Short-term Forecast for August 23, 2006

| August 23, 2006

Synopsis:
The S&P 500 index closed moderately down today, confirming the start of a new short-term downtrend from the beginning of this week.

Technical Analysis:
The extent of the new short-term downtrend from Monday should tell us a great deal about the health of the intermediate-term uptrend from mid June. The breakout above near-term resistance at 1,280 last week reconfirmed the intermediate-term uptrend and suggests that this level should now act as support during any subsequent short-term weakness. Whether or not that new support level holds will be a key development moving forward. Technical indicators remain relatively bullish as money flow, MACD momentum and RSI back off of their recent 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 continue to favor the intermediate-term uptrend continuation scenario (70%/30%).

Treasuries

Synopsis:
The 30-year bond closed unchanged today as it continues to test the strong resistance near 110.

Technical Analysis:
The short-term uptrend from 8/14 closed unchanged as it continues to consolidate 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 109.80 would call last week’s breakout into question and suggest a return to support near 108.60, 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 continue to favor a move back into the rising wedge at the moment (70%/30%).

Currencies

Synopsis:
The US dollar index closed virtually unchanged as it continues to test resistance at the top of the current downtrend channel.

Technical Analysis:
The US dollar was essentially unchanged today as it continues to test strong resistance at the upper boundary of the intermediate-term downtrend channel from 7/19. A break above that resistance near 85.20 followed by a move above the previous short-term high of 85.60 would confirm a new intermediate-term uptrend from 8/7. Technical indicators remain slightly bearish as MACD momentum moves sideways in negative territory and RSI moves sideways just below the 50 level, but it would not require much subsequent strength to turn them bullish again.

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 intermediate-term downtrend channel resistance near 85.20 would be the first step toward confirming a new intermediate-term uptrend and forecast a possible test of the resistance at 87. Probabilities slightly favor the downtrend continuation scenario (60%/40%).

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 closed essentially unchanged as the downtrend from July remains in control.

Technical Analysis:
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 are trending downward and have recently 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 15.50 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 closed slightly lower after testing near-term resistance earlier in the session.

Technical Analysis:
The Gold Miners index closed slightly down on the session after briefly testing resistance at the upper boundary of the rising wedge that has been forming since the beginning of June. Rising wedges are typically bearish formations, so a strong move above its upper boundary resistance near 1,125 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 moves sideways just above the 50 level.

Outlook:
A move appreciably below rising wedge support near 1,060 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 1,125 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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