June 27th, 2004

Table of Contents:

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

1. Administrative:

2. Market Indices:

3. Gold, US Dollar, Commodities, Corresponding Stocks:

1. Administrative Comments:

Added more sectors to the Market Sector page, as well as increased the chart size to improve clarity, and also color coded the comments to make it easy to identify weak and strong sectors.

Strong sectors are noted in green

neutral sectors are noted in black

weak sectors are noted in red

Market Sector Page

2. General Market Analysis:

The general market for the week was mixed, both the DOW and S&P rallied early in the week, but fell to close down for the week, while the Nasdaq closed the week for a gain. The DOW lost about 45 points, the S&P 500 lost about 1/2 a point, while the Nasdaq gained about 39 points.

The major indices are still close to breakpoints and will either begin a strong downtrend or a steady uptrend here. It's not surprising that the market was mixed last week, given the FOMC meeting this coming Wednesday about interest rates.

I suspect that Wednesdays FOMC meeting will be the catalyst that sets the trend for the market over the next month or two, whether it be up or down. Therefore, I expect the market to once again be mixed on Monday, Tuesday, and Wednesday morning before the FOMC meeting. It might also be a good idea to lighten up on some positions, take some profits, or raise stops prior to Wednesdays FOMC meeting.

The market has already factored in at least a 0.25% fed hike in interest rates, therefore anything over or under will likely be a major market mover. If the Fed raises interest rates by 0.5%, then I suspect the market will take it hard. However if the Fed holds rates steady once again, then the market may be off to the races.

I was looking over the public list on stockcharts.com and came across an interesting that chart that seems to suggest that the Fed might actually hold interest rates steady one more time:

The chart below measures the spread between the 30 year T-Bond Yield to the 3 month T-Bill, the higher the number, the larger the spread between the long and short term rates. The 30 year T-Bond Yield is controlled by bond traders, while the 3 month T-Bill is essentially set by the Fed as short term interest rates.

The interesting thing about this chart is that the uptrend line was broken in late may and the spread between long and short term interest rates has fallen quite a bit.

Why is this important you ask?

The Fed. does not want the spread between short and long term interest rates to get too large, in otherwords, the Fed will raise or lower short term rates so that the spread doesn't get too wide.

My point is, notice how the spread has narrowed quite a bit over the last two months: This 'narrowing' of the spread might actually be a good enough reason for the Fed to hold rates steady on Wednesday! Such an action, could begin the large market rally that I discussed in last weeks newsletter.

Just as I discussed last week, the following chart suggests that the next three months are good months historically during an election year.

The graph is annualized average 1 month change for the S&P 500 during an election year from 1928 - 2000.

First off, notice how election years are statistically up years. Also notice how April and May are statistically down months for the market - April and May of this year were also down months.

Also note how June, July, and especially August are the historically the best performing months during an election year. If this trend continues, then the current market will likely break it's recent consolidation bullish flag patterns to the upside.

3. Market Indices

However, even though the Semiconductor sector looks weak, I personally think the Semiconductors will break the downtrend line to the upside and ignite a market rally. Why do I think this, when you plot the Semiconductors and Nasdaq together as a ratio, you can see how that the Semiconductors have been under performing all year, and as a result, the Nasdaq has been flat for the year.

Anyway, you can see that my favorite indicator for signaling bottoms, positive divergence, has creeped into the MACD, thus signaling that this downtrend may soon end and an uptrend will begin. If this chart begins an uptrend and breaks the downtrend line, so will the Nasdaq and a market rally will begin.

The DOW Jones:

The DOW has broken the bullish flag to the upside, but fell back significantly on Friday with large volume.

However, just as I explained above, the large fall on Friday and the big down volume should be ignored because of the rebalancing in the DOW, S&P, and Russel 2000.

Major resistance is now the high at 10750 from February, and the broken downtrend line is now support.

Once again, Wednesdays FOMC meeting will likely be the catalyst which sets the next major trend.

DOW Theory states that the DOW and the Transports are closely linked, just like the Nasdaq and the Semiconductors.

The DOW Transports are rallying, thus suggesting that the DOW will soon follow.

The long term chart of the DOW shows that the DOW is in a multi year downtrend which began in 2000.

You can clearly see the bullish flag pattern. If the DOW can take out the high of the flag (10750), then it's off to the races for this summer and early fall.

The S&P 500:

The S&P resembles the DOW chart as it has formed a bullish flag.

Once again, you should not take much credence in Fridays fall on large volume due to rebalancing on the major indices.

The next chart also supports the case for a market rally: This chart shows that small caps are leading the market which is usually the case during market rallies.

The next chart below shows that the S&P may be in a wave 5 Elliot pattern, and about to embark on wave 5. This chart suggests the S&P could rally to 1250.

Foreign Markets:

As I've been stating for weeks now, many foreign stock markets look like they are on the verge of major market rallies. Why is this important you aks? I think the majority of the world stock markets are linked, thus if the world markets rally, so will the US, and vice versa.

The foreign market that look particularly bullish are: Chile, China, Germany, Japan, Spain, Sweden, Switzerland, Taiwan, and the United Kingdom. Chile, Germany, Spain, Switzerland, and the United Kingdom have formed bullish flags, while Taiwan is bouncing off major support and Japan appears to have formed a large inverted head & shoulders pattern.

Of particular interest to me is the Japanese market, Nikkei Index.

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.

EWJ is a way to take advantage of the potentially bullish situation in the Nikkei.

Bullish flag breakout for the Chile Market:

Bullish Flag on the German Market.

China looks interesting if the downtrend line can be broken:

Bullish Flag on Spanish Market:

Bullish Flag on the Swedish Market:

Bullish Flag on the British Market:

Taiwanese market near major support:

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3. Gold, US Dollar, Commodities, Corresponding Stocks:

Gold metal bounced nicely off the support area marked in gold in May. Subsequently gold rallied, then pulled back to form a higher low and a bullish flag with resistance at about $400.

Last week, gold broke resistance at $400, which is bullish. However, I would like to see gold rally a little more and then hold $400 on a pullback. To me, such an event would be very bullish and would suggest that the low is in for gold.

Obviously, the long term chart of this gold bull market is well intact.

Gold is indirectly correlated with the US Dollar, i.e. when the Dollar falls, gold rallies and vice versa.

In order for gold to begin another strong uptrend, the US Dollar will probably have to breakdown and re-enter the long term downtrend. For this to occur, the support area in gold must first be broken.

The only thing that worries me about gold is the possible bullish falling wedge that may be forming in the Dollar. If this wedge is broken to the upside, then gold, precious metals, and corresponding stocks will tumble.

Be sure to monitor this chart very closely if you own precious metals and corresponding stocks.

60 minute chart to keep an eye on.

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