Weekend Newsletter of April 6th, 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. Price Targets on Breakouts
Part 4. Market Index, daily analysis and conclusions
Part 5. Gold, US dollar
Part 1. Administrative Notes:
First off, some administrative notes: We setup our MSN based chat room two weeks ago and it has been a resounding success so far. We now have 58 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, 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 when significant events occur that war ant 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 certain charts do not need updated.
This is a different case with the main index charts, as I will try to update those every night.
Part 2. Brief War Comments
War update
The past week has unfolded much more favorably for the coalition forces. Every day more and more positive news of coalition successes were on the daily/nightly news. Public support for the war has not eroded and criticism for the war planning has gone into the background. Anything can still happen to tarnish these successes, but the momentum is clearly in the coalition forces favor right now and it will take a very large setback to slow this down. With the gaining of territory in/around Baghdad will definitely provide further evidence of the atrocities perpetrated by the regime and probably the smoking gun of weapons of mass destruction and links to terrorist organizations
A very curious thing is how the capture/elimination of Saddam Hussein is not being viewed as necessary for the success of the military action. This may be signaling the difficulty of doing this in a timely manner and the militaries desire to wrap up the campaign as quickly and efficiently as possible. There are rumors that he has already fled the country. It is probable that he is still alive but a quick and timely capture probably will not happen (look at Osama Bin Laden).
Hard to say how the war will effect the markets, the potential exists for the war to ignite either a rally or fall. As long as their aren't any major hiccups, the markets should hold up. Also, if our forces find any of the 'smoking gun' chemical weapons, then this would confirm president Bush's theories/agenda and would probably spark a major rally. If however, the Republican guard has chemical weapons and decides to use them on our troops, a market crash could happen. However, the more time that goes buy without the Iraq using chemical weapons against us, the less likely it is to happen. In fact, if they were going to use them, I suspect they already would have. Since they haven't used them yet (if they even exist) they probably won't be used against our troops.
Part 3. Price Targets on Breakouts
Member A_Rod from the message board posted this question:
"Can you guys put some information in the "education" section explaining how to determine a price target after breakout has occurred. Secondly, can you make an effort in identifying both the resistance/support levels as well as price targets on your "watch list".
I think A_Rod makes a good point and I will add something about this to the education section in the future, however, in the meantime, I will try to answer some of his question right here in tonights newsletter.
Stocks / Index charts sometimes form tradeable stock patterns such as triangles, flags, wedges, trendlines, etc. Once these patterns breakout, either up or down, how does one project a generic objective price target? One does this by identifying the next area of resistance if a stock breaks out, or the next area of support if a stock breaks down.
For stocks that are Long candidates, the 1st price target would be the closest resistance area. The 2nd price target would be the next closest resistance area, and so on.
For a stocks that are short candidates, the 1st price target would be the closest area of support. The 2nd. price target would of course be the next support area, and so on.
So to recap, for longs, you look for areas of resistance as price targets, for shorts, one looks for areas of support.
Below is a list of areas that act as levels of support and/or resistance:
1. The highs and lows on stocks and indicies represent areas of support and resistance.
2. Gaps represent areas of support and resistance
3. The 50, 150, and 200 moving averages usually act as areas of resistance, however, the 200 moving average holds the most weight over the three.
4. Trendlines, either up or down will act as resistance and support zones
Take the example of GT below to see how price targets are figured out. Breakout resistance was $4.50. Once this was broken, the 50 day moving average is the 1st. area of resistance, and thus the 1st. price target. Once the 50 day moving average was taken out, the 2nd resistance area is the series of lows formed during November thru December, this price level is $6.50. This 2nd resistance zone thus becomes the 2nd price target.
Again, for long setups, your price targets are always the next successive resistance zones.
The next example below is a stock pick we originally had in mid October 2002 on our Stockcharts public list. This is a great example of how price targets are obtained.
Notice that the original breakout price was $3.00. Once this is broke, the 1st resistance zone becomes the 1st price target, in this case, it's both the 50 MA and the low formed in July. The 2nd price target is the high in September which is a resistance zone. The 3rd price target was the high set in August, and the 4th resistance zone or price target was the 200 MA.
Again, for long setups, your price targets are always the next successive resistance zones.
To find the price targets on shorts, one would simply look for the successive areas of support, not resistance as you do for long plays.
Part 4. Market Index, daily analysis and conclusions
How do the indices look on a daily basis and intra day 60 minute basis? Let's have a look:
First off, the Nasdaq is by for the stronger looking of the three main indicies (DOW, S&P500 and NASDAQ). The Nasdaq found suppport on both the 50 and 200 day moving averages last week, then gapped to form a possible Breakaway Gap. (The DOW and S&P 500 are still under their respective 200 day moving averages and downtrend lines.) After the gap on Wednesday, the Nasdaq fell on Thursday and Friday. The question now is, will the Nasdaq continue to fall, or will it find support soon?
I am inclined to say that the Nasdaq will find support soon and bounce. The Nasdaq may find support on the broken downtrend line or at the gap, we'll just have to see.
Another thing you'll notice on the Nasdaq, and on the DOW and S&P 500 as well, is that the 50 and 200 day moving averages are right on top of each other. 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.
Now, for a short term look, below is a chart of the Nasdaq on a 60 minute basis. Last week I said the Nasdaq would probably fall starting Monday because of a Descending Triangle, well it did, but it quickly found support and formed what could be a Breakaway Gap, only time will tell though.
There is support at the gap of 1375 to 1360 to fill the gap. The stochastics below are oversold, and thus pointing to a bounce soon. Baring any disaster news in Iraq, I'd expect a bounce soon, at the gap somewhere early in the week.
Both the DOW and S&P 500 have similar patterns to each other in that they are both currently under their respective 200 day moving averages and downtrend lines. These areas represent significant resistance zones for these two indicies. Note that the Nasdaq above has broken it's 200 moving average and downtrend line. As you can see below, both the DOW and S&P 500 are sitting right under these resistance zones, either they will break their resistance zones, or they will head back down - therefore they lie at key price levels.
So what's going to happen here you ask? Well, again, notice how the 50 and 200 moving averages are fairly close together? This convergence usually signals that a large price movement is coming very soon, it could be up or down, but either way, it will be big!
Since the Nasdaq has currently traversed these levels, I'm inclined to think that they DOW and S&P could break these resistance levels to the upside, baring horrible news from Iraq. However, I must stress that technically, the move could go either way. However, because of the convergence of the 50 and 200 MA's, it should be a big move.
Now for the short term outlook on the S&P and DOW: Below are the 60 minute charts of both the S&P and the DOW. Notice after the rally last week, both of these indicies have entered sideways congestion patters that resemble rectangles? These rectangles form support and resistance, and will both either be broken to the upside or downside early in the week.
Support on the S&P is about 875, while resistance is about 886. Which ever of these levels is broken will set the short term direction of the S&P.
The story is the same for the DOW, same rectangle pattern, support is about 8225, while resistance is about 8345. Which ever of these levels is broken will set the short term direction of the DOW.
Part 5. Gold, US dollar
If you follow gold stocks, then you already know what a roller coaster gold has been lately. Gold is definitely weak here and judging by the chart below, gold may have broken its uptrend line going back to Dec 2001, however note that the trendline is only slightly broken and may not be significant.
However, even if gold has broken this uptrend line, 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 this long term uptrend line holds.
However, if this long term uptrend line is broken to the downside in the future, then GOLD IS DEAD.
Both the XAU and the HUI are still holding above their respective uptrend lines. 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.
This is a trying and probably an emotional time for some of you who may be holding long term positions in gold stocks. Below is a list of gold stocks at various price levels. Most of these stocks are currently at or near support zones, just like the metal itself. Make sure to keep an eye on these stocks, I will update the support and resistance zones on them as needed. Keep in mind that if gold metal breaks the uptrend nearest uptrend line, gold could fall to $305, with would cause further declines in the gold stocks themselves.
Here is a list below, just click on the symbols to pull up a real time chart.
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.
The US dollar rallied hard during the start of the war, but has fallen back from resistance noted by the red dotted line at $101.85. The US dollar is currently in a slight uptrend probably because of the war. The red dotted line will act as resistance.
The CRB on a daily chart looks weak. Notice how it's just riding on the 50 MA, and is forming what appears to be a Bearish Pennant.
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