July 11th 2004

Written by Matthew Frailey

Table of Contents:

(click on the numbered sections below and you wil be taken to that corresponding section)

1. Administrative:

2. Misc. Comments:

3. Major Market Indices (multiple time frame analysis):

4. Market Sector Breakdown:

5. Foreign Markets Breakdown:

6. Gold, US Dollar, Precious Metals Stocks, Commodities:

1. Administrative Comments:

I added three new charts to the Market Sector page. I added moving average ribbon charts for the Nasdaq, DOW, and S&P 500.

Nasdaq Ribbon

DOW Jones Ribbon

S&P 500 Ribbon

Another Long One.......

2. General Market Analysis:

Before I get into more general market analysis, let's take a look at long term interest rates:

The Fed has finally began a long road of interest rate hikes with last months FOMC meeting. Since the FOMC meeting, long term rates have fallen. Take a look at TNX, which is the 10 year yield. TNX broke out of a multi-year downtrend line in April and are set to rally much further. However, in technical analysis, when a breakout occurs, a brief pullback usually occurs, which is exactly what we are seeing with long term interest rates.

However, this pullback will soon end another rally will commence.

Zooming into a the chart above, I think the pullback in long term interest rates will continue for a short while and I could see a pullback to about 4.25% for TNX.

So what, you ask? The reason I am high lighting this is because this pullback in long term rates is obviously temporary and will soon reverse and the uptrend will recommence.

I personally am planning taking advantage of this situation by shorting 30 year treasury bond futures. Remember, as interest rates go up, bonds fall, therefore once the pullback in long term rates looks like it has finally run its course, I will short 30 year treasury bonds. I use Interactive Brokers, the symbol is ZB, and I will short September Futures.

Once again, realize that playing futures is very risky, if you do not have experience in this area, consult a professional.

3. Major Market Indices (multiple time frame breakdown)

Last week was a shortened holiday weekend, and the market did not far well: The Nasdaq lost 60.40, the DOW Jones lost 69.61, while the S&P 500 lost 12.57. The two weakest days in the market last week were Monday and Thursday. One catalyst for the sell off was warnings from Yahoo, and other software companies. GE reported strong earnings on Friday, which helped to curb Thursdays big losses.

Next, I would like to introduce you to ribbon charts. What I call ribbon charts, are charts with many moving averages overlaid onto the chart. Ribbon charts are useful for identifying major trend changes in indices or stocks. Basically, major trend changes occur whenever the moving average ribbons coil/fold over one another. Major trends are taking place whenever the moving average ribbons are flat or folded out.

The ribbon charts on the three major indices show that they are coiling/folding which shows that the market is about to embark on a major trend change once again.

The ribbon chart of the Nasdaq below is intriguing: You can see where major trend changes have occurred when the ribbons coiled and crossed over. You can clearly see the beginning of the large sell off in 2002, as well as the start of the massive 2003 rally. Also notice that when the market enters a strong trend, the ribbon unfolds.

As you can see, the ribbon on the Nasdaq is converging and crossing right now, showing that a large price movement will soon occur in the Nasdaq.

Obviously, both a bullish and a bearish case could be argued here. However, notice that the Nasdaq has fallen to an uptrend line that began in October 2002. Obviously, the Nasdaq is at a breakpoint, it is right at support of an uptrend line and will either rally or crash through this line.

I personally do not see the market out right crashing here, therefore I think there is a good possibility that it rallies off this uptrend line. However, I will not make any bets until a clear trend is established.

The MA ribbon chart of the DOW shows a similar pattern, obviously a large move is about to occur, whether it be up or down. I still think there is a good chance it could be up, but we shall see. Even if the move is up, I don't see it lasting past this year.

The MA ribbon of the S&P 500 shows the same condition.

Nasdaq:

The DOW Jones:

Intra Day:

The 10 minute chart of the DOW shows a converging triangle pattern that will break to the upside or the downside this week, probably setting the trend.

The 60 minute charts shows positive divergence in the MACD, suggesting a bounce will soon occur.

Daily:

The DOW could not stay above the broken downtrend line, but may find support at the uptrend line. If this occurs, then the beginning of WAVE 5 of an Elliot Wave Pattern could be underway.

Big Picture:

Per the discussion above, if the DOW can rally here, it still has a chance to enter wave 5 of an Elliot Wave pattern.

The S&P 500:

Daily:

The daily S&P chart resembles the DOW chart as it has formed a bullish flag. The S&P needs to rally and break the downtrend line to ignite a market rally, otherwise a downtrend could soon begin.

Big Picture:

Which of the two charts is correct:

The first chart hits more points with the trend line, however a strong case could be made for both chats.

Either way, it is evident that the secular bull market is over and a new secular bear market has begun. The broken downtrend lines are now resistance.

Most Bearish of the two charts and shows that the market is basically topped out:

Various Sectors	Chart Symbols	ETF	Comments
Aerospace	$DJUSAE		Took out resistance and made a new high, now pulling back to retest former resistance
Airlines	$DJUSAR		In minor uptrend, however watch Crude Oil which has a direct effect on airlines
Transportation	$TRAN		Strong sector, broke symmetrical triangle to upside, Currently pulling back to consolidate
Trucking	$DJUSTK		Strong sector, and pulling back, support at 210
Advanced Industrial Equipment	$DJUSAI		Broke a bullish flag to the upside. Pulling back and consolidating
Industrial Diversified	$DJUSID		Broke a symmtrical triangle to the upside, very bullish Pulling back, may be forming a small bullish flag
Industrial General	$DJUSIS		Resistance at 140, support at 200 MA
Industrial Services	$DJUSIV		Consolidating, resistance at 174
Auto Parts	$DJUSAT		Failed to break resistance, falling back, major support at 220
Basic Materials	$DJUSBM	XLB	Broken downtrend resistance line, which is now support
Aluminum	$DJUSAL		Broke downtrend line, bullish: in a small uptrend
Coal	$DJUSCL		Strong sector, making new highs 120 is support
Steel (US)	$DJUSST		Strong sector, breaks resistance, 110 now support
Crude Oil	$WTIC - ST $WTIC - LT		Strong uptrend, support at uptrend line Multi-year long term uptrend
Oil Index	$XOI		Strong uptrend, strong sector
Oil Companies - Major	$DJUSOL	OIH	strong sector
Oil Companies - Secondary	$DJUSOS		Very strong, rallying to new highs
Utilities	$UTY	UTH XLU XLE	Very strong reacts strongly to the US Dollar
Electric Utilities	$DJUSEU		Broke resistance but still under recent highs, reacts strongly to the US Dollar
Gas Utilities	$DJUSGU		Strong sector, resistance at 283, reacts strongly to the US Dollar
Natural Gas Index	$XNG		Strong sector, making new highs, support at 235
Advanced Medical Devices	$DJUSAM		Symmetrical Triangle
Biotechnology	$DJUSBT	BBH	Bounced off support
Biotechnology Amex	$BTK		Bounced off support, consolidating sideways
Healthcare Providers	$DJUSHP	XLV	Strong sector consolidating into triangle
Medical Supplies	$DJUSMS		In an uptrend, support at 200 MA
Pharmecuticals	$DJUSPR	PPH	Bearish, broke symmetrical triangle to the downside
Banks	$DJUSBX		In downtrend, resistance at downtrend line, unless it breaks downtrend line soon, will turn bearish
Banks Index Philadelphia	$BKX		near downtrend resistance
Diversified Financial	$DJUSSB	XLF	Consolidating, 50 MA under 200 MA
Investment Services	$DJUSSB		Major support at 650, will turn bearish if support is broken
Full Line Insurance Life Insurance	$DJUSIF $DJUSIL		Possible bearish Head & Shoulders on Full Line Insurance, aviod
Casinos	$DJUSCA		Support at 200 MA, large descending triangle formation, could turn bearish or bullish soon
Home Construction	$DJUSHB		Resistance $620, large head & shoulders pattern
Housing	$HGX		Trying to break downtrend line, use caution with rising interest rates
Real Estate	$DJUSRE	IYR	Bearish Rising Wedge
Retail	$DJUSRT	RTH	Sector is weakening, major support at 300
Nanotechnology	$NNZ		New sector, consolidating near uptrend line
Semiconductors	$DJUSSC	SMH	Strongly affects the Nasdaq: Strong and important resistance at the downtrend line
Telecommunications - DOW	$DJUSTL		Consolidating near multi-year uptrend line, at a breakpoint!
Telecommunications - Amex	$XTC	IXP	Major resistance at downtrend line, and major support intact below

Let's take a look at some of the individual sector charts:

Airline stocks are in a minor uptrend, however the thing the watch is the price of oil as airline and transportation stocks are very sensitive to oil. Oil soared last week, and as a result, Airlines pulled back.

Crude Oil has rebounded strongly since late June. Crude oil found support at the uptrend line and broke out of a falling wedge. As a result, oil stocks are doing well,

As a result of rising oil and natural gas prices, the Gas Utilities sector looks fantastic here.

Coal stocks are on the move and are in a very strong uptrend.

The Basic Materials sector looks good as it has broken a downtrend line and has found support on the broken line. This sector looks ready to run.

Have you noticed something yet? Commodity stocks are hot.

The Insurance sector looks weak and appears to have formed a bearish head and shoulders pattern. Check out the chart of AIG, it looks exactly like the sector chart.

With rising long and short term interest rates, the home construction sector appears to have formed a bearish head and shoulders pattern also.

Likewise, Real Estate looks very weak, check out the bearish rising wedge. This sector looks like a great short. The ETF for this sector is IYR.

Medical Devices sector is consolidating into a symmetrical triangle, thus suggesting a large move will soon occur.

Healthcare sector also looks weak, and has broken a triangle pattern to the downside already.

5.Foreign Markets Breakdown:

As I've been stating for weeks now, many foreign stock markets look like they are on the verge of major market rallies. Why is this important you ask? I think the majority of the world stock markets are linked together, thus if the world markets rally, so will the US, and vice versa.

The foreign market that look particularly bullish are: Chile, China, Germany, Spain, Sweden, Switzerland, Taiwan, United Kingdom and especially Japan. Chile, Germany, Spain, Switzerland, and the United Kingdom have formed bullish flags, while Taiwan is bouncing off major support and Japan appears to have formed a large inverted head & shoulders pattern.

Of particular interest to me is the Japanese market, Nikkei Index.

The Nikkei Index looks very bullish to me as it has formed a bullish inverted head & shoulders pattern. The first target would be near 15000, but I think 17500 is possible.

Again, the Nikkei looks very bullish to me and there are two ways to take advantage of this the bullish situation in the Japanese market: 1. EWJ which is an ETF (exchange traded fund) of Japan, and Profund Ultra Japan, UJPIX.

To me, by far the best bang for the buck is UJPIX. Below I plotted UJPIX on the same time scale as the Nikkei chart above. As you can see, above, the 1st. price target on the Nikkei is about 14500 to 15000 once the resistance neckline near 12500 is broken. Such a movement would represent about a 20% price appreciation. Likewise, the ETF, EWJ would be expected to increase by about the same degree.

However, take a look at the graph of UJPIX below: Notice that if the Nikkei moves from 12500 to 15000, then UJPIX will move approximately from $35 to $75 which is more then double.

I personally plan to buy a nice stake in this fund if the Nikkei breaks the neckline resistance.

Austria is showing amazing strength, but how long can it continue this advance?

Bullish flag breakout for the Chile Market, CH looks like a good buy here.

CH has broken a downtrend line and cleared near term resistance at $12 of which it has found support.

Again, CH looks like a low risk investment here with a long term target of $16 and an intermediate target of $14.

The Chinese market has broken a downtrend line to the upside. The broken downtrend line is now acting as support and may act as a launch pad for another rally.

GCH looks like a good long here with minimal risk.

Bullish Flag on the German Market. EWG looks like a good long if the flag is broken to the upside.

Bullish Flag on Spanish Market:

The Swedish market has formed a large horizontal rectangle with resistance at 18 and support at 15.5.

Horizontal Rectangle on the British Market with support at the 42 weekly, or 200 MA. If this breaks to the upside, the target is about $20.

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6. Gold, US Dollar, Precious Metals Stocks, Commodities:

Gold is in a nice uptrend with major support at the uptrend line. Last week I mentioned that I was worried that gold was in the process of forming either a bearish flag or an ABC Elliot Wave pattern. The downside target would be in the high 340's based on both an ABC corrective Elliot Wave and pattern measurement using height of the double top. The chart below is essentially the same chart I presented last week.

However, I am now much more bullish on gold: The two main reasons are the US Dollar and the that fact that individual gold stocks simply look fantastic. I now think the possibility of gold retracing to the high $340's, as I said was a possibility last week, will likely not happen.

There is still a chance things could reverse, but I'm now leaning more bullish on gold and especially the stocks.

The US Dollar hold all the power over the direction of gold and both a bullish and a bearish scenario can be argued based on two US Dollar charts:

The first chart of the US Dollar is the same chart I presented last week that had me all worried about gold and precious metals stocks. The chart depicts the US Dollar in a bullish falling wedge that could break out to the upside. Such a breakout would be very negative for gold, precious metals, and corresponding stocks.

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