This Week's Wizard is Mike Paulenoff of MPTrader.com
The inability of the S&P 500 (SPX) to hold its gains Monday afternoon provides me with important new information about the relationship between the near- and intermediate-term timeframes, which suggests strongly that despite a very oversold near-term condition, the intermediate-term technicals are "running" and "ruling" the directional show.
Having said that, let's identify key support levels that will challenge the intermediate-term technical pressure: 1) 1404, which represents the July 2006 to present trendline; 2) 1391, which represents a level that will make the current decline the same distance as the July-Aug decline; and 3) 1370, which is the prior significant pivot low from 8/16 (when the Fed cut the Discount Rate).
Right now, we have to expect Monday's profile of early strength followed by afternoon weakness to continue until we see a powerful 2-4 PM advance.
As for the Nasdaq (as represented by the Q's), with the intermediate-term technical work nearing oversold and the near-term work very oversold, coupled with a declining pattern that argues that the downmove from 53.70 into Monday's low is complete, I am looking for a sustained rally in the upcoming hours that retraces to the 51.00 area. A climb above 50.25 is needed to trigger upside follow-through to the 51+ area.
Looking at commodities, the big picture of the DUG (the ProShares UltraShort Oil & Gas ETF) shows Monday morning's huge upside opening gap and follow-through that amounts to about a 6% climb from Friday's close.
More importantly, though, is the upside assault on the Sept-Nov resistance plateau at 44.00-44.50, which if (when) hurdled should trigger additional follow-through to test the Feb-Nov resistance line that cuts across the price axis in the vicinity of 49.00.
We will remain long the DUG in our model portfolio (hypothetical) -- in other words, short the energy complex for a while longer to see if the upside breakout above 44.50 can occur in the next two sessions.
Gold, like oil, looks lower. Spot gold continued down yesterday in what looks like a significant decline off a blow-off type peak. Here is what I wrote for subscribers on Friday morning:
The three salient features of the big picture view of spot gold are: 1) that the current vertical advance measures $205, which approximates the distance of the widest traverse of the proceeding 15-month coil pattern -- and usually identifies the optimal follow-through target zone -- in this case in the $830/40 area; and 2) that the relatively reliable 15-week cycle (low to low, see blue arrows) points to a next cycle "low" around December 3rd, which is about 3 1/2 weeks from now and represents 25% of the cycle length -- just about the position in a "right translated" cycle to expect a period of weakness into a cycle low. Finally, 3) my daily RSI is not confirming Thursday's new high in spot gold, which is a third cause for some concern that a correction is approaching quickly.
Clearly, any strength in the dollar could help dampen the commodity bull rush and buttress stocks.
My sense is that Secretary Paulson's comments right before Friday's close could be the start of the intervention process: first jawboning by Government officials to warn speculators that the dollar's relative value is too low, or moving lower too rapidly... and if that does not work to support the greenback (trigger short-covering), then all of a sudden, one trading day or evening we will here rumors that the Fed, or the ECB, or the BOJ is bidding for dollars in the fx intermarket.
If those rumors STILL fail to halt the dollar's slide, then we should expect actual intervention, likely starting in the Asian timeframe, and extending around the globe-- through Europe, and then the U.S. trading sessions, in a concerted central bank effort to hurt the speculators (dollar short position) and at the same time, make a statement to the market that the U.S. Government does NOT want to a lower dollar.
In any case, such a process should have a positive impact on the U.S. financial markets.
