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January 25th, 2004


Next week is a big week in terms of key economic releases: We have a FOMC meeting on Wednesday, several key economic releases, and the biggest earnings week yet. I personally would not hold breakout stocks into an earning report.

The consensus is that the FED will be not raise interest rates due to weak employment numbers and low inflation. Anyway, the FOMC meeting almost always generates quite a bit of volatility. It will be interesting to see if the FOMC meeting jump starts the market once again and sends it to new highs, or marks an intermediate top and a long overdue market correction begins? Either way, the market volatility will probably remain low until Wednesdays FOMC meeting.

If the market decides so run up higher, I do not see it going very far before topping out. However, once the market decides to pullback, I think the major indicies could pullback to their respective 50 day moving averages. Also, once the market decides to pullback, I do not see a melt-down occurring: This market run-up has occurred on high volume and the major indicies now have many layers of technical support underneath that will now act as support. The market is still in a Cyclical Bull Market, and a pullback will likely produce buying opportunities.

I've received a few emails from several subscribers asking how the market has fared during the Presidential Cycle. Below is a table showing how the S&P 500 fared during the 3rd and 4th years of past Presidential Cycles. Interesting data to say the least....

S&P 500 - Percentages rounded to the nearest whole #

Election Year
3rd Year
4th Year
 
% Increase
% Decrease
% Increase
% Decrease
1952
16%
N/A
8%
 
1956
26%
N/A
2%
 
1960
9%
N/A
N/A
- 9%
1964
19%
N/A
15%
 
1968
20%
N/A
4%
 
1972
11%
N/A
15%
 
1976
32%
N/A
18%
 
1980
12%
N/A
15%
 
1984
17%
N/A
N/A
- 4%
1988
2%
N/A
12%
 
1992
26%
N/A
4%
 
1996
24%
N/A
26%
 
2000
24%
N/A
N/A
- 6%
 Average:
 19%
N/A 
12% 
 -6%

The table above shows us some interesting results: First of all, note how there was NOT ONE down year for the 3rd year of a Presidential Cycle! Also note how the average percent gain was 19%!!! No wonder last year (which was the 3rd year of President Bush's term) was so good!

Currently we are in the 4th year of a Presidential Cycle, which historically has fared pretty good, though obviously not as well as the 3rd year.

The third year of the cycle is obviously an 'investors' market where it pays to simpy buy and hold, while the 4th year tends to be a traders market with more volatility.

Nasdaq:

The Nasdaq made a new high early last week, but finally started to pullback late in the week. The Semiconductors were weak last week and is the reason for the pullback in the Nasdaq late last week. The question now is:  Will the Nasdaq consolidate near 2100 and run to new highs once a gain, or will it pullback to the 50 day moving average that has acted as support for so long? Maybe the FOMC meeting on Wednesday will be the catalyst. If the Nasdaq decides to rally to new highs, the next resistance is 2250.

Once the Nasdaq finally decides to pullback, it will not simply melt down. The run up has occurred on strong volume and pullbacks in the Nasdaq and the market will produce buying opportunities - as is the case in bull markets.

The chart below shows you a larger technical picture of the Nasdaq: The next major resistance level begins at 2250 and lasts to 2400 - i.e. a resistance zone.

Also notice the big volume increase during this month which shows the strength of this market.

Below is a plot of the Nasdaq on a 60 minute basis. Note the resistance at 2150 and the support zone in yellow. The Stochastics are oversold and a bounce off this support zone is possible.

The Semiconductor index strongly affects the Nasdaq and the general market. The Semiconductor pulled back last week and is the main reason why the Nasdaq pulled back late in the week. The Semiconductors have support at the 50 MA, this area needs to be watched closely: If the Semiconductors bounce off the 50 MA, then the Nasdaq will also recover and rally. However, if the Semi's fall below the 50 MA on high volume, then the Nasdaq will follow.

DOW daily chart:

The DOW briefly hit new highs last week, but its advance was stopped cold at the venerable multi-year resistance of 10660. Eventually the DOW will need to pullback to the 50 MA support. However, if 10660 can be cleared, then a run to 11,000 could ensue.

The 60 minute chart of the DOW:

This long term chart clearly shows you that 10660 is major resistance, noted by the downtrend line and the red horizontal line intersection. If the DOW can clear this major resistance zone, then the stage will be set for the DOW to rally to 11,000!

The S&P 500 daily chart:

What S&P also pulled back late in the week after briefly hitting a high of 1150. The next resistance level and target for the S&P 500 is 1175 which you can see on the long term chart below. The S&P has strong support at the 50 MA in case a strong pullback begins.

Per the discussion above, below you can clearly see the next resistance and price target of 1175 on the chart below for the S&P. What a truly amazing Cyclical Bull Market this has been and continues to be!

Since I highlighted Palladium two weeks ago, it has performed great. Last week, Palladium broke out and high a high of $254, likewise Palladium stocks such as PAL and SWC also did great. The first target on Palladium metal is $275, however Palladium might need to consolidate for a little bit, and $230 should act as strong support on a continued pullback.

The two main Palladium stocks, PAL and SWC, may experience a pullback if Palladium metal consolidates. I am not too worried about this, last week I sold 1/2 my shares in PAL and SWC to lock in profits, and if PAL and SWC consolidate, I will buy more.

Gold has been pulling back after hitting new highs in early January and is currently resting on the 50 day moving average which is acting as support. Personally, gold looks weak to me and I doubt the 50 MA will hold as support. If the 50 MA fails to hold, the next support level is the uptrend line at about $400. However, some argue that the strongest support lies at the 200 MA.

The US Dollar decides to rally for a few weeks, then golds pullback will likely continue.

On a longer time frame, you can see that gold still looks toppy even though it has pulled back the last couple weeks. The red uptrend line or the 200 MA will likely be tested sometime during golds pullback, especially if the US Dollar decides to rally for a few weeks.

On a very long term basis, golds pullback was logical given that it had run into resistance that goes back until 1996 and earlier.

The Dollar is trying to rally as it formed a higher low last week. The first target is the 50 MA, and if that is cleared, then the second target is the low 90s. If the Dollar rally gains strength, then it could potentially rally to the 200 MA, though that is quite far away.

GOLD STOCKS

Judging by the HUI and XAU, gold stocks look weak to me and are probably going to be 'dead money' for at least a few weeks.

The HUI looks weak: Notice how after it broke the 50 MA and the uptrend line, the HUI rallied back to retest these areas but is now turning back down again. It looks like we have a case of prior support becoming resistance. Many times, when support is broken, it is often retested on a bounce.

How far will the HUI fall? The HUI could fall the low $200s and even near the 200 MA. If the HUI falls to the low 200s or to the high 190s, then consider it a gift from the Gods as a sign to 'load up the truck' with gold stocks.

Should we be buying here? Really, it depends on what type of trader you are: I firmly believe that gold stocks will much higher a year from now then they are now, maybe 200 to 300 percent higher. One strategy would be to figure out how many shares or dollar amount of gold stocks you are willing to hold, and purchase only a 1/3 of your intended total target at this time. Then add more shares on any further weakness.

On individual gold stocks, I have highlighted areas in yellow that are good for accumulating shares for the long term.

Personally I have not repurchased any gold stocks, but I am planning to do so soon, especially if they experience another pullback.

The next chart is a chart I originally posted late last year. This chart shows the propensity of the HUI to eventually fall back to its 200 MA. The HUI has a long way fall yet if it decides to retest its 200 MA. Is this going to happen? I'm not sure yet, but I really hope so because I will 'load the boat' with gold stocks if it happens again.

The chart below further states the case for a pullback to the 200 MA. Notice how the multi-year uptrend line corresponds exactly with the 200 day moving average.

The XAU, or un-hedge gold stock index looks similar to the HUI. It is possible that this pullback carries the XAU to the low 90's near the 200 MA - I HOPE SO!!!

The chart below further states the case for a pullback to the 200 MA. Notice how the horizontal support line is very close to the 200 day moving average.


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