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August 2, 2006

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Unlike yesterday, stocks and metals moved in unison, both posting solid gains. Equities more or less reversed yesterday's losses, with the S&P 500 up about a half percent and the Nasdaqs up a full percent. Gold edged up a half percent. Silver, though, surged an impressive 4%. Miners reacted accordingly, with shares posting 2-3% gains as a group, lead by Pan American Silver which topped $20 to close up nearly 6%.

Given the bullish nature of today's session, I'm guessing that yesterday's equity declines were simply the release of selling pressure generated by end-of-month tape painting. We looked to be in full Fed-pause mode today, and the warning signs to which I alluded in yesterday's post appear to have been valid. How much rally we get before the Fed meeting is anyone's guess, but the markets seem to be setting up for an ideal sell-the-news event no matter what comes out of the interest rate cabal.

Given the fact that I place a higher probability on a Fed hike than do the futures markets, I decided to take some profits off the table by unloading my Pan American shares into this strength. Perhaps the move will prove to be premature, as was my sale last week of Encore Acquisition, but the name of this game is risk control. I sell positions when I no longer perceive a competitive advantage in holding them.

Overall, the market seems to already be under the spell of the FOMC, so trading in either direction will be difficult to do with conviction. I consider this week to be an information-gathering week, meaning I will, for the most part, be an observer reflecting on the action in order to solidify my post-Fed game plan.

For those of you excited by technical developments, Google decisively failed its symmetrical triangle with a $9 drop. It did so with fairly light volume... a requisite for downward resolution. It will be interesting to see how Google's action plays out. Many technicians react to events the day after, so unless GOOG follows thru to the downside tomorrow, extra caution may be warranted for those attempting shorts.

Disclosure: Short PAAS Puts; Long GOOG Puts


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