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Labor Day Weekend
Table Of Contents:
Click on the section titles below to be automatically taken to that section:
Part 2: General Market Analysis
1st. off, I am leaving this afternoon to go to Chicago (anyone here from Chicago?) Anyway I will be out of town until Wednesday evening. Therefore, please address any questions about the website Keith or Casey, you will find their email addresses in the Contact section.
I am starting to see many news articles in the news about rising gas and oil prices. Crude oil has been in an up trend since May and is currently forming a bullish Ascending Triangle. If OIL breaks this triangle to the upside, oil prices and gas prices we pay at the pump will go up. Based on triangle measurement, a projected price target for oil is about $40 a barrel! Let's hope this triangle breaks to the downside instead of the upside.
The bullish chart of crude oil is understandable given the bullish chart of the CRB commodities index. The CRB index broke resistance of 242.20 last week and is now poised to make new highs. This means higher commodity prices such as oil, natural gas, and precious metals, etc.
The long term chart of the CRB index below is important because it shows that commodities have been in a 21 year down trend. The CRB is near the significant 21year down trend line, and if broken, could signal the start of inflation, not deflation as everyone seems to be worried about. If the down trend line is broken, this could pose implications to us all in the form of higher prices for everything.
I know that everyone keeps talking about an economic recovery, however a surge in commodity prices is something that could stop it dead in its tracks.
One thing I've been noticing over the past few weeks is that many of the breakout stocks I have been playing and doing the best with (besides Gold stocks) are in the Biotech Sector. I did a check of hot sectors and found that the Biotech Sector is currently one of the hottest sectors. The chart below illustrates this very well as the Biotech Index ($BTK) has formed a Bullish Flag that could break to the upside at any time. If this sector breaks the flag to the upside, then expect many more breakouts to show up from the Biotech Sector.
Besides playing individual stocks in the biotech sector, the Rydex Biotechnology fund is a way to take advantage of a breakout in the Biotech Sector. The Rydex fund exhibits a similar Bull Flag to the non tradeable $BTK. I would only by this fund if the $BTK index breaks its flag to the upside, not before.
For those of you who own the TRF russian fund, the Russian market is trying to make another high as well as the TRF Russian fund.
As you can see, the TRF russian fund below is trying to breakout once again. I still hold my original shares that I bought back in early April at $22.75 when I first profiled the Russian Market.
VIX analysis:
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 20s and lower, while overly bearish levels are in the upper 40' 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 forecast 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.
Current Analysis:
The daily VIX chart isn't telling us anything different then it was last week. It is near support and could rally here causing the market to fall or it could fall to break support and cause the market rally to be extended. The VIX isn't very useful at this point, only that it is at low levels which usually signal the market is over bought. However the market can remain in overbought and oversold states for some time.
Below is a long term chart of the VIX. IT looks like the VIX will probably fall to multi year support at 18 which could provide the market with one more short rally. This longer term chart is probably more useful then the short term VIX chart above.
Now on the Major Indices:
The gereral market fell early this week but recovered nicely later in the week, which is what I expected and wrote in last weeks newsletter. All the 'perma bears' keep saying the market is going to come crashing down at any second, however the Nasdaq, Dow, and S&P charts do not suggest this and remain quite strong. Fundamentally the market is way over bought, however in the short term, the major indicies remain strong. One has to be very careful trying to time the market based on fundamentals, in my opinion, technical analysis works best for identifying trends in the market.
First the Nasdaq:
The Nasdaq looks very strong here, as it is very very close to making a new high, current resistance is at 1815. The Nasdaq will likely attempt to make a new high early this coming week.
DOW daily chart:
Current Analysis:
The DOW broke the horizontal rectangle two weeks ago, but quickly fell back, only to find support and put on a strong rally later in the week.
This is exactly what I thought might happen last week as I wrote in last weeks newsletter "The weakness will probably continue early this week, however the DOW could find support later in the week. Despite the big pullback on Friday, the DOW remains technically strong."
Anyway, the DOW looks very strong here and may try to make another high for the year this coming week.
Below is longer term view of the above DOW chart.
Like the DOW, the S&P 500 is currently trading in a sideways consolidation pattern via a Horizontal Rectangle with resistance at 1015 and support at 965. The direction this pattern breaks may set the next major market trend, for now it is a waiting game. If the S&P 500 can break to the upside, then the general market could enter another rally. Note that if 1015 is taken out, the next target for the S&P is 1050.
Below is longer term view of the above S&P 500 chart. Here you can see where I come up with the 1050 price target (which is the resistance low set back in May 2002) if the current resistance at 1015 is broken.
Below is a very long term view of the S&P 500. If the rectangle is broke at 1015, then the general market has the potential to rally to new highs again this year, possibly sending the S&P to 1050 at least.
Part 3: Gold Analysis
Gold metal looks very strong here, as it has broken the Symmetrical Triangle to the upside and taken out the $375 May resistance high. The next target is $380, and then the high set back in February. I think Gold will eventually rally to new highs and will eventually see $400 a share.
Based on triangle height measurement, a generic price target of Gold is about $425 - 430!!! I arrive at this figure by measuring the height of the triangle and adding it to the breakpoint. The height of the triangle is about $60 ($380 - $320 = $60), add this to the breakpoint at $368 = $425 to $430. Also note this corresponds almost exactly with the resistance level from the long term chart as seen further below. However, realize that this will take some time to come to fruition with pullbacks along the way.
Below is a plot of the gold metal on a longer term basis. Basically you see the same technical picture as above, but on a muli-year expanded view. Here you can see two triangle formations, triangles are simply consolidation patterns before a large price movement. Amazing to see two such beautiful triangle patterns together on a chart.
On an ultra long term, gold is above a 15 year down trend line. If the recent consolidation on gold is broken to the upside, gold has a shot at $425. Again, note how this correlates nicely with my computed price target based on triangle height measurement - The height of the triangle is about $60 ($380 - $320 = $60), add this to the breakpoint at $368 = $425 to $430.
The HUI broke out of a "text book Ascending Triangle", with the breakpoint at 157.8 in July. This breakout level is significant for gold stocks, especially those in the HUI index. Anytime a multi year resistance level it is broken, an explosive price appreciation usually occurs, which we are enjoying right now. What's exciting is that a long term price target of the HUI is in the 200's based on height measurement of the triangle (75 + 158 = 228). The HUI could pullback at anytime to digest its gains, however I think any pullback will be temporary and I would use it to buy more gold stocks.
Unfortunately you cannot play the HUI directly like you can with the XAU, you can only play the stocks within the HUI, (components of the HUI)
Gold stocks in the HUI may be getting a bit over extended in the short term. Notice the inverted hammer candlestick that formed on Friday. These inverted hammers usually signal a pullback. Thus, I think there is a strong possibility that the HUI, and associated gold stocks, pullback early this coming week. On a pullback, the first support levels are about $190, $180, then $174.70 and $170.65, followed by support at the small flag in the $160s and finally the major support at $157.8 - however I really doubt that the HUI will pullback all the way to $158 at this time if ever.
Remember that gold is in a bull market, therefore the easy strategy is to hold long term core positions and accumulate on dips.
If the HUI pulls back in the short term, the 60 minute chart below shows you the possible support levels, the closest being about $190.
The XAU is also doing very well, and has rallied nicely since breaking out of the Symmetrical Triangle. Last week the XAU rallied to a new high, breaking the $89.10 high set back in may 2002. This is very bullish and sets up the XAU for more gains. Note that based on triangle height measurement, a rough price target for the XAU is about $110. Unlike the HUI, the XAU can be bought directly, and is optionable.
Below is a closer view of the XAU index. On a pullback, the gap formed last week might act as support, as well as $85.
If the XAU pulls back in the short term, the 60 minute chart below shows you the possible support levels, the closest being the gap formed last week.
One must not lose site of the fact that gold is in a long term bear market. Therefore, despite what individual gold stocks may do in the short term, many of the long term charts look very bullish, click on the stock symbols in the table below.
Weekly Long Term Gold Charts
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< $2
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$2 - $5
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$5 - $10
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$10 - $20
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> $20
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The US Dollar:
The US Dollar broke the 97.6 resistance two weeks ago but found resistance at about 99 and is currenlty pulling back. Look for strong support at the uptrend line and the former resistance at about 97.6.
If the Dollar finds support next week at the uptrend line, Gold's advancement may slow somewhat. However, note that despite the Dollars strength during over the last few months, Gold has done well. This is a good sign that the direct correlation between Gold and the US Dollar may be weakening somewhat. This is the kind of action we need to see for Gold to really take off.
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