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September 7, 2006

Bulls Still Lurking

Yesterday's mouth-watering action was followed by a bit of heaviness in the early going of today's session. The weakness took major indices such as the SPX and NDX to very oversold levels on an intraday basis, leading me to anticipate some sort of midday bounce. We did, indeed, see a bounce that managed to take indices into positive territory before a late-day slump brought them back near the lows at closing. Overall, the action represented a tug-of-war between bulls and bears for control of the market, with bears coming out marginal winners, though not to such a degree as to inspire a great deal of confidence for short sellers.

The good news is that we bears saw some follow-thru to yesterday's action, and the S&P 500 broke down out of the bear flag it formed throughout July and August.

stock chart

Back-testing of bear flags is not uncommon, so the next few days could prove trying for bears' patience. If this flag formation were to get busted, especially here in September, it would prove to be one of the more heinous bear traps sprung in recent memory. If valid, the flag projects the SPX to the 1170-1180 area, which is appropriately near last October's lows.

Bonds rebounded a bit today, as did the dollar, which managed a half percent gain as measured by the U.S. Dollar Index. This strength is a reflection of growing sentiment that the Fed may not actually be done tightening. Likewise, precious metals got bashed, with gold and silver falling 2.5% and 4.5%, respectively. Miners saw strong selling, down about 3.5% across the board.

This sell-off in metals may very well be the commencement of the final swoon of the consolidation period that began in May. As readers know, I have been anticipating such a move, and should this downswing continue, the next part of the plan will be to look for signs which could signal a turning point. I don't know what the compelling sign will be... perhaps volume patterns will show strong accumulation. There could be another capitulation similar to the one we saw in June or maybe detractors to the idea of a bull market in precious metals will become publicly too smug. Whatever the catalyst may be, I just hope to recognize it when it happens.

Disclosure: None

 

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