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December 19, 2005
Consolidate and Continue, XAU Holding Breakout and Internet HOLDRS Nearing Resistance
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After a nice big surge in November, the major indices have moved into a December funk for the second time in two years. At present, I consider the current this “funk” a trading range or consolidation after a sharp advance. Trading ranges can break either way and odds favor a continuation of the prior move, which was up. Moreover, consolidations often occur near the mid point of the entire move.
As the 2004 chart shows, the Nasdaq consolidated near the midpoints of the Aug-Dec advance and the Jan-Apr decline (black boxes).
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On this next chart the Nasdaq consolidated near the midpoint of the May-Jul advance. This consolidation lasted a month and ended with a breakout at 2100. As long as the December consolidation lows hold, the bulls are on firm footing and a continuation higher is expected. The advance from mid October to late November was one big move and there could still be another.
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The Internet HOLDRS (HHH) led the Nasdaq in November and then turned flat in December. The stock established short-term support at 66 and a move below this level would be negative. There is a lot of support around 60 from the prior consolidation and April trendline. I would not turn long-term bearish on this group unless HHH breaks 57.
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The Phila. Gold & Silver Index ($XAU) continues to hold its breakout and remains in bull mode. Though not exact, the same chart principles apply to XAU as with the Nasdaq. The breakout must be considered bullish as long as it holds. XAU formed a huge trading range and the breakout at 114 forged a new 52-week high. The index consolidated a bit and then moved higher in early December. Allowing for a little buffer and taking the May trendline into consideration, I will set support at 110 and remain bullish as long as it holds.
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Posted by Arthur B. Hill at December 19, 2005 01:30 PM