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December 14, 2005


Gold and silver continued to get punished today, down $14 and 15c, respectively. This sharp sell-off appears to be sparked by profit-taking by momentum players. There is still a lack of belief in a bull market for precious metals, and traders are quickly stepping out of the way at the first sign of trouble. On the other hand, there are droves of traders who have been twiddling their collective thumbs, waiting for a pull-back to get in on the game. If I am reading support levels correctly, the idle folk may start venturing in around $500 gold and $8.25 silver. From those levels, we may end Phase I of this bull market by launching into a blow-off top followed by a sharp bust, appropriately punishing all the disbelievers who came to the party late. Naturally, this is all conjecture on my part, but that is how I am reading things at the moment.

Also on the receiving end of the teacher's paddle is the dollar, which has dropped sharply two out of the last three days for a loss of about 2% as measured by the dollar index. I include its chart below to illustrate the relative size of this break. We are now clearly in a downtrend off the November 16 peak. Over the passed 18 months, trend changes in the dollar have preceded trend changes in equities by about a month. If this relationship still holds, we are presently due for a sharp drop in equity prices.

dollar index graph

Home builders caught bids today, and continue to be one of the most difficult sectors to read. The group is in technical stasis right now. Uptrends in companies like Building Materials Holding and KB Home still hold, while others like Toll Brothers and Hovnanian have seen serious damage to their charts. I believe the recent rise in long bond prices has given the homeys a temporary prop, and I will look to bond pricesÂ… which can be followed via TLT, among many other waysÂ… for clues as to when the next breakdown will occur.

News catching the wires this morning included a pair of downgrades on Apple by Bear Stearns and BoA. Apple shares have been sorely overbought, by my calculations, for two weeks, and I mentioned in an earlier post a desire to see a strong sign that Apple's parabolic move has been jolted loose before presuming to short it. Today's move saw Apple shares down nearly $5 at one point, before they recovered a bit to close down $3. Was this a jolt? As will frequently be the case, a sign my not be so obvious until after the fact. I decided to open a small short, but will cover it quickly if Mr. Market tells me I have been hasty.

Disclosure: Short BMHC, AAPL


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