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The sea of red out there today (gold stocks excluded) might have some concerned about how close we are to important technical breakdowns, but the biggest technical issue I see right now is the issue of non-participation (negative divergence) vs. consolidation (healthy), as opposed to outright technical damage.

The failure of the S&P 500 to match the recent breakouts in the Dow Jones Industrial Average and Nasdaq 100 may either be viewed as a negative divergence, and a divergence that certainly makes sense given the non-participation in the financials which account for a little over 20% of the S&P 500, or, as a potentially healthy consolidation period and prelude to an upcoming breakout that will take the S&P 500 to new rally highs.

Until actual technical damage occurs, I must respect the consolidation view as long as our long-term indicators remain positive. Our primary long-term indicator, the NYSE Bullish Percent Index, is at 76%, the highest it has been since 1997. Anything 70% and above is considered "high-risk." However, this indicator can remain at high levels for an extended period of time. It has currently been above 70% since June. It could potentially stay above 70% until next June, we have no way of being able to predict that. What it cannot do is remain above 70% for an extended period while technical damage occurs. Very simply, if supply begins to overwhelm demand, meaning sell signals begin to overtake new buy signals, this indicator will, almost by definition since it measures buy signals vs. sell signals, reverse down. That's why I like it. Everyone who has an opinion on the market will one day be wrong. This indicator makes it impossible to stay wrong.

I'm continuing to look for signs of technical damage in the financials. Breakdowns would indicate to me that the "consolidation" has evolved into a negative "divergence."

The charts I'm watching that are currently holding onto positive territory but weakening are: The Philadelphia Bank Index (BKX), which will break down at 850; Citigroup (C: NYSE), will break an important support area at 42; Banc of America (BAC: NYSE), which violates the trend line from the March lows with a print of 76.50; and American International Group, Inc. (AIG: NYSE), which breaks the trend line from the March lows with a print of 58.

The charts that are already negative and weighing are: Fannie Mae (FNM: NYSE) and Freddie Mac (FRE: NYSE), of course; Wells Fargo (WFC: NYSE), which has already violated the March trend line; and XL Capital (XL: NYSE), which has also recently violated its March trend line.

Finally, on a tangential subject, I am very curious about the recent relationship between gold and the dollar. Gold futures continue to hold firm even during spikes in the U.S. dollar futures. Perhaps this is because, as Jason's article yesterday suggested, small speculators are currently the driving force behind movements in the metal. On a long-term basis, the spot metal has formed a large triangle on the charts that will break to the upside with a move to 368, and break to the downside with a move to 348. Sentiment (as Jason explained) and other momentum measures I follow suggest the probabilities favor a corrective move sooner rather than later. This might prove discouraging to small speculators in the near-term, but on a longer-term basis a corrective move back to the 328 intermediate trend line support level would, in my opinion, not damage the long-term bullish prospects for the metal.

Positions in FNM, Dec. Gold

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