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April 11th, 2004 - Easter
Homeland Security Stocks, Interest Rates
Table of Contents:
(click on the numbered sections below and you wil be taken to that corresponding section)
1. Administrative:
2. Market News:
3. General Market Analysis, and Commodities:
4. Metals (Gold / Silver):
1. Administrative Comments:
First off, I added more gold stocks to the gold stock section. Breakpoint Trades now covers 45 gold/silver stocks. I still get emails asking me to add Canadian Juniors, however while I like Canadian Juniors, there are simply too many to follow. I currently cover 45 gold/silver stocks, isn't that plenty to find something you like? Also, I will continue to add more overtime as they appear. During this current gold bull market, there will be many new ones added to the US exchanges in the next few years.
Secondly, on the Gold Index page, I added a new table that compares the price of gold relative to other currencies. I think this is a valuable addition because gold, as priced in relative US Dollars, is in a strong bull market. Thus far, the bull market in gold has been primarily a function of a falling US Dollar, which has been in a steady decline since early 2002.
However, in order for gold to really take off, like it did in the late 70s and early 80s, gold needs to rally relative to foreign currencies as well. The charts below show us that gold is finally beginning to show some strength relative to foreign currencies.
These charts are now on the Gold Index page:
And lastly, I updated most of the weekly charts on the website, especially those in the gold sections. I was erroneously using the 50 week moving average to represent the 200 day moving average. The 42 week moving average roughly corresponds to the 200 day moving average, thus I corrected the weekly charts to include this.
2. Market News:
Earnings season is officially here, and last week Yahoo reported better then expected earnings on Wednesday night. The market subsequently gapped up on Thursday, but couldn't hold the gap, and thus closed down to end the week.
We are in earnings season, which will lead to volatile market. However, on top of earnings season, the market is also very nervous with the escalating IRAQ situation. An increasing number of US soldiers are being killed every day and the resistance in Iraq is getting worse. The Iraq situation is like a powder keg for the market: horrible news could cause the market to tank, while good news could cause the market to breakout and rally to new highs.
Last week, I noticed one sector that is expoding to new highs, Homeland Security. With the 'War on Terrorism' there are some great, low priced stocks that are breaking out on high volume in this sector:
For example, take a look at TASR: I remember trading this stock last year when it was under $5 a share, now look at it:
Below is a table of various low-priced Homeland Security stocks I found while digging on the internet. Will one of these turn into another TASR????
3. General Market Analysis and Commodities
Let's look at the charts:
Last weekend I stated how the Nasdaq looked bullish after breaking a bullish flag to the upside on good volume. Last week, the Nasdaq did not have the follow through I hoped it would, as it is basically churned sideways. The Nasdaq needs to rally very soon to maintain this bullish stance, otherwise it could roll over and fall.
The Nasdaq should have good support at the gap and the 50 MA, so let's hope that it holds, I would like to see one more rally this year. However, I think one more rally is all this market could muster, and this fall and next year could be a disaster. Interest rates are on the verge of breaking long term resistance lines, which will weigh heavily on the market in the long tern - more further below.....
The next resistance levels are the three previous highs (noted by red dotted lines) at 2070, 2095, and the January high at 2155.
Notice below how the Nasdaq has both fallen on high volume and risen on good volume, interesting phenomenon. Also, remember that news can 'trump' the charts, therefore any significant earnings news, or Iraq news (positive or negative) could strongly affect the market - therefore be nimble and take profits quickly until a strong trend emerges.
On a 60 minute chart, you can clearly see the gap that may act as support on a pullback.
The S&P 500:
The S&P 500 needs to rally soon in order to stay above the 50 MA and make new highs. The 50 MA and 1125 are now support levels, while 1165 is major resistance.
On a 60 minute chart, you can clearly see the next major support level at 1125.
The DOW Jones needs to rally very soon in order to stay above the 50 MA and break the downtrend resistance line to have a shot at new highs. The 50 MA and 10325 are the nearest support levels.
On a 60 minute chart, you can clearly see the support level at 10330.
Interest Rates:
Long term interest rates look like they are ready to break out soon in a big way: The 10 Year interest rates have formed a bullish flag and could breakout at anytime - if the chart below was a stock I would go long.
On a long term chart, long term interest rates are very very close to breaking an important multi year downtrend line. If this downtrend line is broken to the upside, the door will be open for rising interest rates. Rising interest rates would probably kill, or at least slow down, the housing market - more details below:
If you own housing stocks, or stocks in this sector, I would place stops on them, or think about exiting them, especially if this downtrend line breaks to the upside. Aggressive traders might want to consider shorting housing stocks.
Also, one has to consider the longer term implications of this: Rising interest rates would signal that inflation is creeping into the economy, of course how could it not with an ever increasing money supply via M3 and the rising cost of raw materials or commodities. Also, when interest rates rise, the stock market will eventually fall as investors slowly pull their money out of stocks and put it into interest baring CD's.
In the short term, the market could do anything, even rally for a few months. However, if interest rates breakout to the upside, then the market will eventually begin a strong correction, probably starting late summer.
One more thing, those of you who have an account with Interactive Brokers, can play Bond Futures. Remember, as interest rates go up, Bonds fall, therefore you would want to short Bond Futures. I am personally going to try this myself, though small at first, once the downtrend line is broken.
Remember, futures are extremely volatile and risky, therefore consult a professional before doing so.
Rising interest rates will hurt the housing market, HGX is pulling back to support. If interest rates fall and do not break the downtrend line, then HGX will rally, probably off support that is quickly approaching. If interest rates do breakout, the stocks in this sector could be great long term shorts.
Likewise, home construction is also testing support and will likely bounce if interest rates do not break out. If interest rates do breakout, the stocks in this sector could be great long term shorts.
As expected, real estate fell off a cliff last week as long term interest rates rose dramatically. The 50 MA that has acted as support for so long has failed, but the 200 MA is very close and may act as support.
If interest rates breakout of the long term downtrend line, then real estate will take a huge tumble and the stocks in this sector (noted in the chart below) would be great long term shorts.
The CRB commodites index is once again on the verge of breaking out, resistance is at 285.30.
Crude oil recovered last week and may try to attack the $40 barrel resistance market.
Likewise, with crude oil on the rise, oil stocks are on the verge of breaking out once again:
Coal is on the verge of breaking out to the upside - indicative of a strong CRB:
Steel stocks are close to breaking resistance - indicative of a strong CRB:
Natural Gas stocks are also on the verge of breaking out - indicative of a strong CRB:
Palladium:
Most of you know that I have been extremely bullish on Palladium since late December 2003 when I pointed out that its chart had formed a nice base and was close to breaking out of a symmetrical triangle. Palladium was around $210 at the time.
Below is the original chart I posted here back in late December and early January:
Next, is the current updated palladium chart, notice the huge run it has had. Originally I said that palladium could run a long way if the symmetrical triangle breaks to the upside - it has done so indeed.
Last week, palladium broke through the $315 resistance barrier which may now act as support on a pullback. Palladium has amazing strength and the next major price target is about $400. However, eventually palladium will need to pullback and consolidate, when it does, new buying opportunities will arise.
Palladium is in a strong bull market like gold.
The two major palladium stocks are SWC and PAL, both of which are up well over 50% since they were first highlighted. On Friday, PAL fell on news of more shares being offered, thus diluting current shares. SWC's next target is $24 and is holding steady. However, I would move up stops on both PAL and SWC to protect profits.
A news story from Reuters discussed a breakthrough which allows palladium to replace some of the platinum used in diesel emission and control systems. Since palladium is about $600 cheaper then platinum, this would represent a significant cost savings. Over time, this would create a much higher demand for palladium, thus causing its price to rise significantly.
Umicore auto emission breakthrough lifts palladium
Obviously, the fundamentals of palladium are looking better all the time and I think palladium has a lot further to rise in the long term.
I discussed the following last week, it's worth repeating again:
Also, for those of you who have large savings accounts, there is a way to grow those savings accounts and actually invest in precious metals without having to buy the physical metals or the corresponding stocks.
www.goldmoney.com
www.e-gold.com
The two websites above are interesting because you can open savings accounts that are 100% backed by gold. e-gold.com is especially interesting because you can open an account that is 100% backed by gold, silver, platinum, and even palladium.
Out of the two, goldmoney.com looks like the easiest one to start as you can fund your account online with your present checking account.
Anyway, the point is, these days you are not safe from losing your money by simply having a savings account. With the US Dollar in a bear market, your cash money (while safely out of stocks) is losing its purchasing value over time as the Dollar continues to lose its value. By having a savings account backed by gold and silver (or even palladium), your savings account will grow overtime as these precious metals are in a huge bull market.
Gold is consolidating after testing the formidable $430 resistance level and may even be forming a bullish cup and handle. However, keep an eye on the US Dollar chart.
This gold chart is a thing of beauty.
On a longer term chart, you can see that gold bounced perfectly off support of an uptrend line, and subsequently through a bullish flag. Long term support is obviously the uptrend line near $405.
Silver has amazing strength and is going vertical. Pullbacks should be bought.
Long, long term I think silver will go to $10, $15, and beyond. Though in the short term, silver is going parabolic and will need to consolidate soon. I would wait for a pullback before buying heavily into this metal. $7.15 will not act as support, though it's hard to imagine silver falling that far.
Comparison of Gold to other currencies:
Gold, as priced in relative US Dollars, is in a strong bull market. Thus far, the bull market in gold has been primarily a function of a falling US Dollar, which has been in a steady decline since early 2002.
However, in order for gold to really take off, like it did in the late 70s and early 80s, gold needs to rally relative to foreign currencies as well. The charts below show us that gold is finally beginning to show some strength relative to foreign currencies. Take a look at the Gold/Yen chart especially:
On a short term basis, the US Dollar will continue to effect gold. The Dollar currently has resistance at 90, and support on the 50 MA. If the Dollar decides to rally, then gold will likely consolidate for a few weeks, but if the Dollar falls, then gold will breakout immediately.
The Dollar has formed a small bullish flag that could break to the upside - I think this scenario has a strong possibility of coming to fruition. If this happens, gold will consolidate here for a few weeks before breaking out.
The longer term chart shows the important support and resistance levels for the Dollar: The Dollar is in a strong downtrend with support at the bottom of the channel and resistance at the top of the channel. Obviously, the Dollar could still rally to test the top of the channel, thus hindering gold in the short term.
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