1. Administrative Comments:

Appologies for the late post, I had relatives in town this weekend.

Synopsis of stock picks from hot sectors in this weeks newsletter:

2. General Market Comments:

The market began the week on a pullback, especially on Tuesday, however it largely recovered later in the week to end just slight down for the week. In last weeks newsletter I stated that it would be wise to be cautious because a short term pullback could occur anytime. This week I still maintain that cautious stance as I will show you with a few indcator charts which are hinting at a possible short term pullback. As I've been stating for weeks now, the market is in that 'warm and fuzzy' time of the year, therefore any pullback should be short term. It is still a couple weeks before Christmas, therefore there is plenty of time for a slight pullback. My advice is to daytrade or to take profits quickly.

On Tuesday, there is an FOMC meeting where the FED will decide whether or not to raise short term interest rates. The consensus is that the FED will raise rates by yet another 0.25% to 2.25%, just as they have done three times this year already.

The 3 month T-Bill Yield (IRX) is a great chart to follow to decide what the FED is most likely to do with rates. To get the interest rate, simply divide the IRX by 10. As you can see, the past three interest rate rises were already factored into the IRX prior to each of the prior FED meetings via a 0.25% spread.

Currently, you can see that there is yet another 0.25% spread in the IRX, which implies that the FED will raise rates by another 0.25% on Tuesday.

Let's look a look at the charts:

As stated above, oil has been pulling back strongly, which has greatly helped the market. However, as you can see, oil has a major support level approaching near $40 at the uptrend line. This area is a breakpoint: Either oil bounces off this area, or it crashes through it. If oil can break this uptrend line, then it would be positive for the market and economy in the short term. Oil will likely fall to the $35 support area in red if the uptrend line is broken to the downside.

The US Dollar will be the likely catalyst to determin oils price direction: i.e. if the Dollar continues its oversold bounce, then crude oil will most likely break the uptrend line. However, if the Dollar head back down, then crude oil will bounce.

One sector that will benefit if oil breaks the uptrend line is Airlines.

As you can see, the Dollar has major support at 80 and is oversold. I think the possibility of a substantial oversold Dollar bounce is strong. A rally in the Dollar will cause commodities to pullback, especially gold and precious metals, and even crude oil as mentioned above.

Likewise, commodities are at a breakpoint and very close to the muti-year uptrend line. As you can see, everything is lining up and is intricately linked! For example, if the Dollar puts on a strong oversold rally, then the uptrend line in the weekly CRB will likely be broken to the downside. However, if the Dollar heads back down again, the CRB will rally off the uptrend line and commodities such as oil and precious metals will rally.

As you can see, the short term fate of commodities are all hinging on the strength / weakness of the US Dollar.

A FEW INDICATORS TO TAKE NOTE OF:

First, take a look at the 60 minute chart of the VIX. To me, this indicator is one of the most useful in predicting market trends. As you can see, the VIX correctly predicted the market rallies in August and November after uptrend lines were broken to the down side.

Currently the VIX is forming a descending triangle, and the direction this triangle breaks, either to the upside or the downside, will set the next short term market trend.

- If the VIX breaks the triangle to the upside, then the market will pullback, it's as simple as that. The market indexes would likely pullback to test support levels.

- If the VIX breaks the triangle support, then the market will rally strongly.

Keep a close eye on this chart, I consider it on the of most important indicators to watch in the short term.

The NASI chart is very useful at predicting market trends: Last week I advised you to keep an eye on the NASI chart because it was getting too overbought. Well, as you can see, last week a sell signal was given via the parabolic sar, negative divergence via the MACD, and stochastics crossover - a triple confirmation.

Take this sell signal as a warning that the market is in danger of a short term pullback which could last for a couple of weeks. Be sure to take profits quickly on breakouts, rather than swing trading them.

Given the sell signal on the NASI, the Nasdaq for example could pullback to retest support at approximately 2055.

As you can see, the NYSI also gave a sell signal last week further hinting that a pullback will likely occur in the NYSE and the market.

Likewise, a pullback could take the NYSE down to retest support at about 6800.

3. Market Index/Sector Analysis:

The Nasdaq has a bullish chart with year high resistance just overhead. However, as I already stated above, a pullback to support at about 2055 could occur given the sell signal in the NASI indicator. I think if a pullback occurs it will be short term and set up a nice base to launch a rally that will take out the highs.

Here's a 60 min. chart of the Nasdaq: The nearest supports are 2100 and 2055, which may be tested on a short term market pullback.

However, a larger time frame shows us that the Nasdaq has broken out of a large symmetrical triangle which is very bullish.

My target for the Nasdaq is 2330 once the January 2004 highs are taken out!

The final chart is the monthly big picture chart of the Nasdaq. This chart resembles a very bullish cup and handle pattern! Also take a look at that bullish ascending triangle that is currently forming.

This long term chart of the DOW resembles a bullish flag that has been broken to the upside. However, the important resistance line is the 5 year downtrend line. If the downtrend resistance line can be broken on good volume, then it's off to the races for the DOW as it will likely go in to the 11,000s.

The S&P 500 looks great as it has taken out resistance at 1165, which will not act as support.

However, the short term daily chart shows us a slight negative divergence via the MACD. Therefore, don't be surprised if the S&P pulls back and at least tests the horizontal support line at 1165.

The 60 min. chart more clearly shows us the nearest support and resistance areas:

STOCK PICKS BASED ON STRONG MARKET SECTORS:

Here is a list of various stocks from strong sectors. I'm short on time today, therefore I'm not going to go over the individual sectors as I did in the last two newsletters:

Biotechnology sector looks bullish here with clean resistance overhead.

Pharmacuticals have bullish positive divergence:

Advertising sector is bullish as well

Breaking out:

4. Gold and Precious Metals Analysis:

Gold metal is finally pulling back and is currently testing former resistance, now support in the $430s. Gold is at a breakpoint and will either find support in the $430s, or it will break it. If support in the $430s fails to hold, then gold will likely pullback to the uptrend line which is the far stronger support.

As I've stated above: The US Dollar will likely determine golds fate here: The Dollar bounced last week, which caused this pullback in gold metal. If the Dollar continues to rally, which is likely, then gold will probably pullback to the uptrend line in the low $400s. It's also possible that gold metal simply consolidates in this range near $430, however we'll see. I think there is a possibility that gold tries to bounce off this horizontal support area, at least in the short term.

There has been talk among a few subscribers that gold is no longer in a bull market, but has entered a bear market? However, as you can see, there is nothing wrong with this chart, any technician worth his own weight would agree that it is bullish. There is no reason to say that gold is in a bear market unless the uptrend line is broken to the downside.

Good news, the gold exchange traded fund (ETF) is finally trading - symbol GLD! This is great because it allows investors to trade gold without having to own the physical metal. Of course, die hard gold bugs would say that this is still fiat money and would rather own the metal. However, to me the gold ETF is welcome addition. Also, the gold ETF may spark more public interest in gold as it is now much easier to invest in the metal than before. I think the gold ETF has the potential to become at least a part of everyone's portfolio.

The gold ETF trades exactly with gold, GPD is simply the price of gold divided by 10.

GLD will either bounce off the horizontal support line near 42.80 or it will fall to the uptrend line near 40.5.

Gold Stocks:

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The daily chart of the HUI shows us that $220 was major support, which was broken last week. A test of the gold area in the $200 range could potentially occur.

WOW!!!! What a pullback in silver last week! Silver is can be very volatile indeed, notice how it gave back months of gains in just a weeks time! Let's see if that uptrend line can hold.

For those of you who follow palladium, well palladium broke major support last week.

The US Dollar has been in a melt down since first breaking support at 87, and then finally support at 85. Currently, the Dollar is putting on an oversold bounce that will likely take it up to retest former support near 85.

The long term picture shows us that the dollar has support at about 80 going back to 1995. Obviously, this is a logical place for the Dollar to put on an oversold bounce. How long and how large the oversold bounce will be is still a mystery, however the 1st. target is the previous support at about 85. However, be aware that there is also a possibility that the Dollar puts in a large oversold rally that last for months. We'll see...