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August 21st 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. Market Comments:
Last week the majority of the market indices bounced strongly. I stated that positive divergence in the 60 minute charts was prevalent and that a bounce was likely - this was the case indeed:
Here's a small segment of I wrote in last weeks newsletter about positive divergence:
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.
Here's the chart of the Nasdaq 60 min. last week:
Now, here's the updated chart of the Nasdaq 60 minute chart, a nice bounce indeed resulted from positive divergence! This was the case all the major indices and sectors alike.
Also, last week, I mentioned that gold and precious metals and corresponding stocks looked much better and could rally strongly. And rally strongly they did indeed, if you bought into gold early last week, then you sipped martinis or drank Dom P. with a smile.
Gold metal broke a pretty symmetrical triangle to the upside last week, and is set to test the highs at 433.
But I'll cover this more in depth later in this newsletter:
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I know that some subscribers disagree with me (that's okay) with my stance that long term bonds will soon fall and rates will rise. However, I'm simply going off what the charts are telling me and this chat of the 30 year yield says that it's soon going to reverse it's trend and go higher: Long term yield has fallen to a 68% Fibonacci support and is near an uptrend line.
I am looking to short the 30 year yield futures, ZB is the symbol.
Rising crude oil has been one of the main topics and worries of the financial media, and for good reason as the price of oil effects everything.
If you are a new subscriber, I have been discussing rising oil prices for some time, as far back as last year and especially in July after oil broke a bullish wedge to the upside. During this time, the financial media was not concerned with rising oil prices. Why? Because they had fallen for two months, but we pointed out that breaking a bullish wedge to the upside meant higher prices to come, especially when resistance at 42.5 was taken out. At breakpointtrades, we are generally ahead of the curve.
So what now? Oil prices are going parabolic (as evident by the chart), thus I think they will soon correct and fall quickly. A fall in oil prices will further help the current rally that began last week. However, oil is still in an uptrend and will find support at prior resistance at 42.5 and the 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.
Currently the NASI has given another buy signal for the Nasdaq, and market itself. The 5 day MA has crossed up and the MACD is just crossing to give a buy signal. The Stochastics is also starting to cross up, but has yet to give a buy signal.
This is bullish for the market and hints that the uptrend that began last week may last for awhile. However, I would still like to see the stochastics cross 20 to give a buy signal. But so far, this is shaping up nicely for a fall rally.
Positive Divergence via the BPCOMPQ hints that the market will rally much further, and we all know how well positive divergence can work: The BPCOMPQ could easily rally to the low in May in the low 40's. This would result in a nice fall rally.
The percent of stocks above the 200 MA is increasing and positive divergence also exists in the chart. Resistance at the downtrend line, but this indicator looks like it will rise, and for it to rise, the market logically has to rise.
However, we need to see the semiconductors strengthen relative to the Nasdaq, current resistance zones market by the horizontal line and downtrend line.
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 trend is now positive:
Last week, the VIX broke a support uptrend line, which began last weeks rally. This was mentioned on the message board.
However, longer term shows positive divergence, thus any downtrend in the VIX will likely only be short term and will end later this fall. The market downtrend will likely resume a downtrend later this fall as well.
4. Major Indices, Nasdaq, DOW, S&P:
Nasdaq:
On the 60 min time frame, the Nasdaq had a nice rally last week and even took out resistance at 1830. Positive Divergence predicted this perfectly.
However, a small pullback could occur at anytime.
Daily char of the Nasdaq shows a broken chart, and a target of about 1600, however a rally could occur to retest broken support, only to then re-enter the downtrend.
Resistance is at the former support, now resistance at about 1880.
The Fibonacci chart of the Nasdaq is very interesting, notice how the Nasdaq bounced exactly off the 38% retracement of the rally from October 2002 to the highs of January 2004!
The Nasdaq 100, NDX, bounced nicely off support and closed right at resistance. It may have some trouble with this area, but if it breaks this level to the upside, then it should have no problem rallying to the 50 MA.
On a long term basis, the Nasdaq bounced off an uptrend line. If the markets decide to rally hard this fall, then the Nasdaq could potentially rally to the downtrend line.
The Semiconductors are in a strong downtrend and have broken multiple supports: However, current, the Semi index is testing former support, now resistance. This sector needs to strengthen in order for the Nasdaq to rally. Positive divergence is beginning to show up via the MACD and if the Semis can turn up, the the current market bounce will likely continue for awhile.
$34 was support, now resistance on a rally. At a breakpoint, either QQQs break resistance, or they find resistance here and fall.
As stated above, produced a nice rally last week that took out multiple short term resistance zones. However the DOW is over extended in the short term and will likely pullback soon.
The Daily chart and important support and resistance zones
Long term view: Is this a bullish flag pattern?
Nice rally last week via positive divergence. This chart looks almost identical to the DOW:
Large caps are starting to perform better, resistance at the MA's:
The Small caps are also rallying and are retesting the 200 MA.
The NYSE bounced nicely off support at 6210, but has resistance fast approaching at the downtrend line.
5. Market Sector Breakdown Along With Various Stock Picks From These 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 hit an all time high of $49.40 a barrel, which is not good for inflation or the stock market on a long term basis. Subsequently, commodities are doing very well.
This large run-up in oil is also what's causing the jitters on Wallstreet and the market pullback.
Oil stocks are also finally starting to look better, see the table below: The oil sectors have formed bullish wedges.
However, I expect crude oil to pullback very soon, probably starting this week. Oil has been going parabolic lately and cannot continue this steep run. A pullback in oil will likely cause the market bounce that began last week to strengthen and last a while longer.
However, even though oil will likely pullback soon, there are now many support layers beneath, such as the previous high of 42.5 and the uptrend line.
With oil strong commodities are in a strong bull market, as evident by the multi-year uptrend line.
The CRB has broken a bullish flag to the upside: Inflation!!!
Big picture view of the CRB: major resistance at 285, but plenty of support underneath.
All the commodities look good, especially the precious metals and gold stocks from last week:
Aluminum also look great, it just broke a symmetrical triangle to the upside, AA looks like a good stock:
Commodity Based Sectors
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Basic Materials
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XLB |
Breaks consolidation pattern to the upside
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Precious Metals
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Breaking resistance, may start a strong uptrend
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Aluminum
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$DJUSAL |
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Breaks Symmetrical Triangle to the upside
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Coal
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$DJUSCL |
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Strong sector, bullish flag
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Steel (US)
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$DJUSST |
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Strong sector, 110 now support
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Crude Oil
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$WTIC - ST
$WTIC - LT
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Making new all time highs, very strong, inflation fears, but may pullback soon
Multi-year long term uptrend
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Oil Index
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$XOI |
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Strong uptrend, strong sector
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Oil Companies - Major
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$DJUSOL |
OIH |
strong sector, bullish wedge
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Oil Companies - Secondary
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$DJUSOS |
Very strong, bullish wedge
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Utilities
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$UTY |
UTH
XLU
XLE
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Very strong, breaking resistance to form new highs
reacts strongly to the US Dollar, if Dollar rallies, could pullback.
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Electric Utilities
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$DJUSEU |
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Very strong, right at resistance
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Gas Utilities
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$DJUSGU |
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Strong uptrend
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Natural Gas Index
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$XNG |
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Strong sector, making new highs, support at 235
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However, many other sectors have also turned up and are looking more positive:
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Various Sectors
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Aerospace
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Strong uptrend, could make new highs soon
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Airlines
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Strong downtrend, broken support may act as resistance on a rally
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Transportation
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$TRAN |
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consolidating in uptrend
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Trucking
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$DJUSTK |
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consolidating in uptrend
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Advanced Industrial Equipment
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$DJUSAI |
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Rallies off support
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Industrial Diversified
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$DJUSID |
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Support at uptrend line, consolidating into triangle
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Industrial General
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$DJUSIS |
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support at 130
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Industrial Services
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$DJUSIV |
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rallies off support
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Auto Parts
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Descending Triangle, major support at 220
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Advanced Medical Devices
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$DJUSAM |
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Bounces off support
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Biotechnology
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BBH |
Breaking downtrend resistance
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Biotechnology Amex
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$BTK |
Strengthening
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Healthcare Providers
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$DJUSHP |
XLV |
Breaking down, support at 283
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Medical Supplies
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$DJUSMS |
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Trying to rally
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Pharmecuticals
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$DJUSPR |
PPH |
Bearish, broke symmetrical triangle to the downside
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Banks
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$DJUSBX |
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Breaking out and trying to rally
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Banks Index Philadelphia
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$BKX |
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Breaks downtrend resistance line
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Diversified Financial
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$DJUSSB |
XLF |
Bearish Descending Triangle, support at 573
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Investment Services
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$DJUSSB |
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Breaks downtrend resistance line to the upside
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Full Line Insurance
Life Insurance
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$DJUSIF
$DJUSIL
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Downtrend resistance overhead, but strengthening
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Casinos
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$DJUSCA |
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Breaks bearish descending triangle to the downside
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Home Construction
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$DJUSHB |
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Resistance $620, large head & shoulders pattern
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Housing
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$HGX |
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Breaks downtrend resistance to the upside
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Real Estate
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$DJUSRE |
IYR |
Breaks resistance on strong volume
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Retail
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$DJUSRT |
RTH |
Breaks major support
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Nanotechnology
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$NNZ |
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Breaks support line, which is now support, but trying to rally and retest this area
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Semiconductors
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$DJUSSC |
SMH |
Strongly affects the Nasdaq:
making new lows
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Telecommunications - DOW
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$DJUSTL |
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Support at uptrend line, may begin new uptrend
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Telecommunications - Amex
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$XTC |
IXP |
Bearish descending triangle forming
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6. Insider Buying / Technical Supported - Stock Picks:
The Insider Longs section continues to get get larger each week. In my opinion, this list is a preferred list of long candidates for those of you who work, travel, and thus don't have the time to trade all day.
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.
Subscribers who work and or travel extensively, might find this section useful as these stocks can generally be held for longer periods of time, with confidence, knowing insiders are buying along with strong technicals.
Triggered Insider Picks are Highlighted in Grey
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Symbol
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BP Price
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Comments
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8/21
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$21.30
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Insider buying of 150,000 shares on 8/16 for an average price of 20.08 |
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8/21
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$19.75
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Insider buying on 8/18, at 19.08
Resistance at 19.75 and support at uptrend line
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8/21
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$108.50
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Insider buying of about 1/2 million dollars by one of the benefical owners on 8/13 for an average price of 99.75.
Resistance = 108.50, support at uptrend line
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8/21
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$50
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Director buys 14519 shares on 8/18 for an average price of 47.66.
Resistance at 50
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8/21
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$11
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Insider buying of 62,000 shares on 8/17 for an average price of 9.31.
Resistance at 11, support at 9
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8/21
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see chart
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3 directors bought about 2 million worth of stock between 8/13 and 8/18 for an average price of 11.08.
Nice pick up in volume, but I would wait for a pullback before buying STMP.
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8/21
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see chart
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Insider bought 150000 shares on 8/20 for an average price of 8.25.
Resistance at downtrend line, targets 10 and 12
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8/10
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$2.70
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One of the board of directors bought 776,475 shares for an average price of $2.45 on 8/3.
Looks like a good buy if $2.70 resistance taken out.
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8/8
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$14.35
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Triggered long on 8/16, took out resistance
nsider buying on 7/30 for an average price of $12.50
Resistance at $14.35, and first target at $15.70
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8/8
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See Chart
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2 company insiders bought about $10 million worth of stock on 8/2 for an average price of $14.75.
Support at the uptrend line, and a low risk place to buy
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8/8
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See Chart
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Triggered long on 8/16, took out short term resistance
5 corporate insiders bought over 35 million worth of stock between 8/4 and 8/5 for an average price of $20.20
No pattern here and the chart doesn't look that good, however with the insider buying, might want to keep this one on the radar. Support is at $20
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8/1
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See Chart
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8/16 Triggered long, by breaking symmetrical triangle to the upside. - new insiders keep buying each week
Tons of insiders have been buying MWY shares over the past 8 months. The most recent insider purchased shares in late July for an average price of $11.21
Strong uptrend line, nice symmetrical triangle
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8/1
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See Chart
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5 beneficial owners bought about $5.5 million worth of stock on 7/23 for an average price of $3.54.
Represents a buy if the downtrend line is broken.
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7/25
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See Chart
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Triggered long by breaking flag on 8/16
Very large insider buying: Beneficial owner buys a total of $173 million worth of stock for an average price of $33.33 on 7/16/04!!!
Could be bought if the downtrend line is broken to the downside.
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7/17
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See Chart
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16 company insiders recently purchased shares for an average price of $10
Huge pick up in volume, as well as positive divergence to boot.
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7. Gold, US Dollar, Precious Metals Stocks:
Gold had one heck of a rally last week as it tore through a symmetrical triangle to the upside and even took out the important resistance of 410.
The next target for the metal is now the previous high of the triangle at about 433.
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:
Nice breakout, gold may be on the eve of another big runup that will last for some time
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 which is the high of 1988!
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 4 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.
The Dollar is still in a multi-year downtrend line at this point. However, there is positive divergence developing which may limit the Dollars fall.
The positive divergence is something to keep a close eye on if you are long gold stocks.
This next chart is very interesting: Basically it is the US Dollar chart inverted with the symbol $ONE, which equals to 1. Up is really down and down is really up:
This chart could break either way, but I've seen enough charts in my lifetime to think it will break to the upside, which is really the downside. Gold and corresponding stocks will explode to the upside if the chart breaks to the upside.
Gold Stocks
The HUI has a great run last week, but is at a downtrend resistance and will likely pullback in the short term. Notice that the downtrend line also corresponds with the 200 MA.
60 min. chart, broke a symmetrical triangle to the upside, and has had a hell of a run. The HUI is obviously over extended in the short term, but should find support on a pullback, possibly in the low 200s
The long term chart of the HUI appears to be forming a bullish flag and is on the verge of breaking out to the upside.
The precious metals sector had one hell of a week, but is overextended in the short term and will likely pullback.
Many individual gold stocks are bouncing strongly, and have extremely bullish patterns on a long term basis:
take CDE for example, a beautiful bullish wedge if forming on the long term charts:
Gold stocks now look like they will begin to outperform, as the Gold/HUI ratio chart has broken an uptrend line to the downside.
Gold metal is also beginning to strengthen against other currencies: This is bullish:
take a look at gold relative to the YEN, on the verge of breaking out to the upside:
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