July 6th, 2003 Newsletter

Table Of Contents:

Click on the section titles below to be automatically taken to that section:

Part 1: Administrative Comments:

Part 2: Market Relevant News Stories:

Part 3: General Market Analysis

Part 4: Gold Analysis

Part 1: Administrative Comments:

1st. I've added more charts to the "Market Analysis" section under Gold and Index/Sector Analysis (such as close up" charts of the Nasdaq, DOW, and S&P 500) and also changed the time frames on many of the gold stock charts.

Also, be sure to check out the stocks in the Gold section, many of the gold stocks are setting up nicely and forming good tradeable patterns such as Symmetrical and Ascending Triangles.

Gold stocks with Ascending Triangles: GFI, RGLD, AU, CDE, SSRI

Gold stocks with Symmetrical Triangles: GLG, GFI, RANGY, NEM

2nd. Keith (stt) and I (Orak) will be adding a new section to the website in the next few days. This new section will be called "Story Stocks". This new section will either be placed inside the "Watchlist" section or it will get its own tool bar tab in the right hand column - we haven't yet decided.

This "Story Stock" section will be used to profile stocks that we believe have very strong fundamental reasons for large price appreciation as well as good technicals via the chart. Stocks listed in this new section will be intended as longer term holds, i.e. weeks to months in order to come to fruition. Unlike stock picks highlighted in the "Longs" section, a stock highlighted in the "Story Stock" section is intended to be held and not day traded: probably a good strategy is to also accumulate more on the dips or pullbacks.

Also note that we will highlight very few picks in this new section, probably less then once a month.

Disclaimer:

Also note that Keith and I may either have existing positions in the "story stock" that we profile or will soon buy a position in that stock after we publish the article.

Part 2: Market Relevant News Stories:

Dismal data depresses markets, Dow industrials sink 72.63, Nasdaq drops 15.28

Jobs report dispirits optimists

20 Killed, More Than 30 Hurt In Moscow Suicide Blasts

Hong Kong Bows to Pressure On Anti-Subversion Bill

US Forces Arrest 11 Turkish Soldiers In Iraq

Bush: Talks With African Leaders Crucial

Website turns tables on government officials

Redmond's Bad Day On The Hill

Zeal Intelligence: Wisdom of Jesse Livermore 4

Articles carried over from last week

Fed learns Japanese deflation lessons

The Fed’s puzzling end game, Wall Street seeks clarity on long-term future of rates\

Part 2: General Market Analysis

The Markets have been pulling back and consolidating after making new highs two weeks ago. So what does the market look like from here? Let's first look at some charts starting with the VIX indicator:

The VIX or Volatility index is ratio of put options to call options. It is a useful indicator because it indirectly measures market psychology. The VIX is like a contrarian indicator, when it's low, it means that more people are buying call options, and thus are bullish on the market. Contrarian theory tells us that the majority of people are wrong about the stock market, therefore when the masses are overly bullish, the market is usually topped out and about to tank, and vice versa.

The VIX can be used in two ways:

1. Usually the VIX is used to indicate when the psychological levels of the market are overly bullish or bearish. Overly bullish levels are in the mid 20's and lower, while overly bearish levels are in the upper 40's and higher. Traders use these levels to indicate when the market is at extremes, such as oversold or overbought. The old saying applies, when the VIX is low it's time to go, when the VIX is high, it's time to buy.

2. The VIX can also be used to forecast the market direction because of it's inverse correlation to the market direction. For example, by using technical analysis, if you decide the VIX is going to fall in the short term, the market will usually rise, and vice versa. Normal pattern or technical analysis can be preformed on the VIX an attempt to decipher short term market direction.

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VIX analysis:

The VIX is forming a Horizontal Rectangle pattern with support at 20 - 20.5 and resistance at 26.40. Whichever way this pattern breaks (up or down) will probably set the next major market trend for this year. The VIX is not very useful at this point in market prediction until it breaks out of this pattern - in other words, any movement inside the pattern is "noise" until the pattern breaks to the upside or the downside.

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Mulit Year VIX Chart

Below is a longer term chart of the VIX: here you can see how the VIX is currently between support and resistance at 20 - 20.5 and 26.4 respectively. However, you can see how 20 - 20.5 is really very minor support in the big picture, with 18 being the real or major support level. This chart gives the "bulls" hope, and shows at least a possibility that the VIX could fall to 18, thus causing more the market to continue its rise, or at least hold up a little while longer.

At this point, it is hard to say if the market will test 18, however the possibility greatly increases if 20 - 20.5 is broken. But again, the VIX needs to break out of this horizontal consolidation before we can deduce the next major market trend.

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Below is a close up view of the above daily chart: Here you can clearly see the bullish Ascending Triangle that has formed. Again, resistance is 1685 while support is the up trend line. If 1685 can be broken, then the Nasdaq could easily run to 1720.

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Nasdaq 60 minute chart

On a 60 minute basis, the Nasdaq has bounced off the 38% support area nicely, and again you can see the 1686 resistance here clearly denoted by the top line.

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DOW daily chart:

The DOW Jones broke it's resistance level of 8870 in early June, and has pulled back significantly after hitting a high of 9353.

Again, just like the Nasdaq chart, you can see that this pullback has not technically damaged the DOW chart as the up trend line remains intact. The DOW has formed what could be a Bullish Flag. The DOW is near a "Breakpoint" here and needs to rally soon, otherwise the uptrend line will be broken. If the uptrend line is broken, support lies at 9000, and 8870.

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Below is a close up view of the above daily chart: Here you can better see the uptrend line and the Flag formation.

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DOW 60 minute chart:

Below you can see how the DOW broke through the top of the Descending Triangle last week. When Descending Triangles are broken to the upside, it is usually bullish. Support and resistance is noted by the blue and red dotted lines respectively.

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The S&P 500 daily chart:

The S&P 500 took out the mega important resistance area of 965 in early June. This is significant because not only did this resistance go all the way back to April 2002, it also was the venerable neckline of a multi year head and shoulders pattern.

The current pullback has not yet technically damaged the up trend, support is the up trend line and 965, while the next resistance level is 1050.

As long as the S&P can stay above 965, I think the market rally will hold up and I remain bullish.

Also note the Symmetrical Triangle pattern that has formed: If this triangle can be broken to the upside, it would be very bullish and possibly set the stage for a rally to the next resistance at 1050.

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Below is a close up view of the above daily chart: Here you can clearly see the Symmetrical Triangle pattern that has formed. If this triangle is broken the upside, it would be bullish and possibly setup the S&P for a run to 1050.

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60 min S&P 500 chart:

On a short term basis, just like the NASDAQ and DOW, you can see that once the up trend line was broken on June 19th, that began in May, a nice pullback has ensued.

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Now let's look at the ultra long term:

Here you can clearly see the importance of the 965 level discussed above. If 965 can hold as support for the S&P 500 then the market will likely continue to make new highs this year.

Also notice how the S&P has formed a horizontal rectangle and it was broken to the upside as well. A book called, Encyclopedia of Chart Patterns by Thomas N. Bulkowski - Publisher: John Wiley & Sons, is a very interesting and useful book because the author has statistics on chart patterns. Stats of Horizontal Rectangles that break to the upside is an average rise of 46% after breakout, however the most likely rise is about 20%! This means that the S&P 500 could rise to about 1155-1175. Note that a 20% rise from 965 is 1155.

I've been bullish for sometime now, and even Stan Weinstein is bullish along with me, see the NBR article from last Friday:

Market Monitor"-Stan Weinstein, Editor & Publisher of "Global Trend Alert (click on Friday's Interview with Stan Weinstein)

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The Russian Market continues to make new highs - The Russian stock market is currently the fastest growing stock market in the world and is in a Secular Bull Market just like the US market was in the 90's. 5400 should now act as support - The Russian Market will probably see 7000 - 8000 this year.

Of course, right now, most of the worlds stock markets are doing very well and seem to be rallying together.

see the article below:

Markets on course for global five-year high

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The TRF tradeble stock fund is a good way to take advantage of the growing Russian Stock Market. I recommended TRF here at Breakpoint Trades while it was under $21. It has had a nice run so far, however for those of you who missed out, you could average in on pullbacks as I think the TRF fund will eventually see the 30's.

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I profiled Yahoo back in April on a newsletter as well as the message board. At the time, I made the comment that if Yahoo broke 'multi-year' resistance around $25, that it had the potential to see the low 40's, as that's the next resistance area. At the time, some people laughed saying that Yahoo was a junk internet company. Well, charts don't lie, and as you can see, Yahoo has been steadily rising and is now near $35 for a whopping 40% gain in share price since I mentioned it.

Stocks that come out of long bases are good for long term holds, even a junk internet stock it seems.

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Part 3: Gold Analysis

Below is a close up view of gold metal. Note how gold has fallen to a critical support in the low 340's and is at the bottom channel of a Bullish Flag. Golds pullback is a direct result of the recent rally in the US dollar as it broke resistance in the low 94's that I have been warning you about this for weeks.

Gold metal is currently at a critical level or "breakpoint" and needs to hold this support level in the low 340's. If gold falls below 340, then I think gold will pullback to the 320's again. The key to gold's strength, weakness, and future lie with the US dollar which needs to be watched very closely.

However, if gold is going to bounce, this is a very likely place. Also, I noticed that the individual gold stocks are forming very nice tradable patterns such as Ascending and Symmetrical patterns.

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Below is a plot of the gold metal on a longer term basis. Basically you see the same technical picture as above, but on a muli-year expanded view.

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The XAU long term chart, while not as bullish as the HUI, broke out of a Symmetrical Triangle pattern. The XAU is now trying to find support near the breakpoint of the triangle.

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