1. Administrative Comments:

With the short Christmas week, I am not posting new sector picks in this weeks newsletter. Take a look at Keiths awesome picks on the daily watch list, as well as my insider long picks for trading ideas during this short week.

2. General Market Comments:

The market started off fairly strong early last week, but then sold off later in the week on Thursday and Friday. Phfizer hit the market fairly hard on Friday with possible negative news on their block buster drug Celebrex. The Fed also raised rates by another 0.25% and essentially reiterated their previous comments about slowly removing accommodation.

This week should be slow and light in volume. This is the Christmas week; the market is closed on Friday and Thursday will likely be dead for all practical purposes. The market is in that 'warm and fuzzy' time of the year, and historically does well. However....the index charts are looking toppy to me and signs of a possible pullback are all around. For example, negative divergence is present in the MACD in many of the index charts, as well as the market indicators themselves. Does this mean that a pullback has to occur here? No, but one could be just around the corner, possibly in early January just after Christmas. This bearish divergence will be negated if the market rallies strongly in the short term, otherwise I'd say that the likely hood of at least a short term pullback is getting stronger everyday.

Keep in mind that this negative divergence is only on the daily charts, and is not present in the weekly long term charts which are currently setting up nicely. Therefore, a pullback would be bullish in my opinion, as it would work off the present over bought conditions and set up the market for a nice rally in early 2005.

Of course, keep in mind that a pullback may not occur, just be cautious and take profits quickly.

Let's look a look at the charts:

As stated above, the FED once again raised short term interest rates by 0.25% on Tuesday. Thus far, long term rates have not been rising, as you can you clearly see from the chart below: The following chart is a ratio of the 30 year long term rates ($TYX) with the three month short term rates ($IRX). As you can see, the spread between the two rates has dropped dramatically since the uptrend line was first broken. However, strong positive divergence is present in the MACD, thus hinting that the ratio, or spread, will soon rise.

In order for the ratio to rise, either longer rates have to go up (likely), or short term rates have to fall (unlikely giving the FEDs current stance on interest rates. Therefore I think there is a strong possibility that long term rates finally begin to rally off current levels.

The next chart is the 30 year interest rates: It's possible that rates could soon begin a rally off this support level.

In last weeks newsletter, I pointed out that crude oil had fallen to the uptrend line and would either crash through it or rally off of it. Well, obviously oil bounced strongly off the uptrend line, current resistance is now about $45. However, as of yet, many oil stocks do not look like attractive breakout candidates, but this could change in the near future with a little more consolidation.

Logically, the CRB commodity index rallied strongly off a muti-year uptrend line. This chart hints that inflation may eventually hit the US in a big way. All our goods are made up of raw materials, therefore the rising prices of raw materials eventually has to be passed on in the form of higher prices for finished goods - as Spock would say, it's only logical.

A FEW INDICATORS TO TAKE NOTE OF:

The VIX 60 min chart broke support which is positive for the market in the short term - when the VIX falls, the market generally rallies, and vice versa.

However, how low can the VIX really go??? The lowest the VIX has ever been is in the mid to low 10s!

The NASI chart can be very useful to predict market trends. The NASI is flashing a warning sign via the sell signal on the parabolic sar and negative divergence on the MACD.

It is wasn't for the time of the year, then I would issue a market sell signal, but maybe a pullback occurs after Christmas.

Anyway, you should at least take heed and tighten up your stops and take profits quickly.

The next chart shows us the percentage of Nasdaq stocks that are above the 50 MA. Once again, negative divergence is very obvious via the MACD and hinting at a pullback in the near future.

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 has also given a sell signal and negative divergence is very prevalent in the MACD indicator. Again, just a warning sign to take heed and protect profits.

Likewise, a pullback could take the NYSE down to retest support at about 6800. There is also negative divergence present in the MACD.

The next chart is a ratio of the DOW Transports with the DOW Jones. DOW Theory states that Transports tend to lead in a healthy uptrending market. However, if you see a divergence take place between the DOW Jones and the Transports, then something has to give. In other words, these two sectors can only diverge for so long.

As an example, if the DOW is rallying, but the Transports are falling or lagging behind, then this is a warning sign that the DOW will soon breakdown and pullback.

Currently, there is negative divergence present in the MACD which hints that the Transports will soon began to under perform relative to the DOW, and is another warning of a market pullback in the future.

Again, continue to play breakouts, but take profits quickly.

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 soon given the sell signal in the NASI indicator. Though given the time of the year, maybe a pullback will not occur until January 2005 or not at all.

Anyway, the good news is that any pullback will simply be a pullback within an uptrend!

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, stochastics are oversold, therefore the Nasdaq may drift up first, especially given the time of the year.

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.

Once again I must stress that any market pullback that may occur will likely be short term. As you can see, the weekly long term charts are very bullish for the Nasdaq.

The Semiconductors need to rally soon, otherwise the uptrend line will be broken and a pullback will commence. This is important because the semiconductors strongly affect the direction of the Nasdaq, i.e. if the semis. pullback, then so will the Nasdaq.

Keep a close eye on this chart, as will be an important factor which determines whether the market pulls back in the short term.

The DOW is bullish and strong, and the yearly highs were tested last week near 10750. There is a slight negative divergence in the MACD, but any pullback would likely be temporary. Support levels are the previous highs.

This long term chart of the DOW is very bullish: Notice that the bullish flag has been broken to the upside, but more importantly, the 5 year downtrend line as been broken to the upside! This long term chart is very bullish and I think we will see the DOW Jones in the 11,000s sometime in early 2005.

Similar to the Nasdaq and DOW, the yearly S&P 500 chart shows us a slight negative divergence via the MACD. Therefore, don't be surprised if the S&P pulls back and at possibly tests the horizontal support line at 1165 in the near future.

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

3. Gold and Precious Metals Analysis:

Gold metal has pulled back from new highs to retest the former resistance, now support in the $430s. Gold bounced off this area last week, but is this just a temporary bounce? Again, the US Dollar will likely determine golds fate here: If the US Dollar rallies, then this current bounce will likely fade and support in the $430s will fail, thus resulting in a pullback to the multi-year uptrend line.

Given that the US Dollar has multi-year support near the 80 level, and is currently oversold on the weekly chart. I think a pullback to the uptrend line is the most likely scenario. However, it's also possible that gold metal simply consolidates in this range for another month or so before it's ready to move up again, we'll see.

One thing to note is that the daily stochastics are now finally oversold, thus it's possible that gold has basically bottomed.

The chart of gold metal is a beautiful chart, therefore as long as the uptrend line holds, I will consider gold to be in a powerful bull market.

Again, gold is in what I and many others consider to be not just a cyclical, but a long term secular bull market. The 1990s were the decade of tech. stocks, but I think will turn out to be the decade of commodity stocks.

Over the weekend I read a slew of gold articles and one of them written by the Aden sisters entitled 'Back to Basics' caught my eye. This article discussed that gold historically has strong support at the 65 week moving average. Obviously, the best place to buy gold is on pullbacks near this 65 week moving average.

As you can see from the chart below, the 65 week moving average seems to work very well as a support level. Though the question remains, will gold pull all the way back to this 65 week moving average or will it find support at the horizontal support line instead? You can see that on the two previous pullbacks, the horizontal resistance lines were in the same region as the 65 week moving average, but this time it is not. A couple months of sideways consolidate would bring the two together and is what I personally want to see happen. If this occurs, then I will buy big back into gold.

However, long term traders or investors have nothing to worry about and could actually begin to average in a little here just in case gold bottoms here.

Taking a look at silver, one can see how volatile it can be. Silver quickly pulled back from the low $8s all the way to the high 6's in a few days time. Currently, Silver is once again at an uptrend support line and is oversold an the daily stochastics. Silver is obviously at a breakpoint and will either rally off this line or break it to the downside. I think there is a good chance that silver tries to bottom here, keep a close eye on it.

I've stated many times that the current bull market in gold has merely been a function of the US Dollar bear market. In order for gold to enter the next leg of a power full gold bull market, then gold must rally relative to other world currencies, not just the US Dollar. For example, gold appears to be in a bull market relative to the US, but not to many other foreign countries, such as Europe where currencies have performed well against the US Dollar. The result is that gold is barely up for Europeans over the last couple of years.

However, the tide may finally start to change as gold is beginning to strengthen against other currencies and may break out in 2005. If this occurs, then we could see gold enter the next level of the bull market.

Also consider that many gold stocks are based in other currencies, such as the Canadian Dollar, the South African Rand, and the Australian Dollar. Therefore, gold must rise relative to these foreign currencies so that their profits can rise, which would justify higher stock prices. Many gold stocks may be currently under performing relative to the metal simply because gold is only in a bull market relative the US Dollar.

For example, gold is beginning to perform well against the Australian Dollar. Notice the bullish ascending triangle that is currently forming. Gold looks like it will breakout relative to the Australian Dollar sometime in early 2005.

As you can see, gold has essentially gone no where as far as the Europeans are concerned for the past two years. However, the gold/Euro ratio chart is once again in an uptrend and has strong and important resistance at 3.50. If this area can be broken, possible sometime in 2005, then gold will become attractive to Europeans which would help to push it into the next leg of the bull market.

Gold has also strengthened relative to the Canadian Dollar with resistance just overhead.

Relative to the South African Rand, the gold ratio chart has strong resistance at the downtrend line.

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, and is the area where I will begin to buy gold stocks if a pullback to this support level occurs during the next month or two.

The XAU has strong support at the uptrend line just below the 95 level. This is the area where I will become a buyer of gold stocks.

The weekly chart of the HUI further confirms this support uptrend line.

Let's look at a few gold stocks in particular:

DEZ is a fairly new gold stock with great fundamentals, and has held up very well during this gold stock correction. This is currently one of my favorite gold stocks.

EGO is another one of my favorite and also has great fundamentals. Notice that EGO has found nice support in the high $2s.

HMY is a gold stock that is based in South Africa. As you can see, it is currently at support and will either rally off this level, or crash below it.

HMY shows you just how weak many gold stocks are.

As you can see from the weekly long term chart, HMY is also at muti year support going back to mid 2002.

Drooy looks similar to HMY, it is at the yearly lows and will either rally off this level, or it will crash through it.

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.

Sometimes by inverting a chart, we can get another perspective. As you can see from the inverted dollar chart, the dotted horizontal line may be retested. Of course, for this to occur, the Dollar must rally.

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...