Short-term Forecast for August 25, 2006

| August 25, 2006

Synopsis:
The S&P 500 index closed near unchanged today as the short-term downtrend from the beginning of the week remains in control.

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 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 down slightly today as it continues to test strong resistance near 110.

Technical Analysis:
The short-term uptrend from 8/14 closed down slightly 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 moves into 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 109.90 would call last week’s breakout into question and suggest a return to support near 108.90, 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 up again today as it confirmed a break above resistance at the top of the previous downtrend channel.

Technical Analysis:
The US dollar moved up again today, confirming a break above strong resistance at the upper boundary of the intermediate-term downtrend channel from 7/19. A subsequent move above the previous short-term high of 85.60 would confirm a new intermediate-term uptrend from 8/7. Technical indicators have now turned slightly bullish as MACD momentum approaches positive territory, MACD histograms move to new highs in positive territory and RSI breaks above 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 near-term resistance at 85.60 would confirm a new intermediate-term uptrend and forecast a possible test of the resistance at 87. The new intermediate-term uptrend scenario has become slightly more probable (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 slightly up today 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 slightly bearish characteristics: MACD momentum is trending downward and has recently broken into negative territory, MACD histograms 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 16.60 would be a bullish signal that would forecast a test of the long-term high near 18.30. Both scenarios are equally likely at the moment (50%/50%).

Synopsis:
The Gold Miners index closed slightly higher today near the middle of the pennant formation from early June.

Technical Analysis:
The Gold Miners index closed slightly higher today, ending the week near the middle 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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