Interesting week: Last week there Greenspan spoke twice during the week about the economy and interest rates. Greenspan basically said the economy is strong and capable of dealing with higher interest rates. If this isn't a guaranteed hint that the Fed. is going to raise short term interest rates, then I don't know what is. The Fed. needs to increase interest rates in order to stave off inflation. Remember, the Federal Reserve can only manipulate short term interest rates, they have no control over long term interest rates - bond traders and supply and demand are what controls long term interest rates. Long term interest rates have broken out of long term downtrend lines and are signaling that short term rates will also rise. Basically, the Fed has to follow long term rates, in other words, the Fed can only allow the short term rates to deviate from long term rates for a short time.

Greenspans comment about the economy being healthy enough to handle an interest rate increase is suspect: The US economy is debt driven, and higher interest rates can only slow or hurt this debt ridden economy in the short term. However, in the long term, higher interest rates are needed to keep inflation at bay and also to stimulate foreign investment which would hopefully lower the trade deficit over time as new foreign cash would flow into this country to buy bonds.

As you can see, the Ten Year note, or 10 year interest rate, has broken out of a bullish flag to the upside. Higher interest rates are now in store. Remember, the 10 year Yield closely correlates to mortgage rates. In other words, expect home loans to increase which will have a negative effect on the Housing Market. Think about it, when interest rates go up, it becomes more expensive for people to buy new homes, thus the demand for homes goes down. When demand falls, so while the price of homes, there is an indirect correlation with interest rates and the housing market. Therefore, you can no longer expect the value of your home to go up 10% or more a year as has been the case for the past few years. Since the late 90's, you could buy a house and expect it to go up in value year after year, sometimes 10% or more. Depending on how far interest rates rise over the next few years, housing prices might even drop as demand for new homes also drops.

Also, as you will see in the last section, rising interest rates are likely one of the reasons for the big decline in precious metals, especially gold, along with a rallying US Dollar of course.

The logarithmic chart of the 10 year Yield has not yet broken its long term downtrend line. However, I think it is only a matter of time before it does so. Once the downtrend line breaks, the first target is 55, or 5.5% interest rate.

The prospect of rising interest rates have logically caused a strong pullback in the real estate sector, as evident from the chart below. I'd say there is more downside in this sector, as it has formed a bearish rectangle, the components are listed below.

The Housing sector is also strongly influenced by interest rates and will be hurt by an increase in long term rates. The Housing sector has thus far, faired better then the real estate sector, however I think this sector is 'toast' in the long term. The components listed below may be good long term short candidates.

OHB is a homebuider that may represent a good long term short. OHB has support at 20 and the 200 MA and a price target of about $15. However, note that OHB could rally to the downtrend line, therefore if you decide to short OHB, you need to give it a lot of room.

Index Charts:

The Nasdaq rallied off the broken downtrend line of a bullish flag on decent volume. The next resistance levels are 2080, 2100, and 2155 respectively.

With last weeks rally, the Nasdaq now looks stronger, however it needs to take out the previous high of 2080 to become strongly bullish again. After a strong separation, the 50 and 200 MAs are once again converging, this hasn't happened since spring 2003. This convergence suggests a large price movement will occur in the near future.

The Semiconductor Index strongly affects the NASDAQ, i.e. where it goes, the Nasdaq will eventually follow. The Semiconductor Index needs to strengthen soon, otherwise it will head down and so shall the market. Currently, the Semis are lagging under the downtrend resistance line. Also notice that the 50 and 200 MA's are converging suggesting a big move in the near future.

Again, I cannot stress the importance of this chart enough:  If the Semiconductors fail to rally, the Nasdaq will not recover and it will break down instead of to the upside. However, if the Semiconductors break to the upside, then so shall the Nasdaq. Keep an close eye on how the Semiconductors perform over the next few weeks......

Longer term picture of the DOW: Large symmetrical triangle has formed, thus suggesting a strong move will occur, either to the upside or the downside in the near future.

The long term chart of Dollar shows the big picture:  The Dollars major resistance point is the red downtrend resistance line which is a major 'breakpoint'.

Once again, let me re-iterate how important this chart is:  If the Dollar finds resistance at the downtrend line and begins to head back down, then gold will recover and break out to new highs. However, if the Dollar manages to break the downtrend line, then gold and corresponding precious metal stocks will likely experience a VERY large pullback that would scare even the most devout 'gold bugs'. Precious metals and corresponding stocks would then need to consolidate for many months before recovering an uptrend. Gold is also pulling back due to rising interest rates.

This chart is very important if you follow precious metals, and even commodities. Keep a close eye on this chart. If the Dollar breaks this downtrend line, all commodities will likely experience a strong pullback, not just gold and silver, but other commodities such as oil, copper, aluminum, steel, etc.

The CRB index, which is bascially a broad composite of 17 various commodities is logically experiencing a pullback. If the Dollar rally continues, then I expect most commodities will pullback. The CRB would also pullback, probably to the 200 MA at least, which is the next support.

Comparison of Gold to other currencies:

Relative to other currencies, gold is still maintaining uptrend lines:

Gold relative to the Japanese Yen, gold is still in a strong uptrend and is nearing support at an uptrend line.

Gold relative to the Australian Dollar shows us that gold has fallen to support on a broken downtrend line, but is maintaining strength.

Relative to the EURO, gold is maintaining support near 1.75.

To say that Silver has pulled back would be an understatement! Silver has quickly fallen from a high of about $8.5 to $6 in the matter of a few weeks with a series a gap downs. Silver will need a long time to consolidate, at least several months before it can resume any kind of uptrend. A lot of technical damage has been done.