Last week was not a good week for the market, unless you were either short or long gold stocks. The market started off the week okay, it rallied on Monday and Tuesday which was not surprising due the positive divergence in the 60 minute index charts - which we pointed out in last weeks newsletter. However, Wednesday through Friday were horrible: The market is in the heart of earnings season. Companies either have to meed or exceed their earnings expectations, otherwise they get slaughtered. For example, Ebay reported disappointing earnings after the Wednesday market close and subseqently got smashed on Thursday and Friday.

Essentially, stocks were priced to perfection and there was no room for error. The market has had a good run since March 2003 when this cyclical bull market began, and traders were simply too complacent, especially after the stellar market performance last fall into the holidays.

The trend is down and especially now you have to be nimble as traders: You can still catch a breakout here and there, but you must be quick to take profits and don't attempt to swing trade unless you are playing gold stocks or perhaps oil stocks. A lot of technical damage has been done to the index charts. Probably the best the bulls can hope for is an oversold bounce or a choppy sideways bounce.

I do not think this downtrend is over, shorting is the way to go. However, shorting is much trickier than going long and/or playing breakouts: Once the market puts in an oversold bounce, then I will look to short, it's less risky to short on a market bounce then on a day when the market is tanking. Also, if you are not comfortable shorting individual stocks, then consider shorting ETFs, or the numerous bear funds out there. If you still are not comfortable shorting the market, then day trade if possible, or consider buying a few gold stocks which appear to have bottomed.

If you are new to this site, then please read my last newsletter from December 2004.

Last Newsletter of December:

In this newsletter, I was very bearish on the market, especially in my last newsletter of 2004. Go back and read that newsletter, you will see that members of Breakpointtrades were forewarned well in advance that a market pullback would ensue. The signs of it were everywhere: Most of the index charts had bearish rising wedges and/or negative divergence. Also, many indicators I watch were all showing the market was due for a strong pullback.

Also, in my January 6th newsletter, I stated that the market looked weak and to consider shorting. I presented a table of inverse market mutual funds that short the market. So far, this list is doing nicely.

USPIX is one example of an inverse mutual fund: When I presented this chart in my January 6th newsletter, USPIX was at $16.97.

Let's take a look at the charts:

Breakpointtrades has some very useful market indicator listed in the market analysis section, under market indicators. Below I will present a list of market indicators that I find some of most useful at predicting the markets future trend. I use these indicators myself and you should also become acquainted with them even if you are a day trader.

Take the examples below as an education at how one could have used these indicators to predict this current market pullback:

The Nasdaq Summation Index (NASI for short) gave a sell signal way back in early December via parabolic sar, negative divergence in the MACD, and stochastics. The NASI is sometimes subject to whipsaws, however it is a very useful market indicator that can alert you to market trends earlier then many other indicators. Currently, we are waiting for the NASI to give us another buy signal.

One could also use the NASI to swing trade either the QQQQs or the NDX futures: For example, take a look at the chart of the QQQQ below. This chart is plotted in the same time frame as the NASI above. Green arrows represent NASI buy signals whereas red arrows represent NASI sell signals.

A trader could do fairly well by simply buying and shorting QQQQs following this indicator. For example, a trader would have shorted QQQQs at about $40 in early to mid. December, and would still be holding them. He/she would then cover and go long QQQQs once the NASI gave another buy signal.

The BPCOMPQ is another good Nasdaq and thus market indicator: The BPCOMPQ gave a buy sell signal in early January via the parabolic sar. This was a red flag for the market.

However, the daily BPCOMPQ chart above is a short term indicator. The bad news is the weekly BPCOMPQ has just given a sell signal as well. This tells me that this market sell off is far from over. The market may try to put on an oversold bounce in the short term, however I think the primary trend is down and will remain so possibly through February which is usually one of the worst months of the year.

The next chart is the percentage of stocks in the Nasdaq that are above their 50 moving average. As you can see, this chart clearly predicted a market pullback via a bearish rising wedge along with negative divergence.

The next chart is the VIX: The VIX is inversely correlated with the market, i.e. when the VIX rises, the market falls, and vice versa.

The VIX chart has clear resistance at about 14.5 and the downtrend line, and looks to me like it wants to rally. This chart is telling me that the market still has more to fall to the downside. The upside target for the VIX on a breakout is about 17 and 20 respectively.

Again, this chart tells me that the market has more to fall before a sustainable rally can occur.

The next chart below is long term 10+ year chart of the VIX, as you can see, a VIX rally was obvious here: Positive divergence in the MACD and the fact that the VIX was at a major support level. All signs of a VIX rally and a major market pullback.

The final indicator chart I want to show you is the Nasdaq/S&P 500 ratio. During market rallies, the technology laden Nasdaq should lead the S&P old economy stocks. This is what occurred last fall from August to December. However, in early December this all changed and the Nasdaq began to lag behind the S&P 500. This was big red flag that the market was going to pullback.

The indicators I have shown you what I regularly use to predict the market. You too should consider keeping an eye on these indicators in the future. These and other indicators are listed in the market analysis section of the website under market indicators.

The S&P 500 is approaching support near 1165, but there is also support at 1145 and the 200 moving average if the S&P fails to find support at 1165. The S&P also resembles a mini head & shoulders pattern.

Again, just like the long term chart of the Nasdaq above, this long term chart of the S&P 500 is very important to the cyclical bull market and for 2005 in general. If the uptrend line is broken, then 2005 could turn out to be a very bad year for the market in general.

The NYSE could potentially fall all the way to major support near 6800 over the next few months!

Besides gold stocks, one group of stocks that is holding up well is oil stocks. Don't get me wrong, oil stocks are not a screaming buy here, but with a little work they could be.

Crude oil is rallying and this is negative for the market. Crude oil has resistance at about 50 and 55. I think there is a good possibility that oil rises to 55 and possibly 60 dollars a barrel. Such action would obviously not help the market, however it could be positive for oil and energy stocks, and even gold stocks.

XLU is the Utilities ETF - nice bullish ascending triangle:

An odd thing is occurring: It seems as though long term rates are breaking down and may enter a downtrend? As you can see, the 10 year rates is breaking down.

As you can see, the 10 year bonds look like they are about to breakout. Remember, as bonds go up, rates fall. Therefore, a breakout in the chart below would correspond with a breakdown in the chart above.

Gold and Precious Metals Analysis:

The gold chart below is very informative and interesting to me as it contains a lot of information: the 65 week moving average, an uptrend line, ABCD waves and Elliot Wave, and the commercial trader net short positions.

A closer look at the Elliot Wave pattern:

Let's take a closer look at the Elliot Wave pattern: First off, I must confess, I am not an expert on Elliot Wave, I just know a few of the basics. Therefore, if I'm totally off base here, please send me an email. I plan to order a few books on Elliot Wave to increase my knowledge.

As you can see from the chart below, gold is currently in wave 4 of a 5 Elliot Wave pattern. This means that gold probably still has one more down leg which would be wave 5. This pattern will be confirmed if the lows of wave 1 and wave 2 (shown in yellow) act as resistance to wave 4 which is about $432.

In a 5 wave pattern, the 5th wave is always shorter then wave 3, and typically about the same length as wave 1. This correlates with a price target between $400 and $410.

Notice how this target range correlates nicely with everything else: For example, the 65 week moving average and the uptrend line are in this range. Also, the current net short commercial position is still too high for a gold bottom, and a drop to the $400 - $410 region would probably be sufficient to cause the commercial short position to drop to levels seen at major price bottoms in gold, typically 30k - 50k.

Of course, US Dollar is key to the gold market; A strong inverse correlation exists between the US Dollar and Gold.

The US Dollar has been rallying since December as it was way oversold, but there is resistance in the 84.5 to 85 range, as was well as the 200 moving average near 87.

As you can see, a bearish rising wedge is forming in the Dollar, therefore this Dollar rally may soon end. A break down from this bearish wedge would be very bullish for gold.

Here's a longer term weekly chart of the US Dollar:

This chart gives us a different perspective: As you can see, the weekly stochastics has only just begun to turn up, and the MACD is just beginning to cross up. Therefore, the 85 level may not stop the Dollar rally. I think the Dollar has a good chance to rally all the way up to the 200 moving average near the 87 level early this year. This could take several weeks or more to occur, this amount of time is also needed to get the weekly stochastics overbought once again.

I think gold metal and especially the stocks will likely rally before the Dollar finally tops out. In other words, they will anticipate a Dollar top and rally before the top is actually hit. The opposite of this occurred last fall:

Last fall, the Dollar was falling to new lows nearly every day, however gold stocks were either barely going up, or fell during this time. In other words, smart money in gold stocks were anticipating a coming rally in the US Dollar, which is the reason the stocks did so poorly last fall, despite the decline in the US Dollar.

Therefore, I think this time the opposite will occur: The smart money will anticipate a top in the US Dollar before it actually occurs, and thus bid up gold stocks.

Gold Stocks:

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