1. Administrative Comments:

Big announcement, we are current re-designing the Breakpoint Trades website, and the result will be a much better and far more useful website:

The new website will still be a month or more away, therefore I'm not going to go into too many specific details at this time, however here is a little information to get you excited...

- The website will be reorganized and will flow much better. Many new subscribers initially have problems understanding the layout of the current website, this will be rectified.

- There will be an integrated chat room, thus it will be easy for members to access the chart room and not have to download software, etc.

- A new partner has joined Breakpointtrades who brings 20 plus years trading and investment experience to you. He has been trading full time for a living since 1987, but prior to this time, he worked on wall street before that in the structured securities area. He is also currently the chairman a resource mining company.

- The new website will be muti-tiered and will offer two levels of membership: One level will be just as it is now but also improved. However the second level will offer far more, and will be aimed at the professional trader/investor. Our new partner will be maintaining this section.

Keith Kern will continue his current duties i.e. the daily watch list as well as the chat room. Though improvements will be made to these sections for your benefit.

Myself (Matthew Frailey) will continue writing the newsletters (but they will also be emailed) as well as the gold section, insider setups, and market sectors pages.

- etc. etc. etc.

More details will be given once we are close to launch....2005 will be a big year for Breakpointtrades, and you'll want to make sure you come along for a very profitable ride!

2. General Market Comments:

Well, just as warned you all about, the market pulled back strongly last week. This was really all too obvious as all the major index charts, and most of the individual sector charts had either negative divergence and/or bearish rising wedges in their daily charts. If you are new to this site, be sure to read last weeks newsletter and a few of them before hand, and you will see that members of Breakpointtrades were not caught off guard by the sudden market pullback - but were well informed in advance.

Here are links to the previous two newsletters:

Last Weeks Newsletter:

Last Newsletter of December:

Anyway, the market may try to put on an oversold bounce in the short term, however I do not think the market has fully pulled back. The daily rising wedge patterns as well as the huge volume on this sell off hint that the market is not ready to run to new highs. Therefore, any bounce that may occur in the short term will most likely be a temporary one.

For those of you who want to short the market, I would first wait for an oversold bounce to occur. Shorting a stock is more difficult than going long a breakout stock:

For example, when I go long a breakout stock, I will usually purchase all my shares at once, when resistance is broken. I then sell off portions of my shares at a time (1/3 to 1/2) during a run up.

However, when I short a stock, I typically do not short when support is broken, I try to wait until a bounce occurs, and short near a resistance level. Also note that I do not short my full initial position at first, but I will typically short maybe 1/3 of my intended position, and then add to it over time when oversold rallies occur. Also, instead of covering portions at a time, I will cover all at once. In otherwords, I like to 'build' a short position over time.

Anyway, there are a two types of positions you can short: 1. Short individual stocks that look topy, or 2. short an ETF or an Index, or take a position in a bearish mutual fund. By far the easiest is number 2, this way you don't have to pick the perfect stock and the it will usually be much less volatile.

Here is a list of "Inverse" or Bear mutual funds which short the Market:

Inverse Market Mutual Funds

I posted the following table last week of how the Market typically performs on a post election year. It should come as now surprise that the post election year is statically weaker than normal as the President no longer has to worry about getting re elected. The following chart from www.chartoftheday.com shows this perfectly. Notice that the market historically performs below average following an election year: Will 2005 act the same? Well just have to see...

Anyway, take notice from the chart below which shows that the Market is historically 'choppy' during January, but then enters a strong correction which lasts form late January unil March or April. I would not be surprised at all if this occurs once again.

As you've probably gathered from above, I'm not bullish on the general market at this time. However, there will be select individual strong sectors that will out perform the market. One of these sectors that is beginning to look really interesting to me is the gold sector: I will cover this in the later part of the newsletter, however is seems to me that gold and gold stocks may be lining up for a strong move. 2004 was not a good year for gold stocks, however 2005 might be just the opposite.

The FED has recently commented on their dislike over the fact that long term interest rates have failed to rise despite their raising of short term rates. The FED wants to stave off inflation and would like to see long term rates go up.

The next chart is the ratio of long term and short term interest rates. Positive Divergence hints that this ratio will eventually begin an uptrend. Logically, in order for that to occur, long term rates have to go up since they are the numerator. Therefore, I think it is only a matter of time before you see long term rates begin to rise.

The following chart is the 10 year long term rates. This chart looks like it has essentially bottomed and will probably begin a rally soon.

Why is this information useful you may ask? Well, for one thing, if you haven't already refinanced your mortgage, then you better do so soon. Also, for anyone with experience trading futures, shorting the long bond seems like the way to go. I am currently short the long term bond (with protective stops of course). I use Interactive Brokers to short long term bond futures.

Let's look a look at the charts:

As I stated above, the market pullback was obvious with all the bearish rising wedges and negative divergence:

The following chart is percentage of Nasdaq stocks above the 50 MA. The bearish rising wedge and negative divergence were obvious signs that the market would pullback.

Currently, this indicator has fallen to support at 50%, and may attempt to rally of this support level. Hence, the oversold bounce I referred to above which may occur soon.

As you can see, the Nasdaq broke down through a bearish rising wedge last week with huge volume. This is never a bullish sign. Anyway, support at 2055 is fast approaching and I would not be surprised to see an oversold rally off this level.

Also notice that the Nasdaq is now near an uptrend support line.

As you an see, the pullback was obvious with the bearish rising wedge and negative divergence:

Same thing for the S&P 500:

Same deal for the Russel 3000 index:

The SOX has broken the uptrend line, but has a support level near 400.

Next, let's take a look at long term charts to give us a 'big picture' perspective.

As you can see, the Nasdaq is still bullish on a long term chart:

The Nasdaq for example has a bullish cup and handle / or ascending triangle. Therefore, the Nasdaq has plenty of room to pullback and still stay within this pattern. The bottom uptrend line is near 2000,

As you can see, the S&P looks very bullish on the long term chart. The S&P has plenty room to pullback and still stay above the uptrend line.

Gold and Precious Metals Analysis:

The 25 year chart of gold shows us that gold metal likely ended it's 20 plus year secular bear market after the downtrend line was broken. Once again, you can see the uptrend support line below.

Last week I stated that Silver looked like it had a bearish wedge formation. My assumption proved correct and silver took a tumble last week. However, silver looks better this week as it has formed what my be a bullish wedge.

Again, the US Dollar should be watched closely here: The US Dollar rallied strongly last week and subsequently caused gold and silver to pullback strongly. The US Dollar has some minor resistance between 84.5 and 85, however I think the US Dollar will probably rally to test the 200 moving average near 87. This event will likely cause gold metal to pullback more and finally retest the uptrend support line, which is still about 10 to 15 points away.

The inverted Dollar chart can give us a different perspective on the Dollar. Remember to think opposite with this chart: In other words, up is actually down and vice versa. Therefore, as you can see, the US Dollar will remain in a bear market as long as the uptrend line remains intact.

Gold Stocks:

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The yearly chart shows us that the HUI is at support levels near the 200 level.

However, notice that the HUI has retraced almost exactly 68% of the rally which began in late July! Along with oversold stochastics, this seems like a logical place for it to bounce: