Equity Upmove Tired - Market Analysis for Aug 21st, 2006

After last week's euphoric, good news rally in reaction to (among other things) the end of hostilities between Hezbollah and Israel (if only temporary), a foiled terrorist plot, better than expected PPI, CPI, and the sense that the U.S. economy is heading for a "goldilocks soft-landing to a well-managed slowdown... the stock indices were victims of some profit-taking on Monday. Is the weakness an indication that the "summer rally" is over?

Possibly. Looking at the near-term point and figure chart of the S&P 500, the fact that the column of X's broke to new highs on Friday but did not extend on Monday, and in fact was followed by a column of 0s, triggered by a decline that printed at 1296 -- shows that at the very least the near-term upmove from 1262 is tired. Beyond that, the enclosed chart tells us that a print of 1293 will trigger additional weakness while a print of 1302 is needed to start a new column of X's on the way to 1305/10.

Looking internationally, my work on the IEV (Ishares European 350 index) is near- and intermediate-term bearish despite a potential appreciation in the euro from 1.29 to 1.33. My work argues that the dollar is approaching a negative period, and by default the euro will attract forex flows, perhaps triggered by asymmetrical timing in the interest rate hike cycles of the U.S. (pausing), and Europe (raising)...

If my work proves accurate, then global equity markets will experience downside pressure during the next 8 weeks, while money comes out of the dollar and flow into gold (GLD) and euro (FXE).

As for oil, Friday's spike and upside reversal from 65.25 appears to have ended both the downleg from the 8/08 high at 72.34 and the larger July-August corrective process from 74.25. In either case, my work points to an initial recovery rally into the 68.20/80 target zone, and then to 71 thereafter.

Mike Paulenoff is author of the MPTrader.com ETF Trading Diary (www.mptrader.com), a real-time diary of his technical analysis on equity markets, futures, metals, currencies and Treasuries.

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