Weekend Newsletter of April 27th, 2003
Summary of this newsletter
simply click on the section below, and you will automatically be taken to that section.
Part 1. Brief News Comments and other Notables
Part 2. Market Index, daily analysis and conclusions
Part 3. Gold, US dollar, CRB
Part 1. Brief War Comments
The news this week seems chaotic. The good momentum the war had brought to the stock market is winding down. However, the news seems saturated with articles on SARS. I'm not sure what to make of the SARS epidemic, but my conspiracy/contrarian side is telling me that it is vastly blown out of proportion.
A few war articles:
U.S. plans long stay in Gulf region
U.S. soldiers ambushed in Baghdad
U.S. arrests ‘mayor’ of Baghdad
Hussein Given Safe Haven In Belarus?
A few SARS articles:
The Mystery of SARS
Hysteria grips a forbidden city at the epicentre of a killer virus
4,000 Quarantined in Beijing as Suspected SARS Cases Climb
I talked briefly about the Euro last week, and so I'm reposting what I wrote:
"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 lots 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.
An article I posted earlier this week on the weakness of the dollar also covers the above points:
Indonesia May Dump Dollar; Rest of Asia Too
Either way you choose to look at the situation, conspiracy or not, the US dollar looks like it will continue to weaken over the next couple of years. I therefore have opened a futures account so that I can trade the Euro/US Dollar. The US dollar or Euro cannot be traded by themselves, but can be traded as a ratio of the Euro over the US Dollar. Basically, when the US dollar falls, the ratio goes up, when the US dollar goes up, the ratio falls. I will be trading the Euro/US dollar based on a chart of the US dollar, i.e. when the US dollar breaks support, I will buy the Euro/USdollar, and when the US dollar looks like it's going to bounce, I will sell or short the Euro/USdollar. Keep in mind that trading futures is very risky because you get as much as 30:1 margin for your money. Therefore, if you don't have any experience trading futures, use extreme caution if you decide to try trading futures.
Also of interest is the price of oil. The price of Oil ran up to high levels early this year, but took a nose dive around mid February and has been falling every since because of the war with Iraq. However, notice that Positive Divergence is now creeping into the oil chart. Therefore, I'd expect the price of oil to start rising again soon and possibly expect to be paying more at the gas pump soon. For those of you who have experience trading commodities, it might be worth picking up some crude oil futures, however futures are volatile, so do so at your own risk. For more on Positive Divergence, please visit the education section.
The Russian stock market, as stated in one of my March newsletters, is in a bull market. After consolidating, it has bounced hard and looks like it may attack it's all time high of 5400 soon.
The traded fund, TRF, is also doing nicely. I currently hold a position in TRF, I bought at $20.75 after it broke out of it's Bullish Flag, it has since been doing nicely. This is a long term position for me, I may add too it if the the Moscow Times breaks it's all time high of 5400, or add to it on the dips. Buying the dips works in bull markets like it did in the 90's in the US, it doesn't work in bear markets.
Part 2. Market Index, daily analysis and conclusions
So what does the market look like from here? Let's look at some charts starting with the Indicators, VIX and BPCOMPQ:
The VIX or Volatility index is ratio of put options to call options. It is a useful indicator because it indirectly measures market psychology. The VIX is like a contrarian indicator, when it's low, it means that more people are buying call options, and thus are bullish on the market. Contrarian theory tells us that the majority of people are wrong about the stock market, therefore when the masses are overly bullish, the market is usually topped out and about to tank, and vice versa.
The VIX can be used in two ways:
1. Usually the VIX is used to indicate when the psychological levels of the market are overly bullish or bearish. Overly bullish levels are in the mid 20's and lower, while overly bearish levels are in the upper 40's and higher. Traders use these levels to indicate when the market is at extremes, such as oversold or overbought. The old saying applies, when the VIX is low it's time to go, when the VIX is high, it's time to buy.
2. The VIX can also be used to forcast the market direction because of it's inverse correlation to the market direction. For example, by using technical analysis, if you decide the VIX is going to fall in the short term, the market will usually rise, and vice versa. Normal pattern or technical analysis can be preformed on the VIX an attempt to decipher short term market direction.
A couple weeks ago, the VIX broke support at about 26 and a half area, and fell hard. This support goes all the way back to last fall and is significant support. In the short term, the VIX is oversold and may go up to retest this broken support. Often once support is broken, it becomes resistance and is often retested. If the VIX retests support, then market weakness will continue for a couple days because when the VIX rises, the market usually falls.
Below is an even longer term view of the VIX. You can see how significant the 26.5 support for the VIX was, as it went all the way back to November. Also notice that an even longer term support exists at about 20. Anyway, two possibilities exist here:
1. The VIX does as suggested above, it goes up for a few days to retest broken support and cause short term weakness in the market. After doing so, the VIX will start to fall again towards the 20 area and the market rally will be reunited.
2. The VIX low, and thus the market top, has already been put in, thus the VIX would continue to rise here and the market rally would be over.
I'm not sure which one of these scenarios will happen, but one thing I can say for sure is that if the VIX rises and breaks the 26.5 support area, the market rally will be probably be over, we just have to wait and see what happens in the next week or so.
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 or is at overbought levels.
However, this does not mean the market will drop like a rock, notice how over the past several years, the BPCOMPQ made it into the mid 50's before toping out, except late last year when it toped out near 49.5. Therefore the market could hold up for a little while longer to get the BPCOMPQ into the mid 50's or it could head back down now. I myself would like to see the VIX head back down to around 20, this would most likely get the BPCOMPQ into the mid 50's and signal a more definate market top and an even better risk reward ratio for entering shorts. In a week or so, we should have more answers:
The Nasdaq did exactly as technical analysis predicted, it rallied up to the lower high formed in January of this year (which is major resistance at 1470) and fell back. This 1470 area is very significant resistance because it is the lower high in the downtrend that started in Late November/early December.
A downtrend is defined by a series of lower highs and lower lows, once this cycle is broken, thus is the downtrend. 1470 is significant because if it can be broken, then this series of lower highs will be broken and the Nasdaq will no longer be in that downtrend.
So what's going to happen now?
Well, the Nasdaq couldn't break 1470 on it's first attempt, but is consolidating and could try to break this level again. Look for possible support areas on the Nasdaq to be either the broken Fibonacci line at 62% or the purple uptrend line of the market rally, denoted below. If the VIX and BPCOMPQ cooperates, then a traverse of 1470 might be possible.
However, 1470 could have already been the market top, we'll just have to see if close support levels hold. Also of note, the market could enter a sideways congestion, i.e. summer is coming on.
Now, for a short term look, below is a chart of the Nasdaq on a 60 minute basis. As you can see, the Nasdaq is near a support level of about 1430, also notice the support levels directly underneath denoted by the blue dotted lines. Look for the Nasdaq to possibly find support at one of these areas.
The S&P 500 graph below is not a nice looking chart if you are bullish on the market. The S&P has formed what appears to be another Rising Wedge. If this is the true pattern, then the market has most likely seen it's highs or is very close to them.
What's interesting is that this pattern is not seen on either the DOW or Nasdaq, again a few more trading days may confirm this pattern. Also of interest, notice how the point of the Rising Wedge hits the 935 resistance exactly?
And finally, the DOW is the weakest of the three major averages and could not break above it's downtrend line. The DOW has formed either a Symmetrial Triangle or an Ascending Triangle. If the Rising Wedge on the S&P 500 chart above is correct, then I suspect the DOW will break down through these triangles, we'll just have to see.
Part 3. Gold, analysis
Gold is currently in sideways consolidation, and has been week over the last few days. Gold metal is currently between support and resistance.
At this point, I have a few long term positions, but I'm mostly trading them at this point. Note that if the support red dotted line is broken, then gold could retrace to the blue dotted line. However, if this long term uptrend line is broken to the downside in the future, then GOLD IS DEAD.
Below XAU could not stay above the 50 and 200 MA's, and has sold off hard since Wednesday. Note there is support at the blue uptrend line.
The daily chart of the HUI basically looks identical to the XAU daily chart. Support is at the uptrend line.
Note that both the HUI and XAU remain above their respective long term uptrend lines. As long as they remain above their uptrend lines, gold stocks can be held. If however these lines are broken, I would exit gold stocks.
The CRB or Commodities index below broke out of resistance at 232 over a week ago, with a target of the 200 MA. However the CRB could not make it's target on the first attempt and has been pulling back to retest this broken resistance now support. I'd say there is a good chance the CRB will bounce around this area, hopefully this will help stabilize gold. Of course, it's hard to say how the CRB will effect gold, as this index also includes lots of other commodities.
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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