SPX Technical Analysis

We Expect more Downside for the SPX

After lazily sitting on the sidelines since our sell on 08/22/07 at SPX 1464.07 we are now looking to get back long with our accounts not managed by mechanical methods. Obviously, we missed out on some upside during the fall but for conservative investors looking to keep drawdowns low, buying highs in SEP, OCT just doesn't pay off in the long run. As it turns out, the SPX is now back below our sell point and we've pocketed three months of risk-free interest.

The SEP/OCT rally was launched by a Head-and-Shoulders Bottom (HSB) with neckline NL which was overcome on 09/18/07 confirming the pattern. In hindsight, the SPX did move about 3% higher topping out on 10/09/07 at 1565. But that move was far short of what should have happened after the HSB confirmation. However, if you ignore the down spike on 08/16/07 (a), then the HSB did meet it minimum implication as the height of the HSB pattern is about the same as the move after the NL break. (The two spikes (a,b) add confusion to the patterns (more about this below).)

NL has retained its importance as it supported the SPX at (c) and (d) and the recent move back up to R1. That's a lot of significant points on NL.

Because of NL's stature, we also consider it the neckline of a Head-and-Shoulder's Top (HST). This pattern isn't perfect because:

• after the left shoulder (sh) formed, the drop didn't actually touch NL
• NL is more downsloping that we'd like to see.

But we still believe that this pattern is valid and that yesterday's rally was a perfect retest of the HST's neckline NL.

The downside objective of the HST is 1410 (OBJ) to 1420 depending on whether you count the spike on 10/11/07.

Since OBJ is so close to S1 we think that the final down day of this correction may spike down to S1 and then rally back over 1410 similar to what happened at (a) and (b). This could even occur on this coming Monday which is usually a good day to buy to take advantage of the end-of-year bullish bias.

What if we've seen the Bottom?

Obviously the recent HST could be false. After all, we are entering a very bullish seasonal period that ends in early January. If R1 and NL are taken out to the upside before OBJ is met, we'll consider the HST a failure. In that case, we'll expect a repeat of what occurred after the break of R0. That is a retest of the lows similar to what occurred at (e).

At this point we plan to go 100% long at the first close below 1410 or on a key reversal off S1 similar to what recently occurred with (a) and (b). If NL and R1 are overcome to the upside, we'll go 100% long after the next 2% correction hoping for a repeat of (e).

The Pre-ThanksGiving Buy Signal (PTG BUY) and RSD

In 1994, we released the SEAS2 Timing System part of which buys the SPX on the Monday before Thanksgiving and sells at the close on the third trading day of January. In real-time, this bias has done pretty well. During the period the SPX has appreciated at a 14.7% annual rate which is 1.7 times the appreciation rate of buy/hold over the same period. The largest loss taken over the period since 1994 has been just 1.3%.

Using the PTG BUY as a filter and then trading a fast moving system such as RSD with leverage on the NDX can work out spectacularly well.

Notice above that when the SEAS2 Pre-Thanksgiving Buy Signal is in effect at the same time RSD in on a buy signal, at just 2x leverage, an NDX investment appreciates at a 5,937% annual rate with 92% winning trades historically. These only come around about once a year but still...

NDX Technical Analysis

NDX About Halfway Down ?

The NDX appears to be in a consolidation period (C1) similar to what occurred in AUG07 with C0. If the lower boundary of C1 fails, we'd expect a drop down to S1. This drop would probably be a 1-2 day event similar to what occurred just before C1 started forming.

At this point we will not take on NDX risk unless our buy criteria for the SPX occurs and the NDX is near or has reversed off of S1. If this occurs we'll forgo the SPX and invest 100% long the NDX.

RUT Technical Analysis

Possible Broadening Top Forming in the RUT.

Broadening Top Formations are ominous. They represent a confused and speculative market. If there is more downside in the future of the SPX and NDX, the RUT will probably reach S1. Can the RUT then run back up to R1? Definitely yes. That, would be a scary looking chart.

At this point, we see no good reason to take on RUT risk.

XAU Technical Analysis

Did the XAU get Close Enough to 200 ?

We sold our non-mechanically managed XAU related positions on 09/06/07 with the XAU closing at 151.79 . Obviously, this was very early but our gain was so quick and large, taking profit was too difficult to pass up.

Soon thereafter the XAU broke out of the horizontal trading range bound by R1 and S1. We expected this break to retest giving us a reentry opportunity but it just never happened. The R1/S1 range was 40 points wide. The break above R1 implies a 40 point move to XAU 200. Did the move to 195.5 satisfy this implication? Good question...

It looks as though the XAU has confirmed a Head-and-shoulders Top (HST) with today's close. This HST implies a drop to around 153. The top of the R1/S1 channel, which should provide support, is at around 160.

This XAU is noisy and volatile. While it is predictable with technical analysis, the patterns are imperfect and some leeway should be given before giving up on a pattern's predictions. If you look at the top XAU chart you'll see that R1 is more of a range than a perfect line. Having said all that, we expect the XAU to drop to somewhere in the vicinity of 160 (R1) and OBJ. But we remain bullish long-term on the XAU and metals in general.

We plan to buy XAU related positions at the next close below 160.