August 1st 2004
Written by Matthew Frailey - matt@breakpointtrades.net
Table of Contents:
(click on the numbered sections below and you will be taken to that corresponding section)
2. MISC:
Before we get to the market, lets go over a few miscellaneous info:
Major Terrorism alert against major financial institutions in the US, primarily NY:
"The United States raised the security alert level to high for financial institutions in Washington on Sunday after new intelligence suggested a possible threat.
Intelligence suggested a threat against the International Monetary Fund and World Bank in Washington and the New York Stock Exchange, Department of Homeland Security chief Tom Ridge told a news conference."
See the following links: subsequently, futures are down a few points.
U.S. raises security level to high in capital
Big Apple Terror?
Next: Update on my 30 year bond short:
Unfortunately I was stopped out of my ZB future short, but still for a nice gain. However, I plan to re-enter this short very soon and will watch for signs of a bounce in $TNX and $TYX to do so.
The Fed has finally began a long road of interest rate hikes with last months FOMC meeting. Since the FOMC meeting, long term rates have fallen. Take a look at TNX, which is the 10 year yield. TNX broke out of a multi-year downtrend line in April and are set to rally much further. However, in technical analysis, when a breakout occurs, a brief pullback usually occurs, which is exactly what we are seeing with long term interest rates.
However, this pullback will soon end another rally will commence.
So what, you ask? The reason I am high lighting this is because this pullback in long term rates is obviously temporary and will soon reverse and the uptrend will recommence.
Personally I am planning taking advantage of this situation by shorting 30 year treasury bond futures. Remember, as interest rates go up, bonds fall, therefore once the pullback in long term rates looks like it has finally run its course, I will short 30 year treasury bonds. I use Interactive Brokers, the symbol is ZB, and I will short September Futures.
Once again, realize that playing futures is very risky, if you do not have experience in this area, consult a professional.
Should find support at broken uptrend line.
3. Market Indicators:
First, let's see what the market indicators are telling us:
The NASI has done a very good job thus far at predicting market tops and bottoms whenever the MA's cross one another. Also, the MACD is a useful indicator as buy/sell signals are generated whenever the MACD crosses up or down, as indicated below in read and green circles.
As you can see, the NASI gave a sell signal on the Nasdaq in early July when the moving averages crossed over, and the MACD crossed over to give a sell signal. Currently, the NASI is still in a downtrend. A major market bounce will not occur until the NASI gives another buy signal.
It will not be safe to go long for swing or trend trading, until the MACD crosses back up and gives a buy signal. For now, we can assume rallies will be sold and cash is king, day trading, or scalping, is the safest way to trade currently.
The NAUD indicator has fallen to a support level and will give another market sell signal if broken to the downside - it is obviously at a breakpoint. However, it is trying to bounce off support an the MACD is turning u, and may give a buy signal soon.
However, on the bright side, the BPCOMPQ has developed strong positive divergence in the MACD, thus indicating this indicator may soon change direction and go up.
Why is this important? Because the Market moves in the direction of the BPCOMPQ, therefore if the BPCOMPQ turns up, so will the Market.
Watch this indicator closely:
The percentage of stocks above the 200 MA is under 30%, however notice the strong positive divergence in the MACD. This hints that the Nasdaq has a good chance to continue the rally.
The last time this occurred, the Nasdaq rallied about 150 points.
Strong positive divergence in this indicator as well. The last time this occurred, the Nasdaq rallied about 150 points.
Dow Theory states that the Transports and the Dow Jones are linked, i.e. where one goes, the other will get pulled along for the ride.
Currently, the Transports have formed a bullish flag and if this flag breaks out to the upside, then the DOW will likely rally as well, thus launching a market rally.
On the Bearish side:
The direction, not the level, is what is important for the VIX; i.e. when the VIX goes up, the market falls, and vice versa. In the long term, positive divergence hints that the VIX will eventually enter a major rally, thus causing a market sell off.
Shorter term, the VIX is in an uptrend, if the uptrend holds, then the market will fall, if the uptrend line fails, the the market rallies: simple as that.
Small Caps usually lead whenever the Market does, well. How to use this chart: When the trend is up, the market is doing well and you can be long stocks. When the trend down, you should be out of long positions.
Currently, the trend is down, and until it turns up, the market will remain weak.
4. Major Indices, Nasdaq, DOW, S&P:
Nasdaq:
Nasdaq has bounced off a lower trend line of a channel or possible bullish flag.
The long term chart suggests a bullish flag and a bounce of uptrend line.
Nasdaq bounced near the 38% Fib line.
The Semi's bounced off the lower botton channel.
DOW has resistance at 10300
The S&P is technically the strongest of the three major indices,
Bounce off 1075 support as predicted. Anything could still happen at this point.
60 min chart right at resistance downtrend line.
5. Market Sector Breakdown Along With Various Stock Picks From These Sectors:
Presented are strong sectors, along with stocks in those sectors:
The strongest sectors are in the commodities group. This is not surprising given that crude oil is hitting all time highs.
Last week, crude oil broke resistance of 42.5 and hit an all time high. This is not good for inflation or the stock market on a long term basis. Subseqently, commodities are doing very well.
EOG is in the oil sector and has resistance at 63.85
UCL is also in the oil sector and looks great, with resistance at 39.70 spike high.
Basic Materials look like they could breakout:
X is in the material and steel sector, nice looking chart with resistance at 40
OMG is in the materials sector with a bull flag
FMC is in the materials sector with resistance at 45.
Copper looks very strong and has a large bull flag.
I presented WLV a few weeks ago as a good copper play, so far it's doing great.
With war on terrorism, Aerospace sector is strong.
BA is in the Aerospace sector with resistance at 51.50
Telecommunication sector is strong:
CBB in the Telecom Sector with resistance at 4.5
6. Insider Buying / Technical Supported - Stock Picks:
Stock picks presented here are supported by recent, and or, long term insider buying, and are further confirmed by technical analysis. Each week, I receive a list of stocks with recent insider buying from another service I subscribe to. I receive about 50 new picks a week. I look at each of the picks, and only select the ones that also have decent chart patterns.
Resistance at the downtrend line.
Huge insider buying of FLA of 173 million from one of the owners and a nice pattern to boot.
Tons of insiders have been buying MWY this year, currently it has formed a symmetrical triangle.
I first presented MWY as an insider long pick back in January 04. You can see how it has preformed since that time!
I presented PRTRD two weeks ago and I'm still long this stock at an average price of $10. I will continue to hold for now.
7.Foreign Markets Breakdown:
Japan, China, Taiwan:
I have been stating for weeks now that I am closely watching the Japanese market and am waiting for a trigger to go long.
The Nikkei Index looks very bullish to me as it has formed a bullish inverted head & shoulders pattern. The first target would be near 15000, but I think 17500 is possible.
Again, the Nikkei looks very bullish to me and there are two ways to take advantage of this the bullish situation in the Japanese market: 1. EWJ which is an ETF (exchange traded fund) of Japan, and Profund Ultra Japan, UJPIX.
To me, by far the best bang for the buck is UJPIX. Below I plotted UJPIX on the same time scale as the Nikkei chart above. As you can see, above, the 1st. price target on the Nikkei is about 14500 to 15000 once the resistance neckline near 12500 is broken. Such a movement would represent about a 20% price appreciation. Likewise, the ETF, EWJ would be expected to increase by about the same degree.
However, take a look at the graph of UJPIX below: Notice that if the Nikkei moves from 12500 to 15000, then UJPIX will move approximately from $35 to $75 which is more then double.
Last Friday, I bought UJPIX. I know it's a bit early as the Nikkei hasn't yet broken out, but I think it's only a matter of time.
The Chinese market has broken a downtrend line to the upside. The broken downtrend line is now acting as support and may act as a launch pad for another rally.
GCH still looks like a good long here with minimal risk.
I currently own shares of GCH
I'm looking at purchasing EWT, Taiwan ETF. Taiwan has fallen to support and looks like it could rally from here.
A closer looks confirms that EWT has positive divergence in the MACD, a bounce seems likely here.
8. Gold, US Dollar, Precious Metals Stocks:
Gold bounced and formed a higher low last week, but the jury is still out if an uptrend line or downtrend line will begin. However, the longer gold moves sideways, the less bearish it becomes.
The Dollar is still key and appears to be in an uptrend.
The long term uptrend line of gold metal is still intact. If this line does not hold, then gold will likely fall to 350.
Silver has done very well since its melt down in April. In fact, silver is much stronger than gold and in a nice uptrend. Current resistance is at 6.85. You may want to consider silver stocks over gold stocks at this point.
When discussing gold, the US Dollar is paramount and holds nearly all the power over the direction of gold. Eventually, the gold will move up regardless of what the Dollar does, but at this point in time, the two are still linked closely together.
The Dollar broke out of the bullish wedge two weeks ago, but ran into resistance at 90.45 last week and a slight pullback could be expected here.
Revisiting this old chart, I suppose this case could still be argued. Time will tell and we should know which chart is correct in the next couple weeks.
The Dollar is breaking the multi-year downtrend line, this may play havoc with gold for awhile and suggests the first chart of the Dollar above is the correct one.
Gold Stocks
The following chart compares the price of gold to the Gold Bug HUI Index in a ratio with gold as the numerator and the HUI as the denominator.
This chart is very interesting to me and seems to be a very good gauge as wether or not to own gold stocks. Basically, when the trend is down, gold stocks are rallying and outperforming gold metal, and when the trend up, gold stocks are falling or lagging behind gold metal.
Notice how this indicator broke down in late July last year which exactly corresponds with the huge rally last year in the HUI. Also notice that this indicator bottomed in December 2003, which subsequently, was also the top of the gold stock rally. Next, the indicator broke a trendline to the upside in April which corresponded exactly with the virtual melt down in the gold stocks in April.
So now what? This indicator shows that the safest time to own gold stocks will be when the uptrend line is broken and a new downtrend begins.
Currently, this indicator has broken a triangle to the upside and has found resistance at the horizontal line and support on the broken triangle.
Again, as long as the uptrend line remains intact, it is dangerous to hold gold stocks. It is safer to wait for a downtrend to begin.
Now, take a look at the HUI plotted over the same time frame and you can see what I mean: Notice how well this indicator works, cool huh?
Uptrend line broken, nice hammer reversal candlestick market the low last week.
XAU is stronger then the HUI
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