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Since our last missive, “BRUSH FIRES”, dated June 11, 2006, where we referenced that the markets were in a short-term oversold state and that one could not rule out the possibility of some “Summer Fun”, whereby the potential existed for the hoses to be brought out to douse the existing brush fires, the markets have recovered smartly from their mid-June lows. However, we also noted that should such scenario materialize and worldwide equities markets enjoy a bounce, we also cautioned that the strength of such move would need to be monitored by both investors and traders alike, in order to determine whether the flames had been extinguished, or, would we witness further downside testing, most notably the October ’05 lows? Which brings us to today. For the past couple of weeks, US markets have seemed content in digesting (consolidating) the recent upside thrust from the June lows. While the overall picture continues to suggest that indecision remains the theme, evidenced by the lack of leadership in various sectors and industries, we are taking notice of the potential dandruff developing throughout several indices and indexes. More specifically, when one observes the 1-Year daily charts of the DJIA; S&P 500; Russell 2000 and the S&P Mid-Caps (See Below), it’s fairly evident that all of the above are potentially forming inverted H&S (Head and Shoulders) patterns, which may suggest short-term bullish implications moving forward, and we emphasize “may”.
Having said that, it’s still premature to come to any such conclusions as to whether the patterns will ultimately materialize, as the right shoulders continue to evolve. On the other hand, should the patterns fail to develop and breach their upside necklines, then we may just witness a resumption of the downside mojo, whereby the June lows may come into play again. Nevertheless, it’s something that we’re watching with a very close eye. Whether or not the above scenario takes place is yet to be determined. However, even if the patterns should prove successful, we think the likelihood of witnessing new highs, although possible, are not probable. And if we’re reading the tea leaves correctly, we suspect that the October ’05 lows will be tested in the forthcoming months ahead. When, one may ask? We don’t know. Yet, if we had to put our best foot forward and venture a “guess”, perhaps sometime in the late August/September time zone. Therefore, the markets remain far from out of the woods in our eyes. With the COMP already having flirted with their October “05 lows, as well as the Semiconductors (SOX), we believe it’s only a matter of time before its brethren follow suit. While many are succumbing to the theory that an intermediate-term low within the confines of a bull market is in place, we couldn’t digress further. The environment remains challenging and tricky to say the least, where opportunities can be found on both sides of the ledger. “Stock picking” remains the name of the game in order to garner some success. And should one choose to enter the fray, just be sure to identify your risk parameters and adhere to such. A few words on Gold, Silver and Oil. While we maintain our core positions in each from the Summer of ’03 and continue to view the climate as a secular bull with much, much further to go (Gold= $1,500; Silver=$40; Oil=$100-125 minimum 3-Year targets), perhaps some further consolidation will be necessary before the next major up leg ensues. Nonetheless, for those seeking protection from the machinations of the US Fed and central banks worldwide, pullbacks in the above referenced may provide wonderful long-term buying opportunities. Plan you trades and trade your plan!!
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INFORMATION The opinions of FSU contributors do not necessarily reflect those of Financial Sense. |
