So what does this mean? Well from a textbook perspective the recent break and close below the August low satisfies the Dow Theory criteria for a bear trend. This could therefore spell further market falls in the short term. As we discussed last week though, the market is clearly divided, with the resource sector remaining in a bull market, while the financials and banks in particular are well into bear market territory.

Given our preference for resources and gold stocks in particular, we have attempted to insulate our Members from much of the fallout in the financial sector. Given the bearish signals emanating from the charts, we continue to advocate such a strategy.

With the outlook for a further decline in the market, where is the next level of technical support? As shown on the daily chart below, the June 2006 low at 5507 is the next target.

The general tone of the current reporting season, now underway, will go a long way to determining whether the market falls to this level or not. Initial indications, resource sector aside, are not exactly positive.

The other point is that final results coming out in the next few months generally represent earnings to 31 December and investors recognise that 2008 brings new challenges. The real issue is earnings expectations rather than earnings themselves. We expect consensus earnings forecasts to decline once the current round of reporting is over.

There's nothing like a bear market to focus investors' attention on value and companies on high price earnings (growth) multiples are most at risk. Last week chipmaker, and former tech high flyer, ARM Holdings advised the market that full year revenue growth for this year will be around 6 percent, about the same as that in 2007. This compared to median expectations of 15 percent. The result of this transgression? Investors headed for the exit doors with the share price marked down by 20 percent in one day.

Investors have also been reminded that bargain stocks might not have reached bargain levels just yet. Bradford and Bingley slumped 23 percent yesterday after revealing a disappointing full year result and taking writedowns to the tune of £225 million on complex credit instruments.

The lesson is clear, good companies are only good investments if the price is right. Although value is returning to the market, we do not believe there is any need to rush in and pick up 'bargains'. If the bear market gains momentum, cheap stocks can get much cheaper. We recommend continuing to build cash and await buying opportunities.

Interest Rates

We believe a major reason for the market's bearish stance is the dilemma the Bank of England faces in using interest rates to shore up the economy.

Last week the Bank of England lowered the official rate by 25 basis points to 5.25 percent. However investor confidence in further significant loosening may be misplaced. Inflation is already above the Bank of England's 2 percent target and rising food and energy prices mean that expectations are even higher.

Indeed, Mervyn King reminded all and sundry yesterday that inflation was likely to rise to such an extent that we would have to pen another letter of explanation to the Chancellor.

Such strong language (in the face of a global slowdown) is a clear acknowledgement that the Bank is behind the inflation curve and needs to play catch up. In fact we believe that the UK economy is experiencing greater inflation than the 'official' figures suggest. Retail price inflation is actually running at 4.1 percent. This is in our view makes the need to halt any further loosening all the more compelling.

The job of a central bank is to contain inflation - to keep the inflation genie in the bottle to use a well-worn cliche. As such we do not expect the Bank of England to take any chances by unscrewing the lid. It must (and indeed claims to) prioritise this over averting a sustained decline in economic growth.

So, that said, the chances of a series of rate cuts are slim in our view. At best, presuming further signs of a slowdown, rates may fall another 50 basis points, however even this may be dangerous from an inflationary perspective.

Such a notion is clearly (or should be) appreciated by the broader market. The bank will not be the white knight riding to the rescue of a stagnating economy. Hence, our view of the need for investors to be highly selective in the sectors of the market that they are exposed to.

And on that point..

Gold

Gold has rallied strongly over the past week and again trades near all time highs. In the recent market turmoil, gold stocks have largely stood out as safe havens. While we are bearish towards the market in general, we view the price action in the gold sector as bullish. We continue to recommend maintaining or building exposure to the precious metals.

The fundamental backdrop for gold continues to be bullish, with the Bank of England cutting rates and the European Central Bank suggesting it no longer has a tightening bias. The credit market turmoil is seeping into UK property markets and from anecdotal reports, the European banking sector is not healthy.

So whilst we do not see a prolonged series of cuts, we do not expect there to be any tightening either. Status quo is likely to the choice of the day in the UK and Europe. Along with an aggressively easing US Fed Reserve, such a stance should ensure REAL rates continue to fall (as inflation rises) and this is a bullish backdrop for gold.

Further support comes from comments at the recent G7 meeting, suggesting the IMF (International Monetary Fund) sell some of their gold reserves. This suggests one of two things. G7 finance ministers and the IMF have no idea of the real role of gold, or that they have a very good idea and don't want a rising gold price to signal that the global credit markets are getting seriously ugly. We'd guess the latter.

The IMF is surely an anachronism anyway. First established after WWII to ensure economies remained in balance, for the past 20 years the organisation has presided over the greatest global imbalances ever. In the past, the IMF has been quick to lecture and impose 'austerity measures' on developing economies whose trade balances get out of whack, yet no such programs have been devised for the unbalanced developed world. The organisation has reached its use by date.

This is not the first time IMF gold sales have been suggested and it's not likely to be the last. One thing is for certain, such sales are not likely to stop gold's relentless advance.

As shown on the chart, firm support has emerged at US$885 and at US$850, limiting downside risks. With the upward trend still intact, a break above the February all time high of US$936.32 looks likely in the coming weeks. Above here, the next notable target is the US$1000 mark.