August 15th 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)

1. Administrative:

2. Market Comments:

3. Market Indicators

4. Major Indices: Nasdaq, DOW, S&P:

5. Market Sector Breakdown:

6. Insiders Buying / Technical Supported - Stock Picks:

7. Gold, US Dollar, Precious Metals Stocks:

1. Administrative Comments:

all sections of webstie updated:

2. Market Comments:

The market had a mixed to slightly down week; the Nasdaq lost ground while the DOW and S&P basically moved sideways. The Nasdaq is technical the weakest of the three major indices and the question still remains if this pullback is a long consolidation before another uptrend, or the beginning of a new major downtrend.

Crude oil continues to go up day after day and hit a new all time high once again last week and closed at $46.58 on Friday. Rising oil prices are a big worry for the US, and world economy, for good reasons. One things for sure, if crude oil prices continue to rise, then the US stock market will not recover and will enter a far larger decline. However, if oil prices begin to decline, then the market has a shot of at least a short term rally. One thing I've noticed is that oil stocks are lagging this rally in oil prices, in a sort of negative divergence, if you will. This may mean nothing, or it may be signaling that this fast run up in oil prices is not sustainable and therefore will soon fall.

The US Dollar continues to decline, and subsequently gold and precious metals are doing very well. In fact, gold is being propped up not only by the drop in the Dollar, but also rising oil prices, and world and economic uncertainty.

After looking at a ton of index charts over the weekend, even though the daily charts of the major indexes look very week, I think there is a very strong possibility of a short term market bounce very soon. Strong positive divergence is showing up on the 60 minute charts of the major indices and many sector charts. Therefore, I conclude that the markets will bounce strongly very soon, probably this coming week. Therefore, I would avoid shorting stocks or entering into bearish mutual funds until after the market bounces. This imminent market bounce could last several days up to a week or more, therefore you should be able to play this bounce with breakouts, ETFs, or futures.

For example, here is the 60 min. chart of the Nasdaq, you can clearly see the positive divergence which has developed. This is also apparent in the other major index charts, thus a short term bounce seems very likely, baring any significant negative news or disastrous.

Gold is doing much better in the uncertain economic environment and this inverted chart of the USD seems to suggest that the Dollar is going to breakdown:

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 and 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. However, if the NASI crosses up to give a buy signal, then the market could sustain a rally for some time.

The NAUD indicator has broken support, which is signaling the market has a lot further to fall. Though, again, I think a bounce will occur first. As usually occurs in technical analysis, the previous support, once broken, is often retested on a pullback, and I think with the positive divergence that is showing up in the 60 min charts of the major indices, there is a strong likelyhood of this occurring.

The NAHL indicator has finally given a sell signal for the market. Note that the NAHL is a long term indicator and moves very slowly. Notice that the NAHL gave a buy signal back in April of 2003 and went vertical.

Small caps usually lead when the market does well, and that is obviously not the case. The indicator below is a ratio of the Small Caps to Large Caps. The direction of this indicator is what's important, when the trend is up, the market is doing well and can support a rally (thus indicating that small caps are leading. However, when the indicator is down, it indicates the market is weak and declines will likely continue.

The VXO bounced off long term support, thus causing a strong market pullback. The direction, not the level, is what's important, when the VXO rallies, the market falls and vice versa. It looks as though this indicator has only just begun to rally and has a long way to go up.

However, notice that the VXO has run into possible resistance near 20, a pullback here would allow the market to rally briefly, aka positive divergence on the 60 min. index charts.

Then again, major resistance doesn't really occur until 26.

On a long term basis, the BPCOMPQ is usually not oversold until it reaches below 30, obviously it has a ways to go yet. However, you can also see a little positive divergence, which may cause a market bounce in the short term.

A closer view shows the positive divergence much more clearly.

I think the likelyhood of a short term bounce in the market is very strong here.

The S&P Bullish Percent Index also shows positive divergence and is signaling a short term market bounce.

4. Major Indices, Nasdaq, DOW, S&P:

Nasdaq:

$34 was support, not resistance on a rally

The DOW Jones:

Daily:

As stated above, positive divergence in the short term hints that an oversold rally may occur this week.

The DOW resembles the Nasdaq chart, as it has broken a large bearish descending triangle to the downside. Once again, based on triangle height measurement, I calculate a price target of about 9000 for the DOW, however the first target would be support at 9500. 9000 also represents a 50% Fibonacci number.

A little closer view:

DIA ETF, maybe, just maybe support at the lower trendline of the channel.

The S&P 500:

Daily:

As stated above, positive divergence in the short term hints that an oversold rally may occur this week.

Just like the DOW and Nasdaq charts, the S&P has broken support of a bearish descending triangle. I calculate a price target in the high 900s!

With oil strong commodities are in a strong bull market, as evident by the multi-year uptrend line. Is that a bullish flag I see forming, if so, then commodities may be set to breakout in a big way soon.

However, this all depends on what the US Dollar does from here: If the Dollar enters another downtrend, then commodities will indeed breakout, but if the Dollar recovers and begins an uptrend, then commodities will not do well and may break the uptrend line.

Check out the long term chart of the CRB, even if the Dollar rallies and the uptrend line above is broken to the downside, the long term chart shows that the CRB is in a major secular bull market.

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. It is my belief that stocks with strong technicals, along with insider buying, can be held for much longer periods of time (good swing trade candidates) rather then simple day trades.

Obviously, with the precarious market, you want to be careful on the long side, however strong insider buying is nice to see in this weak market and these stocks could buck the trend or lead when the market bounces.

Why am I not presenting a list of insider/shorts, you ask? Because in my opinion, insider buying is far more important than insider selling.

7. Gold, US Dollar, Precious Metals Stocks:

Gold is forming a triangle pattern and is bouncing quite nicely: The triangle is either an ascending triangle or a symmetrical triangle. Gold is definitely looking better all the time, and the recent strength is a result of the drop in the US Dollar. As long as the uptrend line remains intact, gold looks good.

Gold is inversely correlated with the US Dollar: When the Dollar falls, the price of gold goes up, and vice versa. In order to for cast the direct of gold, one must also analyze a chart of the US Dollar.

The long term chart shows us that gold has strong support at a multi-year uptrend line and likes to consolidate into triangles prior to large price movements:

Looks like gold is on the verge of another major price movement:

The Big Picture of gold metal shows that gold broke a 20 plus year downtrend line in 2003 (which ended a secular bear market) and is now in a secular bull market. The horizontal gold region is important resistance, that once broken, will set off a huge run up in gold, the 1st target would be $500.

Silver is in a nice uptrend with resistance at $6.85 and support at the uptrend line.

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 three weeks ago, but ran into resistance at 90.45 and subsequently has been falling ever since. The Dollar could still do anything at this point, it could enter another major decline if support is broken, or it could enter a major rally if it recovers and takes out resistance. The fate of gold rests on what the Dollar decide to do at this point.

Many individual gold stocks are bouncing strongly, HMY is a good example:

HMY looks great on a long term basis and the rally was obvisous given HMY had fallen to long term support.

GFI is another good example: