July 25th 2004

Written by Matthew Frailey

Table of Contents:

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

1. Administrative:

2. Misc. Comments:

3. Major Market Indicators and Major Indices:

4. Market Sector Breakdown:

5. Foreign Markets Breakdown:

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

1. Administrative Comments:

Not feeling too well this weekend, as a result, the newsletter is posted a little later than I would like. Sorry for inconvenience.

2. MISC:

Before we get to the market, lets go over a few miscellaneous info:

Last week, I presented PRTRD as a stock with recent insider buying. I am currently long this stock, and I am holding for now despite the strong market pullback. I have not decided where yet to place a stop, though a loose stop would go below the hammer low of $9.35.

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 high lighted the following:

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.

Notice how long term rates have broken a long term downtrend line and recently pulled back to support at the broken downtrend line. Long term rates will likely rally off this line very soon, and as a result, long term bonds will fall, which includes ZB futures.

A closer view shows you that a bullish wedge has formed, thus indicating that rates will rally.

3. Market Indicators, and Major Indexes;

First, let's see what the market indicators are telling us:

The NASI has done a good job thus far at predicting market tops and bottoms whenever the MA's cross one another. Also, the MACD is a useful indicator and buy/sell signals are generated whenever the MACD crosses up or down, as indicated below in read and green circles.

As you can see, the NASI gave a sell signal on the Nasdaq in early July when the moving averages crossed over, and the MACD crossed over to give a sell signal. Currently, the NASI is in a downtrend, suggesting this market pullback will continue.

It will not be safe to go long for swing or trend trading, until the MACD crosses back up and gives a buy signal. For now, rallies can be shorted and the day trading or scalp trading is the safest way to trade - cash is king.

The NAUD indicator has fallen to a support level and will give another market sell signal if broken to the downside - it is obviously at a breakpoint.

However, on the bright side, the BPCOMPQ has developed strong positive divergence in the MACD, thus indicating this indicator may soon change direction and go up.

Why is this important? Because the Market moves in the direction of the BPCOMPQ, therefore if the BPCOMPQ turns up, so will the Market.

Watch this indicator closely:

Small Caps usually lead whenever the Market does, well. How to use this chart: When the trend is up, the market is doing well and you can be long stocks. When the trend down, you should be out of long positions.

Currently, the trend is down, and until it turns up, the market will remain weak.

Major Market Indices:

Nasdaq:

So far, the long term ribbon chart of the Semiconductor index looks like a bearish crossover, but it is short term oversold and may rally back to the moving averages. Note how the price has diverged quite a bit from the M's.

The DOW Jones:

Daily:

The DOW is currently testing support between 9960 and 1000, marked in gold below. The next major support areas below are 9500 and 9000 respectively.

There is strong possibility that the DOW eventually falls to 9500, as it corresponds exactly with the important Fibonacci number of 38%.

The 50 MA is also dangerously close to going below the 200 MA.

33% of the stocks in the DOW are above the 200 MA.

The S&P 500:

Daily:

The S&P is technically the strongest of the three major indices, but it is pulling back strongly on good volume. Support exists at 1100 and 1075, however it is also short term oversold and a strong bounce could occur at anytime.

48% of the stocks in the S&P 500 are above the 200 MA. The S&P 500 is the strongest of the three major indices.

The USPIX short fund is giving a buy signal as it has crossed above the 200 MA. However, a good buy signal will be generated when the 50 MA actually crossed up over the 200 MA.. A possible long term price target is in the low 40s.

I personally do not own this fund, I am waiting for the market to bounce first, and I want to see the 50 MA cross up over the 200 MA first.

The ETF, IYR broke a bearish wedge this weak. Also long term interest rates are likely to go up soon, thus this sector may be hit harder.

The Casinos index broke a descending triangle to the downside.

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. I have not yet went long this fund, but I'm currently keeping a close eye on the Nikkei Index for a long confirmation.

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.

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

Well my friends, gold could not hold the uptrend line and has broken a possible bearish flag to the downside, which means further weakness in the gold and gold stocks. The first targets are the two previous lows at 382 and 377 respectively. However, a potential target is in the high 340's based on pattern measurement of the double top and an ABC corrective wave pattern.

The weakness in gold is a direct result of the US Dollar rallying, which now may continue for some time - more on the US Dollar below:

The long term uptrend line of gold metal is still intact, but for how long? Support at the uptrend line is about 380 - 385. If this uptrend lines fails to hold, the gold will remain weak for quite some time.

Here's one more look at gold: Note a bearish flag has been broken to the downside, support exists in the gold region between 369 to 379.

When discussing gold, the US Dollar is paramount and holds nearly all the power over the direction of gold.

Last week the US Dollar broke out of a falling wedge pattern, which is very bearish for gold, commodities, and corresponding stocks. The Dollar now looks like it wants to rally and the first targets are the two previous highs at 90.5 and 92.5 respectively.

Again, a rallying US Dollar will not just have negative effects on gold, it would also cause weakness in other commodities as well. Therefore, if you have profits in other commodity stocks, you might want to tighten your stops or consider taking profits.