SPX Technical Price Analysis

SPX Breaks down Below Daily Uptrend line (S1)

We said in a past issue that we're worried about the possibility that the bullish year-end tendency has backed up a couple months (into SEP/OCT). We continue to worry about that and the possibility that the 2006 end of year will end up less impressive than most years. The SEP/OCT failed to be bearish. The OCT End-of-month failed to be bullish. With two seasonal failures in a row should we really trust the 2006 End-of-year bullish bias?

Since July06 the SPX has moved up 14% with a maximum drawdown of only 1.8%. After such a low volatility move up we are worried that the market is due for a significant correction.

We see three possible scenarios at this point:

1. With the recent failure of S1, the SPX has put itself under tremendous pressure. If it does not make a new high and then drops below NL?, then a Head-and-Shoulders Top (HST) will be confirmed implying a drop to around 1350. What would probably happen then would be that the SPX would find support at NL2? replicating in reverse the move upward since the early NOV low (Symmetry). Then the SPX would bounce a couple percent replicating in reverse the Late OCT06 drop from the Sh2? top. This would create a larger HST. If NL2? then fails, a drop to around 1315 would be implied. We believe that if this sequence were to occur, a major bottom would set up between 1300-1315 which would be a spectacular buying opportunity. A drop to 1300 would only be a 7.5% drop from the recent top. This would be historically rare during the end-of-year bullish period ( 14 cases of >5% drawdowns since 1942 => 18% of the time), but certainly not impossible.
   
   
2. Another possibility is that the SPX rallies back up to 1405 and then corrects setting up a horizontal trading range which will act as a flag. Eventually, when the SPX breaks out above R1 in 2007, the big rally we expect will be launched.
   
   
3. Lastly, the SPX break of S1 could be a false breakout and the market could just continue to move higher.

At this point we feel that each of the three scenarios have about equal probability of occurring. Therefore, there's a 67% chance that ~1400 is going to end up being more significant resistance to the SPX than we first thought.

Therefore, having gone long at 10/27/06 at 1377.34 and with the SPX currently trading at 1398 we're sitting on a 1.5% gain which isn't much but is still a winning trade (especially considering our Rydex leverage => ~2.2%).

As long as the SPX is above 1395 and below 1410 at our fund cutoff time, we'll sell to 100% cash. We consider this move to be relatively high risk. The possibility of having to buy at a higher level is high but taking a 2.2% gain in a month is not something we can complain too much about.

NASDAQ 100 Technical Price Analysis

NDX Support Remains Intact (S1)

The fact that the NDX support did not fail, implies the SPX failure was a false breakout. One concern we have is today's opening gap. Most gaps fill and we expect this one to do so as well during another test of S1. However, as we said last time, as long as S1 does not fail we expect the NDX to move higher.

NDX Relative Strength (NDX-RS=NDX/SPX)

NDX-RS has formed a line of support S3. If S3 were to fail we'd consider it a sign that the market in general is going to correct. We'd also consider it a signal to exit NDX related funds.

(The chart above can be produced with ULTRA via the "Graphs" menu item with NDX in the "Database Item or EDF Name:" field and SPX in the "Divided by:" field).

XAU gaps Above Resistance (R3)

The 120 level (S1) is the top of a horizontal channel that had been in effect for a couple years after the huge Head-and-Shoulders Bottom that caused us to predict the XAU move to over 160 back in 2003. Now 120 has supported the XAU four times in the last year. That is rock-sold support.

As we said when we took our long gold positions between 120-125, we expect the XAU to move back up to R1 (over 150). We will sell our gold positions near R1 at the first close above 150. We'll also exit after a break of the new uptrend line S2.

In the short term we expect another test of R3 as the gap is closed followed by a rally to R1.

Interest Rate Analysis