The market has decided that the big driver to expectations for coming weeks is the impact of Chinese credit tightening and prospect of higher interest rates in the US and the UK. The shares of resources suppliers were dumped as investors decided that the credit tightening would have a large impact on Chinese orders and earnings.

The major markets traded lower and more and more investors are asking themselves about broader market vulnerablity after the strong runs of the last year in Europe and the 'States.

I think that the markets have merely reduced some of the exuberance that was in there around commodity prices. After all, China and Japan are still doing their accelerating growth. Slightly slower demand and growth is not a bad thing - and the market will wake up to that soon -- and commodity shares will be snapped up in this heaven- sent dip.

But what about the Dow?

Long term technicals on the Dow Jones Industrial Average are suggesting that the last three weeks have been setting up scope for an aggressive selloff soon. Despite all the Ra - Ra talk about a new bull market in recent months, the Dow has not managed to break typical range resistance since January 2000. That is after some of the most intense efforts in history to stimulate the US economy. China and Japan and some countries that are resource producers -- are about the only ones to confirm robust growth.

What do the prices that people are willing to pay for the shares of major US companies say when relativity is measured and projected on time and price (technical and 69 month cycle) tests ?

They say that whatever the reasons are and will be, a market selloff has been gathering momentum in the last few weeks and that every point that the Dow falls between now and the important psychological area at about 10 000 can increase scope for typical selling all the way to 2002's lows or to about 6000 by October 2005.

If that scenario develops - think of the impact on world markets and your portfolio.

Time to be defensive until at least the technical and cycle vulnerablity reduces. Too soon to write off Gold as an unfaithful relic of history. Watch the US$ and the Dow for momentum to corroborate. End April is an important cycle signature for broader markets ( perhaps down next) ) and precious metals ( perhaps up next).

Victor Hugo

www.HugoCapital.com
www.SAgolds.com
www.GoldSignals.com

1 May 2004