Weekend Newsletter of April 20th, 2003 "Happy Easter"

Summary of this newsletter

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Part 1. Brief War Comments

Part 2. Market Index, daily analysis and conclusions

Part 3. Gold, US dollar, CRB

Part 1. Brief War Comments

With the military victory won it will be interesting to see what George Bush and Tony Blair will do with their political victory. Both are riding high in the polls and they will try to use this momentum to push domestic agendas.

Tony Blair this week expressed his plan to use this momentum in two ways: One was to convert Britain to the Euro on an aggressive schedule (1-2 years) - this could be more important than many people realize. The other was to create a more useful executive branch of the EU by proposing that the EU presidency be an elected position (currently each member nation provides a president for a period of six months). The interesting thing about this is that when Britain converts over to the Euro (before this there was debate if and when this would happen) this will probably further weaken the Dollar (since like gold, the two seem to be diametrically opposed to each other). One thing that the conflict in Iraq has demonstrated is the division between the agendas of the U.S. and its old Cold War allies in Europe. Without the common ‘enemy’ of the Soviet Union the relationship has changed and will continue to change.

The situation with the Euro is something I see as a very important to our way of life. It's also something I do not see covered in main stream press. Right now in the world, it is "hip" to be anti US, and lot's of nations are talking about switching their currency of choice from the US Dollar to the Euro. Some arab nations are saying now that they will only accept Euros as payment for oil, as well as some other countries around the world. What could really harm the US is if a domino effect occurs where nation after nation demands Euros for transfer of goods and does not accept US dollars - however that probably has little chance of happening. As stated in the previous paragraph, the move to the Euro, especially by Britain, will probably cause further weakness in the US dollar. There is a good side to this however; a weaker dollar is needed to help the US trade deficit. A weaker Dollar will eventually help to lower the number of imported goods into the US because foreign goods become more expensive, while helping the US to export more goods since they are now cheaper. However, it has been estimated that the US dollar needs to fall another 40 - 50% to bring the US trade deficit back into balance.

George Bush has the U.S. economy to focus on next. He will use his momentum to push his tax cut plan through as quickly as possible. The situation with North Korea will also come to center stage as well. The about face of North Korea (on multilateral talks) is being driven by two things. The first is increasing pressure from its neighbors. Supposedly, China had discontinued oil flow into the North for a few days due to ‘technical difficulties’ (at least that's what they said) prior to this about face. Secondly, since the U.S. achieved such a swift victory in Iraq, North Korea can no longer count on the factor of U.S. reluctance to fight a two front war, or for world opinion to change U.S. policy. A lot of the rhetoric coming out of North Korea prior to the war about annihilating the U.S. in a ‘sea of fire’ was just political brinkmanship. They are using their nuclear program as a bargaining chip in the political arena to advance their own agendas. The strategy was that the more ‘noise’ they made, the more the U.S. might possibly concede to keep them quiet. North Korea had little to lose by doing this. They are stretched very thin on resources and economically they are not that strong. What they do have is a sizable well-trained military force. They will continue to use their ‘bargaining chip’ for as long as they can but will probably back off on the ‘sea of fire’ talk.

As far as predicting how the war news will effect the markets, who knows, this is something I do not do. I will not try to predict market moves based on news items. Obviously the market is news driven, but the chat purest in me still thinks that one can predict market trends based on chart analysis - baring any disaster news like a nuclear bomb going off in the US. Therefore, I focus on charts to predict market direction as I am a chart purest. Barring any disaster or surprise news, I think most the market can usually be predicted based on it's chart, as most of the news is already factored into the charts themselves.

Part 2. Market Index, daily analysis and conclusions

The stock market trades in cycles, short (also called cyclical) and long term (also called secular). Secular markets typically last 10 - 20 years, while cyclical markets last 1 - 3 years. To give you some examples, a secular bull market began in 1948 and lasted until 1966. The last secular bear market was from 1966 - 1982 which spanned 16 years. The DOW in 1966 hit 1000, and hit a 800 in 1982 - 16 years later!!! Sort of makes you want to tell your broker to "go to hell" when he/she tell you hold stocks for the long run - I don't know about you, but 16 years is too long for me to have my money tied up only to go no where.

Of course, a Secular bull market began in 1982 that lasted until 2000, or 18 years. Thus it is now logical to assume that the stock market entered a secular bear market in 2000. As history shows, this current secular bear market will probably last at least another 10 years.

However, this IS NOT a reason to be a perma bear. Obviously, secular bear markets, while they last 10 - 20 years, keep in mind that every year is not a down year. There will typically be several small, or cyclical, bull markets inside the long term secular bear market.

One thing we need to do as traders is not be become overly biased either long or short to the point where we can't change our trading style. For example, I see far too many traders becoming 'perma bears' who just always assume that every rally is going to end quickly just as it has the past 3 years. However, you really need to note is that during the horrific 70's secular bear market, there were 4 bull markets that lasted from 1 - 3 years each, these were cyclical bull markets in a long term secular bear market. We are already 3 years into a long term secular bear market, sometime in the in future the market will probably enter a 1 - 2 year short term cyclical bull market. As traders, you need to be prepared for this, don't always blindly assume that every market rally is going to end quickly and be another big shorting opportunity. Because as history has show us, every secular bear market has several small bull markets interlaced inside it.

Please keep in mind that I'm not saying this current rally is the start of a cyclical bull market, it most likely is not and will probably soon end just like all the other recent bear market rallies over the past 3 years.

So why am I mentioning this, do I think this current rally is the start of one of those 1 - 2 year cyclical bull markets? To answer the question, no I'm not sure and I doubt it, however as history shows us, this current rally very well could be the start of a cyclical bull market that lasts 1- 2 years. On the other hand, this current rally could end shortly just like all others over the last couple of years. However, keep in mind that this secular bear market is due a 1 - 2 year bull market, it could start now, or it could start next year, but one is probably coming sometime in the next few years. I'm not saying I believe we are starting one of these cyclical bull markets now, I'm just saying that the possibility exists and you need to be prepared for it as traders and not allow yourselves to become overly biased to the bear side. As traders, you need to be able to turn on a dime, and take advantage of the current trend of the market.

There are some anomalies showing up that show the possibility for a major move in the markets in the near future. On the major averages such as the Nasdaq, DOW, and S&P 500, the 50 day and 200 day moving averages are very close together. This only happens after an extended sideways consolidation and is usually the precursor to an explosive market move. Therefore I think the markets will soon start a major trend, however it could still be up or down, but a large move does seem imminent. The VIX while currently in the mid 20's looks very weak and in fact looks like it will fall to 20 at least, and possibly even 18. Also consider that the VIX traded consistently in the low teens in the mid 90's, with lows of 10.

This week I'm going to start my market discussion with the market indicators, the VIX and BPCOMPQ to predict the direction of the market.

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Here's an even longer term chart of the VIX, notice how it could easily fall to 20, and even 18. Many market newsletters are currently saying that now is the time to short heavy, however I would use caution shorting just yet, as the VIX can still fall a lot more. Also remember to keep in you mind that one of those 1- 2 year bull markets could pop up any time in this secular bear market.

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Below is another chart I find very useful in predicting major market tops and bottoms. The BPCOMPQ very accurately predicts market tops when it is above about 49 and market bottoms when it is below about 30. One thing about this indicator is that it move very slowly, notice that while it is nearing overbought levels, it will still take some time to get above the blue line at about 49 to signal an overbought market.

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First off, the Nasdaq is by for the stronger looking of the three main indices (DOW, S&P500 and NASDAQ). In my experience, the Nasdaq follows Fibonacci very well, notice how the Nasdaq has rallied up to the 62% retracement line, it's very close to breaking out - breakout is 1430. Judging buy how weak the VIX looks, a breakout above this level is looking Imminent. If the Nasdaq breaks out of 1430, the next target would be the high set in January of about 1465. If 1465 can be taken out, this would bode well for the market because the series of lower highs which define a downtrend would be ended.

Another thing you'll notice on the Nasdaq, is the convergence of the 50 and 200 day moving averages (MA's). Notice how the 50 MA has crossed up over the 200 MA, this has not happened in a long time and could be very significant.

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Now, for a short term look, below is a chart of the Nasdaq on a 60 minute basis. As you can see by the red dotted line, resistance is at 1430 and needs to be taken out in the short term to set the Nasdaq up for larger gains.

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Part 3. Gold, analysis

The uptrend line that began in December 2001 was broken a little over two weeks ago - denoted by the solid blue line below. However, this is not all bad, as gold now appears to be finding some support on the extended downtrend line of the triangle. However, gold is now firmly against the broken uptrend line - remember, once support is broken, it often becomes resistance, therefore I wouldn't be surprised if gold has some trouble getting above this area and pulls back some, but anything could happen here really and the fact that the CRB broke out is a good sign that gold will hold up here.

At this point, I have a few long term positions, but I'm mostly trading them at this point.

However, if this long term uptrend line is broken to the downside in the future, then GOLD IS DEAD.

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Both the XAU and the HUI are still holding above their respective Long Term uptrend lines and bounced nicely last week. The XAU has long term support in the low 60's, while the HUI has long term support at about $115. Note, these are logarithmic charts.

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