July 18th 2004
Written by Matthew Frailey
Table of Contents:
(click on the numbered sections below and you will be taken to that corresponding section)
I also added a stock pick to the Insiders section, under Longs.
2. General Market Analysis:
I added a stock to the Insider Section of the website, the only stock that stands out for strong insider buying, as well as an interesting chart is PRTRD:
A total of 16 insiders recently purchased shares of PRTRD (11 were Directors, 3 were Vice Presidents, 1 Chief Financial Officer, and 1 Chief Executive Officer). Note the high volume recently, as well as positive divergence. It's hard to say exactly where the 'Breakpoint' is, it's somewhere in the low $10s. However, one could probably buy now with a loose stop just below the low set on Thursday. The first target would be about $11 near the 50 MA.
Last week I highlighted long term interest rates, noting how long term rates have fallen over the last month and a half.
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.
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.
Personally I 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)
First, let's look at a few indicators:
The NASI has done a good job thus far at predicting market tops and bottons whenever the MA's cross one another. The next major rally will not begin until the MA's cross to the upside once again.
The direction, not the level, is what is important for the VIX; i.e. when the VIX goes up, the market falls, and vice versa. In the long term, positive divergence hints that the VIX will eventually enter a major rally, thus causing a market selloff.
Only 32% of stocks in the Nasdaq are now above their 200 MA. However, even though this chart continues to make new lows, positive divergence suggests a possible bounce soon? Kind of a weird concept to look for a bounce in the market wheneven the number of stocks above the 200 MA is declining?
The Nasdaq chart is very weak and resembles a large descending triangle with support near 1865.
Now, let's take a look at the Nasdaq via a more detailed chart: You can clearly see that the Nasdaq is sitting right at a support, marked in gold, with the low end at 1865. The Nasdaq broke down from a bearish rising wedge early this month. However, there are some interesting things to note from this chart:
First off, this is 6th retest of this support area for the Nasdaq. In technical analysis, whenever support is repeatedly tested, it gets weaker on every retest and usually fails if it is tested too many times. Think of it like standing on a frozen lake and jumping up and down on the ice, with every jump, the ice gets weaker and eventually it will crack and you will fall through. Likewise, if support is tested too many times it will eventually break and a fall to the next support will occur.
Second, the volume has been high on the recent pullback, which is never a good thing for the bulls.
In conclusion, the Nasdaq is likely to break this support area and retest the next support area between 1800 and 1770.
However, even though the Nasdaq is very weak at this point, it is also short term oversold as it has fallen all of July thus far. Also note that stochastics are currently oversold, therefore an oversold bounce could occur at anytime. At this point, I would have to say that any rally could be used to enter shorts. Do not enter shorts during strong pullbacks, wait for bounces to get a better risk/reward.
A slightly longer term view of the above chart, which shows the start of the major rally in early 2003.
The next chart is shows the major Fibonacci lines of the Nasdaq connecting the rally from March 2003 till the high of January 2004. Note how the 38% retracement is at about 1810-1815, which is a perfectly normal pullback and NOT the start of a major decline to new lows!!!
Also, not shown here, but if the Fibonacci lines are drawn connecting the lows of October 2002, which is really the start of this cyclical bull market, then the 38% Fibonacci number is about 1765. Note how this number corresponds almost exactly with the second gold support band in the previous chart.
Again, so far this is just a normal pullback in the strong uptrend that began last year, and cannot be said that the market is heading to new lows yet.
The Nasdaq ribbon chart can be good for identifying major trend changes whenever the ribbon coils or folds. Major trends then occur whenever the ribbon unfolds and widens. Currently, the ribbon is coiling and a major trend change is upon us, but it still cannot be said whether it will be up or down. It sure looks like it will be down, but then again the ribbon could still curl up.
The Semi's are ultra weak and the reason why the Nasdaq has been breaking down.
The DOW Jones recently broke down through a small horizontal conjestion pattern, the bottom of which is now resistance at 10290. Notice how the volume has picked up on the sell off and the DOW resembles a large descending triangle.
The DOW has support between 10000 and 9960. However, a strong bounce could occur at any time since the stochastics are oversold and the DOW has been down almost everyday in July.
Big Picture:
The DOW ribbon chart can be good for identifying major trend changes whenever the ribbon coils or folds. Major trends then occur whenever the ribbon unfolds and widens. Currently, the ribbon is coiling and a major trend change is upon us, but it still cannot be said whether it will be up or down. It sure looks like it will be down, but then again the ribbon could still curl up and the Flag scenario could still play out.
The S&P is technically the strongest of the three major indices, but it is pulling back strongly on good volume. Support exixts at 1100 and 1075, however it is also short term oversold and a strong bounce could occur at anytime.
Long term picture of the S&P 500 shows major support at about 1075.
The S&P ribbon chart can be good for identifying major trend changes whenever the ribbon coils or folds. Major trends then occur whenever the ribbon unfolds and widens. Currently, the ribbon is coiling and a major trend change is upon us, but it still cannot be said whether it will be up or down. It sure looks like it will be down, but then again the ribbon could still curl up and the Flag scenario could still play out.
4. Market Sector Breakdown:
Let's take a look at some of the individual sector charts:
One thing that stands about the sector charts is that commodity stocks are hot and in a strong uptrend which is due to rising oil prices, a falling US Dollar, as well as rising world demand for raw materials, especially from China.
Airlines finally broke down last week, likely due to rising crude oil. This sector could go to new lows very easily and may offer some decent shorts.
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 I stated above, oil stocks are on a tear right now. Oil companies simply pass the costs on to you, and probably a few cents extra - wink, wink.
As a result of rising oil and natural gas prices, the Gas Utilities sector looks fantastic here.
Likewise, Electric Utilities are very strong and in a good uptrend.
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 that is in the process of breaking down.
Check out the chart of AIG, it looks identical to the sector chart and looks like a great short.
With rising long and short term interest rates, housing stocks may represent good shorts, especially once long term interest rates start to move up again.
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.
The ETF, IYR is the easiest way to take advantage of shorting this weak sector.
Medical Devices sector broke down last week.
With the weak market, investment services like brokerage firms are suffering. These industries do well when the market is doing well, and poorly whenever the market is falling.
The Casinos index has formed a large bearish descending triangle
5.Foreign Markets Breakdown:
I have been stating for weeks now that I am closely watching the Japanese market and am waiting for a trigger to go long.
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, but I have not done so at this time. The minimum investment in this fund is $5000. An investment in this fund would be a long term hold, and would require several months to 6 months or longer to fully capitalize on the movement.
Bullish flag breakout for the Chile Market, CH looks like a good buy here.
CH is doing great since I first noted it several weeks ago after it broke resistance at $12, which is now good support. Long term target is $16, intermediate target is about $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 still looks like a good long here with minimal risk.
HongKong looks interesting if the downtrend line can be broken to the upside.
Bullish Flag on the German Market. EWG looks like a good long if the flag is broken to the upside.
The Swedish market has formed a large horizontal rectangle with resistance at 18 and support at 15.5. EWD is a good long if 18 can be taken out.
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.
Horizontal rectangle pattern on the French market.
TRF has been consolidating sideways for the last few months, but I still like TRF as Russia is growing by leaps and bounds.
6. Gold, US Dollar, Precious Metals Stocks, Commodities:
Gold is in a nice uptrend with major support at the uptrend line. The last couple of weeks, 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 the last two weeks.
I currently own gold and silver stocks, however it is still up in the air if gold will correct here or now.
The long term uptrend line of gold metal is well intact.
The US Dollar holds all the power over the direction of gold and just as I stated last week, 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. 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.
However, the US Dollar chart also resembles a bearish head and shoulders pattern with a neckline that has already been broken and retested as resistance. The 1st downside target on this chart is the low near 84.5. So far, I am leaning towards this scenario. However, the 1st chart is still intact unless the wedge breaks to the downside.
The Dollar is still in a long multi-year downtrend channel and until the channel breaks to the upside, then the Dollar will remain in a long term downtrend.
I am a 'gold bug' and would love to see the Dollar fall all the way to the lower trendline once again. However, positive divergence seems to be forming in the MACD, which suggests the US Dollar may not fall much below 85 and the downtrend channel will eventually be broken.
Gold Stocks
The following chart compares the price of gold to the Gold Bug HUI Index in a ratio with gold as the numerator and the HUI as the denominator.
This chart is very interesting to me and seems to be a very good gauge as wether or not to own gold stocks. Basically, when the trend is down, gold stocks are rallying and outperforming gold metal, and when the trend up, gold stocks are falling or lagging behind gold metal.
Notice how this indicator broke down in late July last year which exactly corresponds with the huge rally last year in the HUI. Also notice that this indicator bottomed in December 2003, which subsequently, was also the top of the gold stock rally. Next, the indicator broke a trendline to the upside in April which corresponded exactly with the virtual melt down in the gold stocks in April.
So now what? This indicator shows that the safest time to own gold stocks will be when the uptrend line is broken and a new downtrend begins.
Currently, this indicator has formed a triangle and is on the verge of breaking to the upside. If an upside breakout occurs, then expect a nice pullback in gold stocks. Again, gold stocks will not enter a major rally until this indicator begins another downtrend. In my opinion, this is a VERY important indicator to follow if you own, or are looking to own, gold stocks.
Now, take a look at the HUI plotted over the same time frame and you can see what I mean: Notice how well this indicator works, cool huh?
The HUI broken out of a symmetrical triangle which is very bullish. Many of the individual stocks in this sector also look similar to this chart. Resistance is at $207.75. The uptrend line as well as the broken downtrend line may now act as support.
Longer term chart shows the broken uptrend line is now resistance, and the HUI may need to pullback and consolidate for a while yet before making a big move up.
The XAU his rallying nicely, but has resistance fast approaching near $92.80.
Long term chart:
Commodities are in a powerful bull market.
The 20 plus year chart of the CRB index, which is a composite of 17 commodities broadly divided into metals, tropicals, grains, meats, and energies.
This chart should scare economists as it suggests that inflation is going to hit the American economy in a big way very soon and over the next decade. Commodities have broken a 22 year downtrend line and will likely take out the 1983 high in the next 6 months. Remember per the discussion at the beginning of the newsletter, the general market is in a long term secular bear market and likewise the economy itself. Commodities have entered a secular bull market.
The US Government reports that inflations is tame, but how could that be when broad based commodities are up by about 50% from 2002? Also, M3 (total Dollars in Circulation) is increasing by about 10% a year, logic dictates that when more Dollars are in circulation, the less they are worth. Subsequently, the US Dollar has fallen by about 30% since 2002!
Therefore, I ask you, why is the Government saying that inflation is low??? Take a look at your grocery bill, take a look at how much houses are appreciating, college tuition is going through the roof, car prices are out of site, rising drug and health care costs are soaring, etc. Oh, but computers are getting cheaper all the time; which, incidentally, is one of the things the Government uses to calculate the CPI. Now I ask you, does this make any sense??? Do falling computer and electronics prices really affect you that much? No way, not as much as oil/gas, groceries, housing, college tuition, car prices, health care, etc. all of which are skyrocketing.
The CPI, consumer price index. Whether you believe in conspiracy theories or not, politicians have reasons to 'low ball' inflation to make things seem better than they really are.
Regardless, eventually, the politicians will not be able to hide the inflation threat even with their 'biased' CPI numbers.
Palladium may be forming a bullish falling wedge. If this is the case, the two palladium stocks, SWC and PAL would be good investments. I particularly like SWC for the long term.
Copper looks like it has formed a bullish flag that is breaking to the upside.
A few copper stocks to take a look at are PCU, PD, WLV, MAD, FCX, and RTP.
WLV and FCX look especially nice
As you can see, WLV has great support at $10 and can be accumulated here with a stop just below support.
Silver stocks outperformed gold stocks last week and the chart below shows why: Silver has been rallying strongly, but might have some trouble here at the gap resistance of $6.85.
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