Short-term Forecast for August 21, 2006

| August 21, 2006

Synopsis:
The S&P 500 index closed down slightly as it consolidated recent gains.

Technical Analysis:
The short-term uptrend from 8/15 pulled back slightly today as it began to consolidate last week’s sharp gains. The breakout above near-term resistance at 1,280 last week reconfirmed the intermediate-term uptrend from 6/14 and suggests that this level should now act as support during any subsequent short-term weakness. Technical indicators remain bullish as money flow, MACD momentum and RSI have all moved to new highs.

Outlook:
A close above the recent short-term high near 1,302 would both reconfirm the current intermediate-term uptrend and predict a possible test of long-term highs near 1,325, while a move below new support in the 1,280 area would call last week’s breakout into question and suggest that a test of long-term uptrend support near 1,245 had become more likely. Probabilities currently favor the intermediate-term uptrend continuation scenario (70%/30%).

Treasuries

Synopsis:
The 30-year bond was down slightly as it consolidated recent gains.

Technical Analysis:
The short-term uptrend from 8/14 moved slightly lower today as it consolidated last week’s sharp gains. Although Friday’s breakout above resistance at the upper boundary of the rising wedge was slightly bullish, there are two very strong intermediate-term resistance levels near 110, so at least some short-term weakness is probable before substantial additional gains are possible. Technical indicators remain slightly bullish as MACD momentum moves up to test recent highs and RSI approaches overbought territory for a second time, although the initial signs of a negative divergence have developed between price action and the aforementioned technicals.

Outlook:
A move back below the upper boundary of the rising wedge near 109.70 would call last week’s breakout into question and suggest a return to support near 108.50, while a move appreciably above strong resistance near 110 would reconfirm the intermediate-term uptrend from the end of June and predict substantial additional gains. Probabilities favor a move back into the rising wedge at the moment (70%/30%).

Currencies

Synopsis:
The US dollar index moved moderately lower today, suggesting a possible retest of the previous intermediate-term low near 84.

Technical Analysis:
The short-term downtrend from early last week moved down to test the recent lows of the intermediate-term downtrend from mid July. Technical indicators remain slightly bearish as MACD momentum moves sideways in negative territory and RSI drifts slightly lower well below the 50 level.

Outlook:
A move below near-term support at 84.50 would reconfirm the intermediate-term downtrend from mid July and predict a test of the recent lows near 84, while a move above the previous high near 85.60 would confirm a new intermediate-term uptrend and forecast a test of the resistance at 87. Probabilities currently favor the downtrend continuation scenario (70%/30%).

Precious Metals

The Gold Currency Index (GCI) is a composite of gold prices in the currencies of 10 of the largest economies in the world as defined by GDP. It is therefore currency independent, reflecting the true, intrinsic value of gold as an international currency itself.

Synopsis:
The GCI moved higher today as it consolidated recent losses.

Technical Analysis:
The short-term downtrend that began at the beginning of the month bounced off of support at the bottom of the Bollinger bands today, returning the index just above the 60-day moving average. The intermediate-term downtrend that began in mid July remains healthy as technical indicators continue to exhibit moderately bearish characteristics: MACD momentum is trending downward and has recently broken into negative territory, MACD histograms have just made a new low in negative territory and RSI is coming off of a new low below the 50 level. A pennant has been developing since the long-term high in early May, and intermediate-term direction will likely be determined by either the breakout from or breakdown of that technical formation.

Outlook:
A move below intermediate-term pennant support near 15.40 would constitute a bearish breakdown, reconfirm the intermediate-term downtrend from mid July and suggest a test of near-term support near 14.50, while a breakout above intermediate-term pennant resistance near 16.75 would be a bullish signal that would forecast a test of the long-term high near 18.30. Probabilities slightly favor the intermediate-term downtrend continuation scenario at the moment (60%/40%).

Synopsis:
The Gold Miners index rallied sharply today after testing near-term support levels for the past week.

Technical Analysis:
The Gold Miners index rallied over 4% today after testing support at the bottom of the rising wedge that has been forming since late May. Rising wedges are typically bearish formations, so a strong move above its upper boundary resistance near 1,120 would be required in order to generate a bullish signal. Technical indicators remain neutral to slightly bullish as MACD momentum moves sideways just above the 0 level, MACD histograms continue to trend sideways right at the 0 level and RSI holds the 50 level.

Outlook:
A move appreciably below rising wedge support near 1,050 would constitute a bearish breakdown of the formation and forecast the start of a new intermediate-term downtrend, while a move well above rising wedge resistance near 1,120 would constitute a bullish breakout and suggest that a test of the long-term high near 1,250 had become more likely. At this point, both scenarios are equally likely (50%/50%).

Category: Forecasts, Short-term Forecasts


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