July 27th, 2003 Newsletter
Table Of Contents:
Click on the section titles below to be automatically taken to that section:
Part 1: Market Relevant News Stories:
Part 2: General Market Analysis
The Markets rallied in the later part of the week and still look bullish. However, important technical event is the VIX breaking support.
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VIX analysis:
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 20s and lower, while overly bearish levels are in the upper 40' 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.
Current Analysis: The VIX broke support last week in the low 20s. This may be significant and could set the stage for the VIX to fall to about 18 which is the next support level. The VIX falling to the next support level at 18 would probably cause the markets to rally once again and possibly form new highs. I am now short term bullish on the markets because of the VIX breaking support. However, this rally may be short lived, based on the VIX charts further below.
The VIX on a long term basis is in a Downward channel (two of them actually). The VIX broke support last week and now looks like it will fall to 18 or the bottom of the down trend channel, this would cause the market to rally again, possibly to new highs.
However, as you can see, there is not much room left to the downside, but lots of room left to the upside. If the VIX falls to 18 or the bottom of the channel, the markets might finally be topped out, as 18 will probably act as major support for the VIX.
Below is a longer term chart of the VIX: here you can see the long term support at 18 that goes back to 1999.
The chart below gives an even long term chart of the VIX. You can see that the VIX has fallen to support of an up trend line going all the way back to 1998. On the chart below, I've drawn multiple support levels (dotted lines), the first is 18, followed by 14, and finally the low 10s! Could the VIX fall to 14 or even 10? I doubt it, and it needs to fall to 18 first. Also, consider for the VIX to fall to 14 or even 10, the market would probably have to rally another 50% - 100% - hard to envision at this point, but I guess anything's possible.
Now on the Major Indices:
First the Nasdaq:
The Nasdaq is still strong on a technical basis as supports held on a retest last week. The Nasdaqs up trend line remains strongly intact, and if the VIX falls, the Nasdaq may breakout yet again and form new highs. The Nasdaq has formed a triangle pattern, that will be resolved soon to the upside or the downside. If the VIX falls to 18, then the Nasdaq will probably break to the upside.
Below is a close up view of the above daily chart: Here you can clearly see the up trend support line and the triangle that has formed.
The DOW looks strong yet again as it breaks to the upside of the Symmetrical Triangle. This is bullish and sets the stage for a rally to the June high of 9350, and then possibly the high at 9430. A weak VIX will help this happen.
Below is a close up view of the above daily chart: Here you can better see the Symmetrical Triangle that was broken to the upside. Next target = 9350.
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 S&P bounced nicely off the support up trend line last week. The S&P is forming an Ascending Triangle and looks bullish with resistance at 1015. If 1015 is taken out, then there is a good chance it will rally to May 2002 levels at 1050.
Below is a close up view of the above daily chart: Here you can clearly see the Ascending Triangle pattern that has formed. Resistance is 1015, and the next price target is 1050.
Now let's look at the ultra long term:
Here you can clearly see the importance of the 965 level discussed above.
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. Statistics of Horizontal Rectangles that break to the upside rise an average of 46%, with the most likely rise about 20%! This means that the S&P 500 could rise to about 1155-1175. Note that a 20% rise from 965 is 1155.
In the short term, the first target is 1050, however 1015 has to be broken first.
Foreign Investments:
The Russian Market pulled back hard to retest the former resistance level at 5400. So far, the Russian market appears to have found support at the old resistance and has bounced nicely off it. Note, there is a gap that may offer some resistance.
The TRF tradable 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 TRF pulled back and is bouncing.
Another foreign investment that looks good is Indonesia. Indonesia has been depressed for years, and is looking good again. Indonesia is going to pay off their IMF (International Monetary Funds) loans almost 2 years early and investment is sky rocketing in the country. The fund below might be a good "long term" investment as XXIFX has recently broken through 2.85 resistance zone and retested it on a pullback. The long term target is about 4.60, so not a bad return or about 50%.
Note however, that this would be a long term chart, and probably take many months to come to fruition. Stops should be placed just under 2.80. If you are impatient, this might not be the investment for you.
Brazil market looks interesting has it has formed an Ascending Triangle and may be a good long if it breaks to the upside. Resistance is 11.35
Japan market is rallying nicely, as you can see by the up trend line. I bought a small position last week near the up trend line at 7.65.
Part 3: Gold Analysis
Below is a close up view of gold metal. Gold broke out strongly from its Bullish Flag and looks very bullish here. The nearest price target is 375, and on a pullback, 357 might act as support. Gold looks really good here. Golds breakout is a result of the US dollar breaking down through a Bearish Flag.
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. Gold has rallied hard over the last week, and 357 might act as support on a pullback, 375 is the near term price target.
Below is a longer term view of the Gold Metal. You can see the 16 year down trend gold has been in and is trying to break out of this down tend. A clear break would officially end the Secular Bear Market in gold and Gold will enter a Secular Bull Market.
The HUI broke out of a "text book Ascending Triangle", with the breakpoint at 157.8. This breakout level is significant for gold stocks, especially those in the HUI index. A long term price target of the HUI is in the 200's.
Unfortunately you cannot play the HUI directly like you can with the XAU, you can only play the stocks within the HUI, (components of the HUI)
On a shorter term basis, you can see that the HUI broke out of a Bullish Flag formation and took out the formidable resistance at 157.8. A slight pullback is likely to begin at any time, however I would use this opportunity to buy more gold stocks.
The XAU rallied nicely last week and took out resistance at 82.90. Near term target is the high set back in April 2002 at about 89.1.
On a shorter term basis, you can see that the XAU broke out of a Bullish Flag formation and took out resistance at 82.90. A slight pullback is likely to begin at any time, however I would use this opportunity to buy more gold stocks.
Below is a list of gold stocks, note that many are now near support levels and could be accumulated here.
Just click on the chart symbols in the tables below to pull up a real time chart from Stockcharts.com and you will find a detailed explaination right on the charts.
Section 2 - Table of Gold and Silver stocks sorted by price range
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< $2
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CBJ |
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$2 - $5
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$5 - $10
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$10 - $20
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> $20
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A few Silver Stocks
The US dollar rallied hard off multi year support and created a Bearish Flag. This Bearish Flag was broken last week as the dollar couldn't break the formidable 97 resistance level. The dollar breaking support has been good for gold metal and gold stocks.
The US dollar may find some support in the low 94's (noted by the dotted line), which may cause gold to retrace a little. However, I think the dollars up trend bounce is over and it will probably make a new low later this year, thus causing gold to rally much more.
Below is a longer term chart of the US dollar.
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