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December 1, 2006

Red Stripe

Tape painters discovered a new color in their palette today: red. We wanted red today, and we got red, but I have to admit the late-day recoupment of half the earlier losses left a bittersweet taste in my mouth. Rather than enjoying a solid down day with confidence of more selling to come, we bears now have to spend the weekend wondering if the strong close will cause trouble for us next week.

A couple technical indicators still point in our favor. First, the candle formed by this session's action looks like a wonderful hangman. Second, momentum indicators are now in solid downtrends:

stock chart

Just before mid-session, intraday charts warned of the potential for a late-day bounce, so I booked some gains and scaled back my short exposure at that time. However, I have an itchy trigger finger to put those shorts back on and will be looking for excuses to do so early next week.

The ISM report on manufacturing showed its first contraction in 3 years, raising suspicions that the Fed will cut rates sooner than later. The news knocked the buck for another half percent (or was it just momentum?), and there are two other related observations that could provide clues to near-term market action. First, since July, any hint of an excuse for the Fed to cut rates has resulted in a frivolous buying spree. We did not see buying today, so perhaps a pertinent shift in psychology is under way. Second, with the dollar down well over a percent in two days, precious metals have not moved. This stasis may indicate metals are ready for a breather. However, if the dollar continues to slip hard and fast, I imagine metals bulls will find a renewed will to press prices higher.

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