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Weekend Update

"And we're down to the 12th inning..."

In this weeks wrap-up -

In this weekends wrap-up we will cover

1. Fundamentals - The fight over, and issues of outsourcing.
2. The Current Technical Outlook -
  2.a. Short term Perspective - Channels, Indicators, Counts
  2.b. Long term Perspective - Elliott Counts, and some targets
  2.c. Gold and Silver
  2.d. Leaders and Shakers
3. Sentiment Indicators
  3.a. Volatility Studies - VIX
  3.b. Put / Call Ratio
  3.c. Summation Ratios and other Oscillators
  3.d. Commitment of Traders
4. Conclusion


The question on every investors nervous mind this week is "Do I buy on this dip." It has certainly been nerve wracking for the longs watching all the good news drift by on the ticker without a positive reaction from the market. Moreover, we have not had the V shaped recovery that we have had at the bottom of every other "dip."

Yes, the bears were certainly partying this week with the market ending the week close to its lows, and gold teasing the fabled 400 mark. This does not mean that they should be without caution, since the market could pull out a hat trick and rally at any time. Things certainly feel a bit different this time around due to all the factors that seem like they should have turned this market higher a long time ago. The dollar continued its decent although more and more people are beginning to take notice (sign of a bottom?).

The big story this week, is the ongoing protectionist sentiment simmering up in Washington. I have a feeling that after these latest salvo over at China, tariffs could begin flying left and right. Europe has already gotten the WTO approval to slap a couple tariffs on the U.S. for our illegal steel tariffs. Funny how we get pissed about Europe's ban on our genetically altered meats, while we're busting out our very own tariffs. Anyways, Greenspan commented this week on how he thought this was all a very bad idea, along with other well known "economic figures."

Anyways, I thought I would post a email conversations I've been having with folks in response to these mailings.

First is a comment from Brian Hurley concerning gold manipulation.

I saw your recent article on the ed bugos website. I have no problem at all with most of it and I appreciate it that you are a bull on gold, as I am, but I really think that when perhaps the most significant factor determining the price of gold, at least in the short term, is central bank manipulation. you discuss the technical view on gold and completely ignore the elephant in the living room. forgetting for a moment the indisputable evidence of manipulation over the years, you don't even mention the central banks as a factor. i know that doing so can be tiresome and that the criminal central bank mafia can do pretty much whatever they want with absolutely no disclosure making it difficult to prove definitively, but to fail to mention these activities at all is living in some kind of perverse Disneyworld. furthermore, since the mainstream financial press clearly act as propagandists for the fed, you may want to distance yourself from them when giving your opinions. It is crystal clear that the fed intervened today, (Friday), as the stock market sold off on terrorist concerns. if gold breaks above $400 and holds, the financial press wont be able to ignore it and the investors will pile in, making it even more expensive to manipulate. the fed and its criminal counterparts around the world don't need a lens focused on rising precious metals prices resulting directly from their incompetence. they also don't need a perceived alternative to fiat currencies which they are creating in record amounts out of thin air. so they manipulate the markets, (and not just gold, currencies, bonds, and equities also). we count on financial journalists with a contrary, or at least honest, view to expose the monetary fascists and their destruction of our currency. they are few and far between. i can imagine that it is perhaps dangerous to expose these criminals but if enough people do it, it will become less dangerous.

First of all, thanks for the feedback -- there aren't many people out there that care to say more than "good job." As for manipulation, I have mentioned it before in reference to the market as a whole (discussing the PPT). Concerning gold, I agree with you that there is a degree of manipulation going on in the markets. The legislation regulating short selling vs. going long the metal - allowing the short sellers to short more gold than there exists while the longs cannot hold but a small number of contracts toward expiration. However, this is typical of markets that have been in bear markets for a long time since larger players have made a business out of playing the market in one direction fleecing those that jump into it. However, I do not believe that manipulation can have any significant long term effects on a market, just like market history shows us that those that corner a market cannot do so for long (jesse livermore discusses manipulation for two chapters in his book Reminiscences of a Stock Operator). A manipulator can effect day to day prices.. and even hold it artificially low for a little while, yet no market can resist the general pressures and conditions of the market. Said "manipulators" can work all they want, but historically no market has been successfully manipulated over any significant period of time. As for Gold and Silver, they are very small thinly traded markets with only a couple dominating players.  Because of the long term bear market, those players are still heavily short -- they are the ones that carry the majority of the short position on gold (check out Commitment of Trader reports on www.marketpit.com). So I agree with you in a sense that the gold and silver markets are manipulated in the sense that there are big players in the market who's interest lies in keeping the prices down. However, any manipulation attempts, by the government or whoever, are obviously unsuccessful because the price has advanced at a steady pace forever 2 years now. I would disagree with the fact that the government is desperately trying to push the metal down, because if they did, they would have done so by now. It is currently in the administrations interest to decrease the value of the dollar because of debts -- and so they are letting it fall slowly. Gold is rising along with the rest of the commodity sector because of this and other supply/demand, currency issues. I also see that you agree that Gold and commodities are in a bull market. However, even though it is going to be going up over the next couple years, it is going to correct sharply every now and then just like every other bull market that has sprung up -- and I'm talking 10-20% drops. This is completely natural and healthy since it causes most people to panic and not stay in the market on the ride up -- it's why most people never ride the whole of a bull market because they panic out. As for the drop on Friday, there were plenty of reasons for it to fall. First of all it was at the top of it's 2-year channel, overbought in the short term, and overly bullish being so close to the 400 level -- CNBC was even scouting it out. Today (Monday) we are right back up to those levels. Generally, I think people are too quick to yell "manipulation" when something happens that they don't think should be happening -- however, only in rare cases is it anything but the usual up-down action that occurs in every market -- bull or bear.

Or at least that's my perspective..

thanks for responding. I started trading on the cboe in 1980 and I've been involved with the markets in some capacity ever since. I have never in the past been thought of as a conspiracy theorist. I have seen some things, (front running merger news, etc.), but I never imagined government sponsored interventions in the markets. in my mind, that all changed during the Asian currency crisis in the late 1990s. after a mini-crash, the stock averages turned around on a dime. there was an actual report by CNBC of a rumor of a "surprise" rate cut by the fed which was announced shortly thereafter. anyone who believes that Greenspan didn't tell his cronies at the big houses on wall street about his impending move is an idiot. the fact that they were trading on nonpublic, market moving information didn't seem to matter to anyone. since then I have seen gigantic selling of their own currencies by Asian central banks in order to prop up the dollar. I've seen record and increasing amounts of purchases of u.s. treasuries by these same entities for the purpose keeping interest rates low in the u.s. so our consumers can go further into debt to purchase their products. there is only incomplete and delayed information about foreign bank purchases of our equities but, from what I can gather, these purchases tend to increase at "critical" times. it wasn't until the past year that I have become aware through GATA and other sources about world central bank and bullion bank manipulation of gold. for the size of the market, this is perhaps the most manipulated of them all. also, when i refer to these people as criminals and monetary fascists, i don't use the terms lightly. government control of private sector markets is fascism, pure and simple. and destroying the wealth of  Americans by debasing our currency and selling our gold is criminal. I was  never a conspiracy theorist but now I think that whatever I believe they are  capable of is probably mild compared to the truth.

I agree with you that the markets in general are manipulated in order to "protect" it. The PPT has made it's presence obvious to all those who follow the markets -- establishing floors and then conveniently news comes out right after -- triggering rallies -- etc. It is all pretty easy to do in the futures pits. The ethics of doing this are of course questionable although the idea would imply that they are protecting Americans in general from "panic selling" that is supposedly un-justified.... However, they cannot compete with the market in the longer term without losing -- yes they can slow it down -- yes they can even turn it for a while -- but they were jumping in the whole way down during the NASDAQ crash yet it still cratered despite their best efforts. Similarly, because of the currency issues I believe we will face, with no major currency offering any stability, Gold WILL rise, no matter how much big players want to keep it down. What I think they have been doing is trying to unravel their shorts without spiking the market -- good luck I say. That is why the 400 level could be a major short squeeze point. By the way, nothing wrong with being a conspiracy theorist ;-), I am one myself.


See, emailing isn't so bad - so if you have any comments or questions don't hesitate to contact me. One of the best ways to learn new things is through discussion - and it's never too late to learn, or teach something new. And just to top off last weeks discussion, I ran into a great picture on www.despair.com concerning last weeks topic.

Now on with the charts!

2. The Current Technical Outlook –

2.a. Short term Perspective

The bears got out their party hats as most index's crossed below their long term support lines. Can't say that we didn't see this one coming with solid divergence on all indicators. Although trend line breaks like this usually indicates a top is in place, the shorts should be wary of a rebound until we put in a lower low, and a lower high - this would confirm that a new downtrend is in place. Notice how the RSI and the MACD broke out of their wedge like formations - patterns like that usually confirm a new move. The only worrying thing for the bears this week was the early decline in the –DI indicator which should rise strongly if this downside is to be trusted. Lets see what the short term brings...

Last Weeks Forecast : Although the market could fool the bears once again, this week I am going to lean decisively towards the more bearish outlook IF we dive past 1925 head first. Any hesitation early on in the week will give me reason to rethink the bearish posture. However, if we do pass 1925 in such a manner, I wouldn't look for an end to the move until we reach the 1850-1875 level.

Well we decline down to about 1880 and have stagnated at that level for now. Now due to the extraordinary amount of divergence, I expect a strong kick back up to about 1925-1940 before continuing to the downside, although if this is going to be a strong down move, we could fly below our previous lows at any time. Another possibility is that we are in wave 4 right now and have 5 yet to go which will end at about 1850 with plenty of divergence. Shorts could be placed right below our recent lows (I'm sure a lot of people have so the market could decline fast) and longs are no doubt in place right at 1920.

Next Week : Unless we go flying below Friday's lows, I expect a good bounce from here up to the 1925-1940 level. If we happen to go below the lows, the decline could be very swift all the way down to 1850 or lower. Just how quickly people are going to panic is the question.

Charts of Interest

Yields continued south as expected - and they could continue south as the market falls. The RSI is about to break out of it's wedge which would confirm the direction for me. The dollar is still the big question since capitulation in the currency could cause a serious panic in the bond market since foreigners own the majority of the market. An interesting article on mortgagebankers.org (http://www.mortgagebankers.org/news/2003/wk1119.html) talks about how there are still A LOT of people taking out adjustable rate mortgages despite rates being at all time lows and rising. A quick rise in rates could really wreck havoc on these poor unsuspecting folks. The mortgage brokers of course love it since all the risk of carrying the mortgage is placed on the consumers, and they no doubt encourage people to take the adjustable option.

2.b. Long term Perspective

We dipped down below the 50-day although we have yet to break it decisively. It wouldn't be at all unexpected to see this market head down towards the middle of the pitchfork formation, and if we break down from there, test the 200-day MA. Keep the bearish optimism in check, however, since there is still plenty of potential for this market to bounce in the bears face at any moment. Until we see a decisive turn in this market, keep a close eye on any short positions.

2.c. Gold and Silver

Owwwhh... so close! Gold just scratched the 400$ area before falling back down to the 395 area. Although disappointed, I'm sure that the gold bugs feel that the 400 level is now inevitable - with the futures traders at JP and Stanley no doubt sweating about their heavy short positions. However, I still have the eerie feeling that gold is going to correct sharply when ‘bugs' least expect it (i.e. right at the 400 level.) In order to catch such a move, we have the lower support line in place that should not be broken if gold is about to blast through 400. Therefore, my ‘forecast' on gold, is that it is either going to blow through the 400 level, or we are going to se a sizable correction down to the 360-370 area - if not lower. I know a lot of you are very bullish on gold, but even CNBC is beginning to smile at the gold funds, and analysts have been commenting about how they may be good buys. Granted, we are going from ‘no coverage' to ‘some coverage,' but the growing divergence could play out at anytime making the majority once again bearish on the precious metal.  What could cause a sharp drop in gold - action in the dollar of course.

The poor, poor dollar drifted even lower this week as Chinese trade issues plagued it with the threat of U.S. protectionism. Things defiantly don't look too good for the greenback as major banks are bailing out of their long dollar positions (even after one of their own analysts came on TV and expressed his bullish views on the dollar - proves they are all full of it I guess.) Now I recommend that everyone sticks with the trend - which is down - since fundamentally, there aren't a lot of reasons to buy the dollar at this point. In fact, the dollar looks to be in danger of capitulation if it breaks 90. However, I would not be surprised to hear Greenspan or the Treasury secretary say something bullish about the dollar and see it rally all of a sudden since it is in their interests not to see the dollar fall too quickly. So if your short the dollar for the longer term, I wouldn't worry about it since the trend is obviously down. However, for the shorter term traders out there, don't get caught on the wrong side of a spike reversal - the faster the dollar falls, the more likely the FED is to "issue a statement." In fact, I hope they do, because the markets reaction to "good news" would be very telling of it's current strength.

3. Sentiment Indicators

3.a. Volatility Studies

VIX is rebounding slowly off its lows. The real question is whether this index is going to be accelerating anytime soon. If this indicator passed 22 it would be a good signal that volatility is returning to the market - just don't expect it to do it in one fell swoop.

3.b. Put / Call Ratio

We have yet to see a large spike in this index which would indicate that most people don't think this downside is ‘for real.' This is very encouraging to the hungry bears.

3.c. Summation Ratios and other Oscillators

The summation index's have signaled a strong sell signal surpassing the 300 mark and the April low. The next test is at the 0 level.

3.d. Commitment of Traders

The large and commercial investors went MASSIVLY short this week - they obviously believe that we have a real decline on our hands. They were premature in going short last time - are they making the same mistake again?

Charts available from www.vtoreport.com.**

4. Conclusion

I would venture a guess at this point that we won't be soaring to any new heights anytime soon, judging by the markets lack of enthusiasm for good news, and the decisive amount of selling over this past week. Now, if the market does rise, it won't be the first time I am wrong, but judging by the action in the dollar, the extensive divergence, and the sell signals coming up on the majority of the long term indicators, I am feeling pretty good about this one. Now I think we are going to rally next week, but I don't think we are going to see the energy we saw during the last rally take us to a higher high.

"We're coming down to the 12th inning on this one folks... trend lines don't fail me now."

The best of luck trading...

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