May 26 2006 The beginning of the end, or the end of the beginning?

It strikes us that the present situation of the market is more precarious than at any time in the last several years. We could be wrong of course (and often are, because the preceding statement is a question of interpretation, not chart analysis). Precarious we think because the market is at a tipping point: Nose up against the all time high (a daunting prospect) with volume picking up on the sell off and analysts running around like chickens littles. It is a time of uncertainty. So what does the chart say? Cluck Cluck. This one says the price decline is stalled at the previous low and support.

But, while the Dow is at least not overtly bearish at this point, the S&P after giving a very bearish false breakout has sliced through four lows and rests at a lower level of support. It has rebounded vigorously there, but as may be seen a nine month trend line has been broken. Signs like these are ignored at the investor peril.

Let us put it this way. If you lighten up some and it goes up all you have lost is some paper profits. And it may just be a case of selling too soon. We have often sold too soon and marveled later after bad breaks at our wisdom. If it should sell off and start the inevitable correction you can sell some more and pat yourself on the back for following good technical procedure.

The NDX is even more negative. Take out the October low and some blood could be shed. Two important trend lines are broken here. We would certainly examine our tech issues and prune any with bearish charts.

If you have a particular issue causing you grief send us the symbol and we will look at it.

bassetti@edwards-magee.com

The silver chart is perhaps a study for what is happening in securities. A failed signal up, a sell signal through the triangle trend line which so far has not followed through, and the entire pattern could morph into a trading range, which is what might also happen in the securities.

Would we be buyers here? Yes, because the stop is so obvious -- 3% under the May low. This is a spec gut trade. There is no signal to make such a trade.

Like silver the gold is in a downtrend, looking for support, which it might find here. Again, the stop is obvious, under the April break by 3%.

The potential damage of the ETFs (GLD, SLV) is limited by the lack of leverage so we think even conservative investors could dip in a toe there.

May 19 2006 Midnight? Smashing Pumpkins?

We speculated (our most prominent character flaw) about the market turning into a pumpkin in our letter quoted in Barron's May 8. Little did we suspect that the light at the end of the tunnel was a pumpkin bearing down on us. And it may not be, but the signs are not benign. An important trend line broken and a weak basing point taken out. Here. Worse in the other major indices. Don't just watch in horror. Lighten up you positions. And lighten up more if the April and March lows are taken out. Is this the beginning of the end? Won't really know till the October low is taken out. But nasty portents.

April's low taken out. March's low taken out. Important trend lines broken. AND May breakout proved to be false signal. You should remember from our previous writings, as well as those of Schwager that an apparently valid signal which is quickly invalidated is excellent set up for a signal in the other direction. Magee called it an end run or false breakout. Bull trap.

The suddenly deteriorated situation is confirmed by the NDX. We have been bleating for some time about the true state of the market being more fragile than the Dow showed. Lambs to the slaughter.

Even in Silver, as shown here you should be hedged out or short. Failed breakout, 1 day island reversal, breakaway down gap, broken trendlines. A god send or a da Vinci code invitation to those lost lambs who didn't get long for the last run up. Buying opportunities lower.

Same in gold. For the conservative wise investors will be buying the precious metals ETFs lower and holding them for years. We lightend up considerably in the ETFs before the break, enough so that our positions there will be left to take the equity drawdown and catch to perfection the turnaround. When the downwave ends we will be doubling up for the next wave up. When will that be? Never know till afterwards.

While this is scary (and looks not unli8ke the lead up to the great Reagan crash of 1987) price would have to take out the low around 11060 to signal the beginnings of a trend change. Of course, if Monday and Tuesday see a crash, remember, you read it here first.

May 12 2006 Couldn't be better...

Last week Barron's quoted our email letter. Never mind. We know what we said, and so do you. What caught our eye was not our letter which as always was witty and as verbally felicitous as Galbraith, to whom we paid tribute and homage, (well, maybe as felicitous, we hope, could be, might be someday, we keep working at it and praying at the shrine of the great economist), what caught our eye was the letter from the chap right after us who after citing all the wonderful fundamentals said like Goldilocks it couldn't be better. We immediately went white at the gills and rushed out to short the market, but the market was closed (what kind of real market is closed? Just the New York club). The reason of course was the old market story we bore our graduate students with. To wit, or unwittingly, J.P. Morgan took

Here is why we have trouble seeing anything but a bull trap if the market breaks the old highs. For all intents and purposes this is the first attempt of price to take out the old high. Standing like a wall against that attempt is the tulipovolume from the great bubble.

the train down from New York to Pittsburgh to visit his steel investments. He toured the steel plants with the General Manager, those great roaring magma red streams of liquid money with dwarfs from Inner Earth running around making steel. At the end he asked the GM to sum it all up. "Couldn't be better," said the GM. J.P. went back to his hotel that evening and sent a telegram to his New York broker. "Sell all my Steel."

All week long there was an air of weirdness in the air. (Some of these letters will be remembered and quoted and idolized forever in the literature of finance.) (In fact that sentence (not that one, the one before that one) may rank right up there with "It was a dark and stormy night...".) And, where is the Panda Punctuation Lady when we need her? It started with last Friday's runaway spike day and lasted

till (but not necessarily ended with) this Friday's continuation of the break. Brian Brooker, our sometime collaborator and most excellent graduate student said it looked like an upthrust after distribution (Wyckoff), and damned if, in retrospect, this observation seem to have some validity, though, before hand you would have said the pattern wasn't right. Anyway, things have been a little surreal anyway since the silver break. In view of the fact that gold and silver were going straight up probably a consolidation to be expected. Look, when the local financial writers for the Chronicled and the web talking heads start talking about how gold is going to 1000 time to hedge your positions. Top indicator.

Skip the brilliant prosing and get to the point. What does it all mean? And it was flowing so well. Well, that might have been the clock striking midnight in the market, but as always you never know till later. Not enough data to change a trend, but enough to scare the pants off you. Remember the old market maxim: On a limit up day sell some. That maxim is different of course for plungers, which is, on a limit up day buy some more. Given the position of the market price -- that is knocking at the all time high it wouldn't hurt to lighten up. We have been bemused and amused by the ability of the price to make this much progress, as we have pointed out in our comments about the number of times it took price to surmount 1000 in the great mule markets of 1965-1982.

Gold also took its licks as shown in the next to last chart. But the longer term gold picture is shown in the last chart. We are watching gold with close attention as we may see a consolidation period like that which took place in April. Depending on the market circumstances we may hedge our long positions. As for our GLD positions, yawn we would have to see the end of the trend before closing those.

May 5 2006 Cinco de Mayo, gringo. How about a day without a Congressman?

5th of May, day the Mexicanos defeated the French in Puebla, for our readers who wonder about our dishwashers, tomato pickers, etc. Anyone who thinks dirt cheap labor (illegal or not) is a disadvantage is invited to remember what a country we were able to construct using slaves. Not a big thing with us, though we are hispanophiles. Big thing here is this trend. Knocking at the all time high. We think all of us "grumpy old bears" as Professor Hank Pruden calls us totally misunderestimated the effect that $10B a month war spending would have on the market. Well, actually

we didn't know it was that much because they consistently lied about it. But it was there in the market for all to see and is the fount of these trends. Omigod! They have admitted to war costs of $480B m/l costs of the war to here -- meaning the trillion dollar costs we predicted at the beginning of this dandy little war are going to come true. Don't get mad. Get rich. Like here where the S&P is breaking out.

Even the XMI is breaking out. Prof. Pruden is predicting 14,400 in the Dow.

We are just bemused. If not amused.

Meanwhile the precious metals markets are a function of the deep distrust of the really sophisticated and cynical. And likely to remain so. We have been long the futures and the GLD and wishing for the silver ETF.

We think this pattern in the silver, where it has not made new highs is due to uncertainty about the ETF. We are not long the silver right now, having been summarily chased by the break (an erroneous trade). We think we should be long, but are pretty cautious at the moment. Subscribers to the precious metals letter can be informed by email of our trades.

For technical (computer) reasons the yearly letter is divided here. For earlier letters go to