D.B. Hi Ike, how are you doing?

I.I. I am doing well, thank you.

D.B. Last time you concluded the interview by saying that:

" We view the current rally as the part where "the fat lady sings." However, she is not completely done, yet. We expect  a pullback, but the evidence suggests that the overall move has not been concluded yet."

You  had  upside targets of 10750 for the Dow, 1180 for the SP, and 2100 for NASDAQ (see Conclusion 09-05-04) The markets pulled back into October, and since then they have staged a remarkable rally with the Dow closing at 10523, the SP closing at 1182, and NASDAQ closing at 2102, as of Friday, Nov., 26th, 2004. Now that the upside targets have been met, is the "fat lady"  done singing?

I.I. Apparently, the "fat lady"  has  a long part in this drama! In fact, I'll tell you the same thing I said last time, I expect  a pullback, but the evidence suggests that the overall move has not been concluded yet.

D.B. What makes you say that?

I.I. The charts are suggesting so. Take a look at NASDAQ on a monthly basis. It broke above resistance, and it is now testing our first upside target. It would make sense that somewhere between current levels and 2150 we get a pullback, however, if the pullback is contained  within support, or, NASDAQ closes above 2150 and stays above it, then I would expect a new recovery high. Notice that the break-out, suggests  an  upside target in the  2230-2250 zone, which also happens to be the 80 month moving average.

I.I. In addition, the SP closed above its 80 month moving average, and above its 2002 highs, suggesting that it can rally up to 1250-1270, as long as, it doesn't violate support at 1090 going forward. Interestingly, notice that even if it rallied up to 1250-1270, it would  simply be rallying back up to what used to be long term support (green line) prior to breaking down below it in 2002. In this case the bears can say that this is classic bear market action, because once an index, or, a stock violates long-term support, the most usual course of action is to go back up and re-test it. The same  holds true for the Dow.

D.B. Is it justifiable from a fundamental point of view for the SP to rally to 1250-1270?

I.I. In my view, the fundamentals do not even justify current levels, let alone 1250-1270. However, what difference does it make what the "justifiable" level is, as long as there are  more buyers than sellers and they are willing to pay "unjustifiable"  prices? Was it "justifiable" for NASDAQ to run up to 5000, was it "justifiable"  for CMGI to be changing hands at $160.00, in January of 2001? No, it wasn't, but it happened. I know this sounds very simplistic, but the truth of the matter is this; markets go up because there are more buyers, than sellers, and they go down, because there are more sellers than buyers. We can have intellectual arguments with regards to why investors  should be buyers, or, sellers at a particular price level, but  it doesn't change anything.

At the moment, these are the facts that currently define the character of the  market; inflows exceed outflows by a wide margin, the major indices have been making  higher lows, and higher highs, which is the definition of an up-trend, they have broken above a declining tops line that controlled price action for 10 months, and as long as they remain above it, the chart patterns  indicate higher upside targets. All these facts give the market a "bullish" character, as long as the character of the market remains the same, we ought to expect higher prices, despite short-term pullbacks which simply alleviate overbought conditions. 

Could  the "character"  of the market  change?  Of course, no doubt about it, and if it did, then our expectations  ought to change accordingly. It hasn't, yet. Do I have any reason to expect an imminent change? Based upon 50 years worth of market data that is available to us, I must say that it would be very rare-although it is possible- for the market to abruptly change character  without any  technical warnings at all.

D.B. Can you elaborate on this?

I.I. Based upon 50 years of  historical price data, advances with a magnitude of  the current one, experience a "momentum failure"  prior to termination. A "momentum failure" takes place when price makes a higher high, yet, momentum indicators make a lower high. Usually, that type of combined action has given a valid warning that the advance is over. Later, when we discuss all of our indicators, you'll see that none of the intermediate-term ones has diverged negatively. They  all have confirmed the recent price highs, by making higher highs. So, with a number of different momentum indicators confirming price, I really do not have much to conclude upon that at the present time the odds favor an abrupt intermediate term trend change. I do have several reasons to expect a 3%-5% decline  in the near term, but no "technical"  reason to expect an immediate resumption of the bear market, with lower lows lying directly ahead, in the absence of an exogenous catastrophic event, that curtails investors'   robust appetite for risk.

D.B. What are some of your reasons  for expecting a pullback in the short-term?

I.I.  The McClellan Oscillators which are short-term indicators, for example, have failed to confirm the price action of the last 5 trading days. Usually when that happens, even if we get higher prices for a few more days, eventually there is a pullback.

In this business we make decisions based upon what we think the odds are for a particular scenario. Based upon the technical evidence at hand, the odds do favor an imminent pullback, but they do not favor an imminent change in the intermediate trend, if the technical evidence changes and supports otherwise, then I'll change my expectations.

D.B. What is your opinion with regards  to the U.S. dollar?

I.I. The "technical evidence"  suggests that the short and intermediate term trends are down, and in fact the decline has accelerated. There is support at the 80.00 level in the dollar index which may bring about  a bounce, but I would not bet on it. When the trend is so profoundly negative, expecting support levels to hold,  usually turns out to be a bad idea. Channel support is at 76, so, maybe that is where we'll see a bounce in the dollar index.

D.B. Can we have  a "dollar crash?"

I.I. Crashes take place from deeply oversold  positions, the dollar is deeply oversold, and it will get more oversold in the 76-78 zone, at that point if it can't bounce, yes, we may get a crash, but keep in mind that crashes are low probability events, it could happen, but you can't bet on it.

D.B. If the dollar crashes, how would that affect equities?

I.I. Maybe that will be the "exogenous catastrophic event" that forces investors to change their  appetite for risk, I truly can not give you a quantifiable answer.

D.B. What is your long-term target for the dollar index?

I.I. I wouldn't expect a  long-term turn around until the dollar index reached 60.

D.B. By when?

I.I. I would say over the next 1 1/2- 2 years, unless we get a crash, in that case things will accelerate rather abnormally!

D.B. How about gold, and gold stocks?

I.I. The monthly chart for the HUI, shows a rather profound up-trend, it is currently near resistance, so, a pullback is possible. However, as long as it remains above 200, we ought to be bullish because the 4 year up-trend will remain intact. If the HUI closes above 265 in the next few weeks, its next upside target will be 325. By the same token, if it closes below 200, get out of the way, because the next stop will be 150.

D.B. Let's take a look at the rest of the charts.