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June 6th, 2004
Table of Contents:
(click on the numbered sections below and you wil be taken to that corresponding section)
1. Administrative Comments:
I will be out of town next weekend, therefore there may not be a newsletter. However, if I am able to , I will post a very short one.
2. General Market Analysis and Foreign Markets
The technical picture did not change much last week for the general market, (Nasdaq, DOW, NYSE, S&P 500); for the week, the major indices moved - 8.12, + 54.37, + 19.16, and +1.82 respectively. Basically, all the charts all look the same and are consolidating under major downtrend resistance lines, and have a little room to move to the upside before running into major resistance. Another thing in common the indices have are the converging 50 and 200 day moving averages.
I lean bearish on the market in the short term, but realize that anything goes and a rally could still ensue if the downtrend lines are broken to the upside on good volume. I will switch my stance from bearish to bullish in a heart beat if the charts breakout to the upside. For the long term, I am bearish the Market as it is extremely overvalued when compared to historical valuations, and if the market decides to rally now, it just postpones the inevitable correction. The conspiracy theorists would say that the current administration will do everything in their power to postpone a large correction until after the election. Who knows, let's just follow the charts and act accordingly.
Also, as you will see further down, many foreign markets look bullish: Maybe this is hinting that the US Market will also break to the upside? Once again, we'll just have to see, I would not make any large bets one way or the other until we have confirmation.
As you can see from the Nasdaq chart, it is consolidating in a downward channel; Bulls could argue that a bullish flag is forming, while Bears could argue that a descending triangle is forming. Currently, 2000 is acting as psychological resistance and don't be surprised to see the media quote this level as significant. However, the downtrend line is really the significant resistance level and needs to be broken to the upside on strong volume to start another strong rally, i.e. a Breakpoint.
Things to note are the converging 50 and 200 MA's, and the general lack of volume on this third leg up of the series of lower highs in the downtrend.
The 60 minute time frame shows us that the Nasdaq has support at the uptrend line and minor resistance at 2000. Note the Negative Divergence in the MACD.
Via Fibonacci analysis and triangle height measurement, I calculate a price target of about 1600 for the Nasdaq if it fails to break the downtrend line and a large correction ensues 1600 represents a 61.2% retracement for the Cyclical Bull Market rally that began in 2003.
According to Elliot Wave theory, a pullback to 1600 would be considered a normal pullback or retracement of the 2003 rally and another rally could ensue from that point. However, a breach of 1600 would mean the end to any uptrend started in 2003 and a likely test of new lower lows for the Nasdaq.
The Semiconductor index is a very improtant indicator for the Nasdaq and the general market itself, i.e. the direction the Semis go, the Nasdaq will eventually follow.
The Semiconductor index, just like the Nasdaq, has major resistance at the downtrend line, i.e. a 'Breakpoint'. This downtrend line is a very important line to watch as a gauge for the market. If the downtrend line can be broken to the upside, then the market might enter another rally that would last into the summer. Major support at the gold line.
The DOW looks similar to the Nasdaq, with major resistance at the downtrend line. Once again, notice the lack of volume on this recent leg up and the converging 50 and 200 MA's.
The 60 minute time frame shows us that the DOW is in an uptrend, however a bearish rising wedge may be forming. Support lies at 10100.
The long term picture of the DOW is telling; major resistance is at the multi-year downtrend since 2000, while major support levels is at 10,000 and 9000 respectively. Conceivably, the DOW could rally all the way to the downtrend line near 10650 and still be in a long term downtrend.
Likewise, if 10,000 fails to hold, then a fall to major support at 9000 is very likely.
The S&P 500 also resembles the Nasdaq and DOW.
The NYSE composite has also formed what appears to be a bullish flag with significant resistance at the downtrend line.
The Industrial Equipment sector also seems to have formed a bullish flag with major resistance at the downtrend line.
In closing my commentary on the general market (Nasdaq, DOW Jones, and S&P 500) as well as other major indices such as the Semiconductors, the Industrials, and the NYSE, all have similar chart patters and are close to significant downtrend resistance lines.
Once again, the major market indices seem to be near 'Breakpoints', i.e. they are either on the verge of a major rally that could last a couple months, or on the verge of a major downtrend. At this point, it's hard to say whether the bullish or the bearish scenario will play out, just make sure to keep an eye on those 'Breakpoints'.
I am leaning to the bearish side, however I currently only hold a couple of shorts that are housing stocks. I am looking at purchasing USPIX Profunds Ultra short, but if the major indices break the downtrend resistance lines to the upside on good volume, then I'll switch from bearish to bullish in a second. Also, the foreign markets look bullish which is puzzling, as you will see further below.
In short, I would advise not placing huge bets for or against the market until the charts give us confirmation. Anything could still happen.
On the short side:
The ProFund UltraShort (USPIX) is one example of a mutual fund that shorts the market, and an easy way to take advantage of a falling market without shorting individual stocks. Note the converging 50 and 200 MA's; if the 50 MA crosses up over the 200 MA, then a strong buy signal will be generated, with a possible long term target in the $40's.
A shorter time frame shows us that the USPIX is in an uptrend. Angel from the message board, is looking to purchase this mutual fund in anticipation of a large market correction, but will sell if the market breaks to the upside. I suppose a stop loss could be placed under the uptrend line if you wanted to buy this fund now.
Interest rates are definitely going up for the long term, as evident from the 10 year yield chart below. As you can see, long term interest rates have broken out of a triangle pattern as well as a multi-year downtrend line.
Rising interest rates are never a good thing for economic growth, they are only good at combating inflation. Higher interest rates will also likely burst the housing bubble. Sorry, but your house can't keep on increasing 10-20% year after year.
The US economy is debt driven and higher interest rates will hit this country hard. The Federal Reserve has no control over long term interest rates, they are at the whim of Bond Traders.
Oh, by the way, in case you haven't heard, Alan Greenspan was re-elected to another 4 year term. This means more of the same, more liquidity injections and the printing of endless amounts of worthless paper money.
In the long run, interest rates are going to rise, how does one take advantage of this: One way is to short stocks that are sensitive to rises in interest rates, such as real estate and housing stocks. Another way is buy a mutual fund that moves inverse to interest rates via shorting the 30 year bond.
RRPIX is a mutual fund that rises along with interest rates by shorting the 30 year long bond. Long term, we all know interest rates are going up. I think RRPIX represents a great long term investment that you could hold for many years, and is as close to a 'sure thing' investment as you can get.
Let's take a look at a Foreign Markets via ETFs:
I have noticed that many foreign markets now look bullish.
Chile is forming a bullish flag and is also near major multi-year support.
China has bounced off a strong mutli-year support level.
Germany looks bullish, as it has formed a bullish flag. The 200 MA now seems to be acting as a support level and a long term target is about $25.
Japan has strong support at a multi year base and has a long term target of $16.
Spain looks bullish, as it has formed a bullish flag. The 200 MA now seems to be acting as a support level.
Sweden looks bullish, as it has formed a bullish flag. Nearest target is $19.75 and the 200 MA now seems to be acting as a support level.
Switzerland looks bullish, especially if it breaks the triangle to the upside. Nearest target is $17.65 and the 200 MA now seems to be acting as a support level.
Taiwan has pulled back to major support, and could begin another rally off this support level.
3. Gold, Gold Stocks, Commodities:
Gold pulled back last week, and gold is simply consolidating above the major support level marked in gold. The recent pullback in gold resembles a small bullish flag, therefore I think gold may see more upside in the coming weeks ahead.
On a long term chart, the fact that golds downtrend ended in May seems obvious, given that it had fallen to a long term uptrend support line.
The US Dollar has finally broken the uptrend that began in February and has also broken a bearish rising wedge to the downside. This is of major significance and very bullish for gold, precious metals, commodities, and corresponding stocks.
The next support level is marked by the gold band, and a breach of this level would result in the Dollar retesting, and probably making, new lows.
Silver has found strong support at about $5.5 after a total melt down in April. However, the gaps formed will offer resistance and it will be months before silver can mend the technical damage caused in April.
However, for long term traders, this is the place to buy silver.
In last weeks newsletter, I stated that gold stocks looked overbought in the short term and that a pullback would likely occur. I was right and a nice pullback occurred last week, however I am now changing my stance to short term bullish.
The HUI has pulled back to support near $190 and the pullback resembles a small bullish flag. I think the HUI may begin another rally to assault the major resistance level at $207.75.
The 60 minute time frame shows us that the HUI has found good support at about $190. $195 represents short term resistance that needs to be broken to begin another rally. If $195 is broken, the I think the HUI will be off to the races again.
The other gold index, XAU, also pulled back last week, but looks similar to the HUI as this pullback has formed a small bullish flag. The significant resistance lines at about $92.80, which was former support.
Commodities remain on an uptrend and this uptrend will likely remain, especially since the US Dollar looks like it is starting another downtrend.
The long term chart of the CRB is a scary chart for me: It has broken a 22 year downtrend line and is on the verge of breaking the 1984 high.
I truly think that it is only a matter of time before inflation begins to hit the US in a big way.
The 'King of Commodities" oil, has been pulling back and the media states that lower prices are now in store, however we know better. Based on the chart, nothing has changed, the uptrend in oil is well intact, including the recent support area in gold. As long as the uptrend line remains intact, oil will remain in an uptrend, PERIOD!
The long term chart of oil is scary, and is the kind of chart you would love to see on an individual stock or market index.
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