THE DOT - if this turns orange or red be alert

Monday, August 18, 2008

weekly technical update on NDX

A strong NDX performance has almost reached the target zone at 1975 and, as you can see, we will run into resistance around 1975 - 1995. The full moon effect in Aquarius, which stands for technology, will top out for now this week and go into a 2-week correction. One component will be the low of oil at the 112 target, which should now head back to 130 and get some steam out of the upside move. The other reason will be again on financials, which still run through big trouble with the auction rate bonds generating another new negative spin but basically the mortgages have still a steepening negative effect on balance sheets of banks and brokers. The XBD index has still to make a new low, therefore it's hard to say if that will happen now within those 2 weeks (less likely), but some of the reluctance has to be scared out of the markets for another upwave.

Rydex has climbed back up to .80 levels and the VIX seems to get comfortable around 20. Neither are extreme readings, but considering the overall picture with CPI at 5.6% (with the former calculation method, we are now around 9%), which is discounted for the fact that the CRB and oil came back sharply. On the other hand, the increases in the PPI, which reflected real-price increases were not forwarded to retail, so the whole impact of that downturn will not be seen in CPI, only the margin of producers might look better if they were unhedged. So CPI will not come back as steep and the trend remains higher. Anyway, it's just a correction. Nevertheless, stock markets are not discounting the economic situation yet.

Coming back to this week's price action, expect a pullback from a slightly higher high compared to last week and heading lower with a rising oil price into next week. NDX should be well bid around 1875 and SPX should at least retest 1250 - more downside will depend on financials. It's hard to figure it short term technically, but medium term XBD will drop to 110.

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