June 29th, 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 have been pulling back and consoliding 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 vorming 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.
Below is a longer term chart of the VIX: here you can see how the VIX is currently between support and resistance at 20 and 26.4 respectively. However, you can see how 20 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 is broken. But again, the VIX needs to break out of this horizontal conjestion before we can deduce the next major market trend.
Now on the Major Indices:
First the Nasdaq:
The Nasdaq is still strong on a technical basis as support has held i.e. the support and resistance levels remain the same and were not broken i.e. the technical chart has not been damaged by the pullback. Resistance is still in the low 1700's while support is the uptrend line.
The Nasdaq is at a pivot point or "breakpoint", i.e. the uptrend line needs to hold here, otherwise the Nasdaq will likely fall to either 1560 (previously major support, now support) or the 50 day moving average. However please keep in mind that the uptrend line is really not that significant to this market rally: 1560 is much more significant, also whenever a stock or index "pullsback" that pullback is considered "normal" as long as it does not fall below a Fibonacci # - see Fibonacci discussion below...
Nasdaq Fibonacci
Here's another look at the Nasdaq using Fibonacci #'s. Again, you can see the uptrend line that is currently acting as support. If this uptrend line is broken, then a fall to one of the 3 Fibonacci lines could ensue.
Keep in mind, that the uptrend line is really not significant in this market rally that began in March. The market rally will remain intact as long as the Nasdaq does not fall below the 62% Fibonacci line. Fibonacci #s represent price levels that are considered "normal pullback" for a rally.
Nasdaq 60 minute chart
As you can see on the 60 minute chart, the Nasdaq bounced off the 38% Fibonacci # last week, but is pulling back again. The Nasdaq could pullback to any one of these Fibonacci lines and the market rally will remain intact. Also notice how the Fibonacci # of 62% gives us a price of 1555 - 1560. This corresponds exactly with the major support level on the daily Nasday chart - it's good to see correlations such as this.
Applying Fibonacci lines to the chart gives us other possible support areas to look for a bounce.
38% = 1605, which is close to 1600
50% = 1580, which is the same as above
62% = 1555 - 1560, (which also corresponds exactly with the major support level on the daily chart)
The DOW Jones broke it's resistance level of 8870 several weeks ago, 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 uptrend line remains intact. The DOW is at a pivot point or 'breakpoint" If the uptrend line should fail, then a fall to the next support of 8870 is likely. The 50 MA would be the next support if 8870 does not hold.
DOW 60 minute chart:
The 60 minute chart gives you a closer view of the DOW: Just like the Nasdaq, you can see that once the uptrend line was broken on June 19th, that began in May, a nice pullback has ensued.
Support levels are denoted by the dotted lines, however notice that a Descending Triangle has formed. Descending Triangles are bearish and usually break to the downside. The Descending Triangle is signaling a strong possibility that the market could continue to pulback here. Keep in mind that sometimes these triangles do break to the upside, and is why we first need to see which way it breaks first before making conclusions.
Either way, you can see how the DOW is at a "breakpoint" on both the 60 minute chart and the daily charts. Look for this issue to be resolved early this coming week, which will tell us the alot about the next market trend for early July.
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 uptrend, support is the uptrend 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 cautiously bullish.
60 min S&P 500 chart:
On a short term basis, just like the NASDAQ and DOW, you can see that once the uptrend line was broken on June 19th, that began in May, a nice pullback has ensued.
Support levels are denoted by the dotted lines, however, just like the DOW, notice that a Descending Triangle has formed on the S&P 60 minute chart. Descending Triangles are bearish and usually break to the downside. The Descending Triangle is signaling a strong possibility that the market could continue to pulback here, especially if it is broken to the downside, but keep in mind that sometimes these triangles do break to the upside, and is why we first need to see which way it breaks first before making conclusions.
Either way, you can see how the S&P is at a "breakpoint" on both the 60 minute chart and the daily charts. Look for this issue to be resolved early this coming week, which will tell us the alot about the next market trend for early July.
The Russian Market continues to make headway as it 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 like the US market was in the 90's. 5400 should now act as support - The Russian Market might have the potential to see 6000 - 7000 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
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.
Part 3: Gold Analysis
This is a close up view of the 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. 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 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.
Below is a plot of the gold metal on a longer term basis. Basically you see the same technical picture as above. However note the long term uptrend dotted line. Gold is in an uptrend as long as that dotted line remains intact at about $310. It would be hard to imagin gold falling to this level, and it would seem like the end of the world to "die hard gold bulls" however on a technial basis golds uptrend would remain intact.
The HUI has formed a "text book Ascending Triangle, with the breakpoint at 155. If this level can be broken (and HELD), then a possible target of about 230 is the objective target based on height measurement.
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)
Two weeks ago, the HUI briefly broke the 155 level but could not hold it and fell back below the breakpoint. The pullback occured because of weakness in gold caused by recent strength in the US dollar. The dollar needs to be watched closely here If the dollars rally continues, then the HUI has the potential to fall and retest the uptrend line at about 130. If this occurs, it will be painful for those of you who hold gold stocks.
What should you do? It all depends on what kind of trader you are: if you are a long term trader, then gold stocks should be held as long as the uptrend line in the HUI chart below remains intact. However, if you are a short term trader, then you might not be able to stomach such a large pullback - (this is something you need to decide for yourself). Again, this all depends on the US dollar, resistance is 94.10 - 94.30, watch it closely.
On a shorter term basis, you can see that the pullback in the HUI was not surprising given the near vertical rise. Perhaps this pullback will form a stable base for which the HUI can rally off of and take out 155 resistance once and for all.
The XAU long term chart, while not as bullish as the HUI, broke out of a Symmetrical Triangle pattern. XAU is now trying to find support at $76. see the daily chart:
On a short term basis, you can more clearly see the support and resistance levels on the XAU, then on the weekly chart - note the support at the $76 area. It will be interesting to see if this level can hold.
As I've been saying for weeks now, if the US dollar rallies then gold will fall. Well...this has happened, the dollar rallied and took out resistance in the low 94's, thus causing major weakness in gold.
Notice from the chart below that gold is again near resistance at 95.4 and one of two things will happen here: Either the dollar will break the 95.4 resistance or it will turn back down - thus the dollar is at a pivot or 'Breakpoint". Note that if the dollar breaks resistance at 95.4, then it could easily rally to 97.5. This would not doubt cause gold to fall below the 340's and probably back to the 320's. However if the dollar starts back down again, then gold will likely begin its rally again. Do you see how everything is lining up very nicely? Gold metal is at support while the dollar is at resistance. This important technical situation should resolve itself in the very near future.
to recap, here are the current breakpoints:
Gold metal = low 340's = support
US dollar = 95.4 = resistance
The recent bounce in the US dollar was not at all surprising given that it hit the multi year support level of about 92.20.
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