December 14th, 2003
Administrative Comments:
Gang, I cut my hand pretty bad and had to get 6 stitches this afternoon in-between my index and middle finger on my right hand.
Everything will be okay, I didn't cut any tendons or anything, but as a result, it is very difficult to type, thus this is the reason the newsletter is a bit late this evening.
Wow!!! Saddam Hussein captured, can you believe it??? Well, obviously the market is going to gap up big time tomorrow morning, as I right this, Nasdaq futures are up 27 points. The big question is, will this gap be sold off tomorrow or will it last for a little while?
My thought is that the gap will last more then a day, and could even propel the market higher until the end of the year and maybe even some into January. Of course, we as traders must react to what the market does, not what we think it might do. Even though Saddam Hussein has been captured, it is obvious that he wasn't in command or leading any resistance movement - he was hiding trying to save his ass. The news media has been commenting on how tired, defeated, and old Saddam looks compared to earlier this year before the war started. One journalist even compared his disheveled hair and baggy droopy eyes to Nick Nolte's arrest picture for drunken driving - I have to admit that's a good comparison. From his picture, lost is the confident imposing stare and what you have left is a tired old man.
Anyway, even though I am a huge contrarian who rarely acts or thinks the way the general masses do, I can't help but feel a little euphoria and joy at Saddams capture! Therefore, I think most everyone is feeling a little good tonight and thus this is my reason for thinking that tomorrows inevitable gap-up will probably last more then a day. However, I don't think this big news will ignite a massive stock rally that will last for weeks either. The market is getting tired and needs to pullback eventually. This news could cause the markets to have that nice end of year rally that I've been talking about for so long. However, sometime in January, I still expect the market to top out and start a big correction. Prior to this news, the Nasdaq has been lagging the DOW and S&P which is a red flag - the Nasdaq must lead, not the DOW and S&P. Anyway, this news of Saddams capture will probably only postpone the inevitable market crash for a little while longer.
Prior to the Saddam news, everything was seemingly falling into place. The S&P and the DOW were making new highs, but the Nasdaq was lagging behind. This is usually a sign of a market top and shows that the masses are moving their money out of the Nasdaq and into the perceived safety of the DOW and S&P.
Also of note was that last week, the three top sectors were Mining, steel, coal, while the weakest sectors were precious metals, Home builders, Retailers, and Semiconductors which points to a toppy general market.
Commodities have been on a tear obviously as mining, steel, coal, copper, natural gas, and oil all were up strongly last week. The CRB commodities index which is a composite measurement off all these commodities is on a strong uptrend and in fact recently broke its 21 year downtrend line.
You can see from the chart below that the CRB commodities index has been on a real tear lately:
The long term chart of the CRB index is very important and shows us that commodities are in more then a simple uptrend: Commodities have decisively broken a 21 year downtrend and entered a Secular Bull Market. Secular Bull Markets last 10 years or more on average, therefore this chart tells me that the big money will be made in commodity based investments in the long term such as precious metals and other metals like steel, copper, aluminum, natural gas, oil, etc.
Last week, I had prepared my personal stock portfolio to take advantage of commodities. I am long several oil stocks, steel stocks, and energy stocks ( however I did sell most of my gold stocks). With Saddams capture, it's possible that the CRB index takes a dip in the short term, especially precious metals like gold and silver and possibly oil.
Last week, Crude oil broke the significant resistance level in the high $32's and as a result, oil, energy, and natural gas stocks did great last week. By the close of Friday, I thought that higher oil prices were a given starting this week. However, I wonder if Saddams capture will delay oils run for the short term? Who knows, we shall see. Anyway, unless oil breaks down big time this week, crude oil looks very strong and may see the high $30's early next year.
As you can see, OIL companies are doing very well
OIL could see the $70's some time early next year.
Likewise, the energy sector is doing quite well, as represented by the ETF, XLE.
First, the Nasdaq:
The Nasdaq has been the weakest of the major indices and has been lagging for the last few weeks which is generally a warning that a market top is in or close. The Nasdaq has support at the bottom trend line near the 50 MA and resistance at 2000.
With Saddams caputure this weekend, the Nasdaq will likely gap-up quite high on Monday. If this gaps follows through, then the Nasdaq could rally to test 2000 and possibly early this week.
The Semiconductor index strongly affects the Nasdaq and the general market. The Semis have been weak lately and is the main reason why the Nasdaq was falling behind the DOW and S&P. The Semis must remain strong in order for the Nasdaq to continue its uptrend. The semiconductor index barely held onto its uptrend line last week but I suspect it will bounce off it nicely next week with Saddams capture.
However, Saddams capture only delays the inevitable and the Semicondcuctor index will likely breakdown early next year.
DOW daily chart:
The DOW has broken 10000 and the masses are excited indeed. Let's see how long the DOW can maintain this strength.
Yes, the DOW has broken the 10,000 barrier. However, 10,000 level is more psychological then technical. In my opinion, the DOW has a few hundred points to the upside at best.
The S&P 500 daily chart:
The S&P looks similar to the DOW with a strong uptrend and is on the verge of making new highs.
On a long term basis, the S&P could run to 1175 which is the next multi-year resistance level. However, I would like to see a nice pullback first before it attempts to rally that far.
Part 2: Gold Analysis
Gold metal held up well above $400 last and flirted with the $410 level a few times. Gold could continue to rise, but as I wrote last week on the message board, Gold metal does not have a lot of upside left to resistance. There is multi-year resistance at $420-425, therefore not alot of upside left. Also, gold stocks took a beating on Monday and Tuesday which was not surprising. As I write this, Gold metal is down by about $6. It's hard to say if Gold will begin a strong pullback here or not. I am personally out of most of my gold stocks and I'm looking for another pullback in gold stocks to start accumuating long term positions once again.
Gold stocks have had such a run-up this year and likely need to consolidate for awhile. here is a reposting of what I wrote last week as it still applies:
"Gold is firmly holding above $400 an ounce around the $410 range. I do not see alot of short term upside potential here as the next multi-year resistance is $420-425 which isn't too far away.
The US Dollar also has the potential to rally as Positive Divergence has shown up in the MACD which could cause gold to consolidate or pullback. So far the Dollar has bounced and could bounce all the way to resistance at 91, but it could also turn down again as well. Gold and gold stocks will likely move indirectly proportional to the Dollar.
Gold Stocks: Gold stocks have pulled back hard this month so far as evident in the HUI and XAU gold composite charts. Tuesday and Wednesday (December 9th - 10th) were especially violent with huge pullbacks. Gold stocks then bounced hard on Thrusday the 11th.
Personally I sold out of 95% of my gold stocks last week and was going to buy on a good pullback. Unfortunately I missed the pullback on Thursday morning as I was away from the computer. Ideally, I would like to have re-established some positions on the Thursday morning gap down, but I missed my opportunity.
Gold stocks could continue to bounce here especially if the Dollar starts to fall again and gold rallies. However, with the technical damage that was done early this week, I think gold stocks will pullback once again and will need to consolidate for weeks to a month or longer before rallying to new highs again, though I could be wrong.
This pullback should only concern you if you are short-term trading gold stocks (i.e. trying to time their movements such as I am which is a very difficult strategy). If you are holding (or married to your gold stocks and holding for the long term) then don't even sweat these pullbacks.
However, for the for the long term...Gold is in the beginnings of a long term Secular Bull Market. This means that gold stocks will likely be substantially higher a year from now. Therefore, the easy thing to do would be to buy gold stocks on dips and not even look at them for a year. A year or two from now, more then likely gold stocks could be double or triple in price what they are now. In other words, marry them and don't even look at them for a year or two. If you decide to do this strategy, the best advice would be not to look at the day to day movements, you also have to stomach the strong pullbacks that will likely occur along the way, keeping in mind that the long term trend is up - remember it's a Bull Market.
You have to choose how you are going to trade these gold stocks, buy and hold em (which is the easiest, but you have to be able to stomach the corrections along the way), or short term trade them which is much harder to do but possibly more rewarding if you can time it well.
1. Establish core positions in gold stocks and don't look at them for a year or two. Gold stocks will probably be substantially higher in the next couple of years.
2. Try to buy Gold Stocks on dips and take profits on rallies, thus timing the market
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 multi-year expanded view.
Below is an long term view of Gold metal. Notice the multi-year resistance line
The US Dollar:
The US Dollar is currently in a meltdown and could continue to fall. The Dollar needs to bounce here, otherwise another meltdown is likely. Maybe the Saddam news will ignite a short term rally on the Dollar?
This chart shows the multi year support at about 88.5 for the dollar.
Silver is also doing great, and many analysts feel that Silver has more upside potential then gold. Silver has strong resistance at $5.43, and if broken, Silver could probably see $6 +
The HUI finally pulled back last week. Monday and Tuesday were vicious pullbacks, but the HUI managed to find support exactly at the 200 MA. I suppose it's possible that the HUI rallies to new highs here, however I suspect it will need to consolidate for a bit.
Long term view of the HUI index. Amazing run this year. Those who bought when the Ascending Triangle was broken to the upside have been well rewarded indeed!
The XAU found support at 100 last week near the 200 MA.
The XAU looks very bullish on a monthly long term chart. Notice the Inverse Head and Shoulder pattern. The neckline was recently broken and an objective price target is about $140-150! Keep in mind the objective price targets will take many months to achieve as each candlestick here represents one month.
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