generally not a good idea to be short. XAU COMMENT: The current price pattern can evolve into a triple bottom or into a bearish continuation flag. Either ought to result in a 20-25 point movement in the index. If the XAU closes above 130 and then pulls back but it stays above 125, then the odds would be better than even that the price pattern has evolved into a triple bottom. On the other hand, if the XAU closes below 119 anytime during the next 5 trading days, then the odds would be better than even that the price pattern has evolved into a bearish continuation flag."
This week the major indices did take advantage of the "bullish set-up." The Dow and the SP rallied 1.4%, and NASDAQ rallied 1.8%. Coming into this week there is still a bit of room left to the upside--roughly 0.5% to 1.0%. Ultimately, however, the indices will have to deal with the multiple negative divergences. Investors who are not very familiar with technical analysis may wonder what causes the negative divergences and what they mean. Negative divergences of the magnitude and nature we have observed during the latest rally are caused by its "narrowness." The rally has been very selective with most issues failing to participate. For example, although the Dow made new highs, the Transportation Index, the Mid-caps, the Russell 2000--just to name a few--have failed to do likewise. Usually when a new bull move starts we see wide participation right at the very start. It is very, very rare for a new bull move to start narrowly and widen later on. Consequently, past history suggests that the latest rally is more likely the "end of something" instead of the "beginning of something." Ike Iossif
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