Important Reporting Note

Starting in 2007 we're going to alter our reporting procedures. Updates will now be released in the same format as the full UTR report. This will allow us to update clients on important market developments on a more regular basis.

SPX still Supported by S1 (for now)

As we said in the last UTR we'd be holding our SPX long positions as long as S1 does not fail.

For many decades, it used to be that a weak Friday carried into Monday. However, that phenomenon has reversed. On Friday the Advance/Decline Ratio was 0.326. Historically, since 2000, buying the SPX at Friday's close when the ADR was < 0.5 and holding Monday only (one trading day) has produced the following results:

Trades: 36 with 64% winners
CARWI: +43%

Note:
CARWI = Compounded Annual Return While Invested. An easy way to remember what CARWI represents is that CARWI is the annual return you would have received if the entire year appreciated at the same rate as that while a system is invested.

Considering that the SPX is at S1 and considering the above historical bias, we feel that a Monday bounce off S1 is likely.

Having said that, we are becoming more and more convinced that a signficant correction is near and that the failure of S1 in the near term is likely. The uptrending channel is 40 SPX points wide and if the channel were to fail, it would be likely that the drop would be at least 40 points taking the SPX down to 1370 which represents only a 4% drop from the recent SPX top.

We feel that in order for the SPX to rally to new all-time highs in 2007, we need a more signficant correction in early 2007.

SPX Correction Scenarios

If the S1/R1 channel were to fail we'd expect a drop to S2 (1325), which if the break occcured on Monday, would be a 7% correction from the recent top.

Currently a drop to S3 (1275) is would be an 11% correction off the top.

We feel that the most likely case is a drop to just below 1300 which would be a ~10% drop from the recent top. So, assume the bottom comes in at 1290 and the the SPX rallies to a new all time high over 1527 by year-end, we'd be looking at a 18.4% gain off the low. We think this scenario is likely.

XAU Breaks Down

We planned on reentering the XAU on Wednesday 01/03/07. But as we said in the last UTR, "We'll abandon this position at a loss if the recent lows are taken out." Those lows were clearly taken out on 01/03/07 at our decision time and so we obviously did not take the XAU positions.

The XAU should have now found support at S3 which is well defined as the old SEP06 top that was retested perfectly in NOV06. Yesterday also had an opening gap that should fill as the XAU bounces off S3. A bounce to just under 140 seems likely.

The problem the XAU now has is that if we get a small bounce off S3 and then the XAU falls below S3, a Head-and-Shoulders Top (HST) will have been confirmed that calls for a drop of 18 points below S3 down to 114. However, as we've been saying for years, there is extremely strong support at around 120 and so that would almost certainly be the extent of the XAU drop. We do expect this scenario to develop and plan to be huge buyers at XAU 120.

Head-and-Shoulders Top (HST) in OIL?

We've been calling for oil to drop possibly as low as $40/bbl for months. It now appears that a HST will launch that final drop. In our opinion, the HST isn't quite confirmed yet but should be soon as WTI drops below NL.

If the HST is confirmed, a drop equal to the distance between the Head and NL should be expected. That takes oil down to OBJ around $40/bbl..