Weekend Newsletter of April 13th, 2003

Summary of this newsletter

simply click on the section below, and you will automatically be taken to that section.

Part 1. Administrative Notes

Part 2. Brief War Comments

Part 3. Market Index, daily analysis and conclusions

Part 4. Gold, US dollar, CRB

Part 1. Administrative Notes:

I've mentioned this the past two week, but I'm repeating it again for our new members: We setup our MSN based chat room two weeks ago and it has been a resounding success so far. We now have 70 active members who use the chat room throughout the day. The feedback from members who have used the chat room is great. Most of then comment how the chat room is like being in a trading classroom and have learned a lot in just a few days of being there. In the chat room, you will see professional traders comment on trades and setups as they happen. I realize that some of you may not be able to take advantage of the chat room because of job/firewall restrictions. However, if you can visit the chat room, I strongly advise you to at least check it out. You might learn something, or in the very least, have a little fun interacting with the other members and us. To access the chat room, please follow the instructions in this link: CHAT ROOM

Also of note: if you sign up for the chat room, PLEASE also send your first and last name to Casey, casey@breakpointtrades.net, as we will use this info to verify you as a member. We have had a lot of non- BPT members try to join the chat room lately, only BPT members can join the chat room.

Also, please note that sometimes I will not be updating every chart in all the sections every day, such as the sectors, gold, etc. I will do so on an as needed basis only when significant events occur that warant the chart to be updated. For example, if a stock or index is trading in 'no mans land' between support and resistance, but the next day nothing has changed technically, there is no reason to update the chart. I have received a few emails asking why every chart is not updated everyday. This is the reason, if nothing technically has changed, then charts do not need updated.

I also redid the Insider - Technical section, I think you will find it much more useful now.

Part 2. Brief War Comments

War update

Since most of you follow the war closely, this section will be small:

With the bulk of the fighting done, it can be easily said that the regime of Saddam Hussein has been effectively eliminated. The next phase of the conflict will be install a new government that will be regarded as acceptable by the local people and the U.S. military. The U.N. will have to become involved in some capacity and it seems that the world banks are trying to insure this (they are mandating a U.N. resolution of some sort to become involved). Expect tough talk from the U.S. about not including other nations in on the rebuilding, but a lot of back room diplomacy/deal-making will be going on.

The U.S. will use the momentum of its swift and decisive military action to effect change on other ‘problem’ nations and areas of the world. The rest of the Middle East and maybe even North Korea will become more of a focus now. Regardless of what happens next in Iraq, the U.S. has proved its point that anyone opposing its militarily is going to be in a losing position.

The media almost seems to be disappointed that the war has moved so swiftly and that Baghdad has fallen so quickly. The media gave us an endless barrage of detail on the looting going on in Baghdad like is was something out of the ordinary. The news media is a business like any other and business, it will report things in such a way to get higher ratings, and thus make more money. I'd rather have it this way though, then have a media that is controlled by the government and told what to say. Also, nice to see Jessica Lynch return home, I'd hate to go through the nightmare she went through. Also more good news is that 7 more POW's were released in fairly good condition while Marines have taken Saddam Hussein’s hometown of Tikrit.

As far as predicting how the war 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. The market is a strange thing, sometimes good news effects the market positively or negatively, you never really know. For example, a piece of good news might make the market rally, then everyone says, "the market is rallying because of the good news". While on the other hand, good news might make the market fall, then everyone says, "the market rallied on the rumor and is now selling on the good news". 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.

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Part 3. Market Index, daily analysis and conclusions

First off, the Nasdaq is by for the stronger looking of the three main indicies (DOW, S&P500 and NASDAQ). The Nasdaq found support on both the 50 and 200 day moving averages two weeks ago and is still trying to find support on the downtrend line. Tough to say what will happen here, a bounce could occur off this line, or the Nasdaq may fall to the 50 and 200 MA's where strong support should exist.

Another thing you'll notice on the Nasdaq, is the convergence of the 50 and 200 day moving averages (MA's) They have been this way for sometime now, but when this convergence occurs, a stock or index is in a consolidation phase. The 50 and 200 MA's can only remain this close for so long, and they will either cross or diverge again soon. ALSO NOTE: These moving averages being so close to one another is usually the precursor to a large price movement! Therefore, sometime soon, I'd expect the either a MAJOR rally or a MAJOR decline in the general markets to happen in the near future.

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Now, for a short term look, below is a chart of the Nasdaq on a 60 minute basis. The red dotted lines denote areas of support, however the support line at 1335 is probably the most significant as it is also near the same area as the 50 and 200 MA's on the daily chart.

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Interesting chart here of the VIX, generally the VIX moves in an inverse relationship to the market, i.e. when the VIX goes up, and when the market falls, when the VIX falls the market goes up. However, this is not always the case, as sometimes the VIX will fall and so will the market, this doesn't happen very often, but it did happen this past week. I'm not entirely sure what to make of this, but it possibly indicates that people are getting more bullish as they buy more call options, the VIX drops.

Anyway, the VIX broke it's large Symmetrical Triangle pattern on Friday to the downside - this likely signals that the VIX will continue to fall. Support exists at 26.40 (red dotted line) which goes all the way back to mid November, the VIX will likely test this area. If the VIX falls to the red dotted support line, another significant technical pattern will form, a Descending Triangle which could lead to even more downside for the VIX - to the very low 20's. This is the true technical picture, then a market rally could soon ensue. Of course, the DOW and S&P must break their downtrend lines and 200 MA's for this to happen.

However, one more note is that the VIX may rise in the short term to retest the bottom of the triangle pattern, as often happens when support is broken, it is retested.

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Here's a closer look at the VIX daily chart,

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The chart below is the VXN which is anther market indicator. The VNX is somewhat contradicting the VIX buy showing what appears to be a Falling Wedge. This would indicate that the VXN will rise and the market will enter a big downtrend.

Which chart is right, the VIX or the VXN? I'm not sure at this point, time will soon tell.

Part 4. Gold, US dollar

The uptrend line that began in December 2001 was broken about a week 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.

Also notice that there is one more uptrend line left that goes all the way back to Feb 2001. This uptrend line shows long term support is about $305. Therefore, my analysis is that gold remains in an uptrend and a bull market as long as gold remains above this line. I already own several gold stocks, however if gold were ever to fall to the long term uptrend line, then I will buy gold stocks aggressively. 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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The XAU on a daily basis has bounced of support nicely so far, however notice how the 50 and 200 MA's have converged? These areas will act as resistance, but also the convergence could signal a larger move coming.

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Note the HUI below is right at the 50 and 200 MA convergence, this area may act as resistance and be hard to traverse in the short term. I wouldn't doubt if the HUI needs to consolidate and pullback first.

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If you have never played gold stocks before, please be aware that they can be volatile, tough to trade, and can really mess with your emotions Therefore, be prepared for an emotion roller coaster with them, they are tricky to trade, even for the best of us, but can also be very rewarding if you buy/sell them at optimal times.

After being stopped by resistance last Monday (denoted by the red dotted line), the US dollar is near support at the uptrend line. The US dollar is pivital to golds strength and an inverse correlation exists, if the dollar is strong, then gold is usually weak, and vice versa. Right now, the US dollar is still in no mans land between support and resistance at the uptrend line and red horizontal line respectively. Until one of these areas are broken, the US dollar chart will not be much of an indicator to golds strength or weakness.

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The CRB (Commodities Index) on a daily basis looks interesting: Note that after a vicious decline that began in early March, the CRB has found perfect support on the 50 day moving average? The CRB could do anything here, it could begin a rally with resistance at 232 denoted by the dotted line, or it could crash if it breaks the 50 day MA. I include this chat in the gold section because gold is a commodity and is reflected in this chat. If the CRB index is rallying, then gold will probably do so as well, and vice versa, if the CRB index is falling, then gold will have trouble rallying.

This chart is also a good example of how moving averages can act as support or resistance areas (Breakpoints). Keith and I typically include the 50 and 200 day MA's in our charts because of this reason.

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