Weekend Newsletter of May 18th, 2003

Summary of this newsletter

To skip to a section, simply click on the list below, and you will automatically be taken to that section.

Part 1. Administrative comments, repost of market cycles

Part 2. Market Index, daily analysis, sectors

Part 3. Gold, US dollar, CRB

Part 1. Administrative comments, repost of market cycles, and US dollar

1st. some administrative notes:

A ton of new subscribers joined this week, therefore I thought I'd give a brief overview of BPT's and what we offers to traders like yourselves.

This website is devoted to Technical Analysis, it's study, and it's uses in market prediction and stock picks. The newsletters here are very technical and rely on charts to predict the market, not the news. I find that technical analysis is the best way to predict future market direction, not the news, for instance in the past, I made my biggest mistakes when trying to incorporate the news in my analysis, therefore I quit doing this a long time ago, and now I just rely on the charts.

Also this website caters to various traders with different styles: For example, day traders and swing traders find this website useful because of the substantial # of picks that are added to the list daily. This saves work for these traders by not having to scan the market for hours each night to find picks themselves.

Some of our members work and lead very busy lives and have little time for trading, however they still wish to trade somewhat and control their own investments. These members usually don't have the time to actively trade daily in and out of picks and want a smaller list of stocks to watch. This site offers a good macro view of the markets via the weekend newsletters as well as the detailed charts of the major indexes, sectors, and gold. Also, on the watch list section, there is a section called 'Insider - Technical'. This section contains only a few new picks each week, and many of these picks can be held for weeks at a time once they trigger because their technical patterns are supported buy strong insider buying and selling.

There is also a corresponding comments or triggered setup section for charts that trigger (long or short) from the two watch lists. These sections contain on going comments and trading ideas such as price targets, when to take profits, etc. The bullish market has really contributed to some impressive gains from our watch lists. Another thing to note is that the all the picks are not found on the watch lists, for example we often place picks on the message board that are not on the list, as do many of our highly valued members. Picks are also profiled throughout the day on the chat room, as well as market comments.

The newsletters are quite long and usually only written once per week. The goal of these newsletters is to give you an objective view of the markets on a short term and a macro time frame. The newsletters use technical analysis exclusively to achieve this, not the news. Many of you who have been reading the newsletters for awhile will agree that my newsletters have been very accurate predicting the market based solely on technical analysis.

Also, parts of my gold analysis can also been seen at: www.321gold.com once per week.

Part 2. Market Index, daily analysis and conclusions

So what does the market look like from here? Let's first look at some charts starting with the Indicators, VIX and the BPCOMPQ:

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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So now what:

Those of you who have been members for while now, know that I've been constantly saying that the VIX could fall to 20. Well, the VIX has gotten very close, and hit a low of 20.57 this week. This is definitely low and could be a bottom for the VIX.

Also notice the Positive Divergence that is apparent in the VIX on the charts below. This Positive Divergence is signaling a possible bounce or rally coming to the VIX. Also notice the blue support line, the VIX could likely bounce off this line. Of course, if the VIX falls through the line, then more upside will be possible yet.

Another important thing to notice on the VIX is that it fell on Friday, however the market also fell. Normally this does not happen, usually when the VIX falls, the market goes up, and vice versa. Basically, two things could be happening here:

1. Options expired on Friday, this can cause anomalies in the market can could be a result of this.

2. Another likely reason would be that people are getting more bullish whenever the market pulls back. This is a sign that the general public is getting too bullish. Remember the "Buy the Dips's" phrase of the 90's? This is what people could be doing here, when people buy call options, this causes the VIX to fall and could be the reason for the VIX anomaly on Friday. If this is the case, it is a warning sign that the market is getting toppy.

Anyway, if the VIX does bounce here, note that there is some resistance at 22.60, and very strong resistance at 26.40. These areas may prove difficult for the VIX to break in the short term.

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Below is an even longer term view of the VIX that shows the 20 support level. Notice how the VIX recently crashed through support at 22.60 and almost tested the 20 support area? Also with some Positive Divergence showing up, the VIX could start to rally soon, however 22.60 and 26.5 will be resistance areas that will slow it's rise.

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Below is another chart I find very useful in predicting major market tops and bottoms. The BPCOMPQ very accurately predicts market tops when it is above about 49 and market bottoms when it is below about 30.

Notice how the BPCOMPQ is now in the mid 50's, this is indicating stocks are in over bought levels. However, this does not mean the market will drop like a rock, notice how in the past, the BPCOMPQ usually stayed in the low 50's for several months at a time and right now, it has only been in this area for a few weeks.

There is another thing to note about the BPCOMPQ indicator below. Notice that it predicted market tops very well since the beginning of the bear market back in 2000. The BPCOMPQ seems to work very well in Bear Markets, however it does not seem to work well in bull markets. If this year is the start of a Cyclical Bull Market, then the BPCOMPQ will not work as well and could remain in over bought areas for long periods of time.

To help understand this, think of Stochastics: Many of you know that Stochastics is not a very useful indicator by itself in a trending market because it can remain in overbought or oversold areas for long periods of time. Thus, the same could happen with the BPCOMPQ.

Am I stating that a Cyclical Bull Market started this year? No, however it is possible, and after 3 years into a Secular Bear Market with 3 down years in a row, we could be due for an up year.

I'm thinking what could happen is that the market tops out and pulls back in the near term and forms a higher low rather than a lower low. This might show up on the BPCOMPQ chart by dipping below the 49 area, but not making it all the way to the oversold area. Notice how last time, the BPCOMPQ indicator never made it down to the oversold area, but instead bottomed in the mid 30's. This same thing could happen again. If it does, then a good market pullback could be a good buying opportunity.

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Also note that if the Market wants to pullback hard, the major indices will likely retrace their rally by a Fibonacci percentage, the likely pullback percentages would be 38% and 50% and maybe 68% retirements. The reason I mention this here is because I have found the Nasdaq to follow Fibonacci very well. I would also view a pullback to one of these areas as bullish if support is found. Below are the important Fibonacci numbers for a pullback as well as a chart for reference.

38% = 1440

50% = 1405

68% = 1370

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Short Term view of the Nasdaq:

The Nasdaq on a short term view is still maintaining an uptrend line. However, if the uptrend line is broken, then look for support at 1532, and then the blue dotted lines. If the VIX bounces, then this uptrend line could be broken.

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The S&P 500 graph below is not a nice looking chart if you are bullish on the market. The S&P has formed what appears to be another Rising Wedge. The wedge is close to breaking and could still break to the upside (if it already hasn't) or the downside. Watch the VIX carefully here to give an indication of what the S&P might do in the future. 955 is the short term resistance, while 965 is the mega important resistance level, see the long term chart below the daily chart.

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Short Term view of the S&P 500:

On a short term basis, the S&P 500 broke above resistance at 935 and is currently holding this area which will now act as support. However, if 935 is broken, then look to the red dotted lines as areas of support.

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Now let's look at the ultra long term:

On a short term basis, the S&P target is 935 - 940, however the strong resistance and long term price target is 965 which is the neckline of the large head and shoulders pattern on the S&P. If the VIX falls to 20 or 18, then this level could be seen on the S&P.

see the chart below

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Conclusions:

The market could definately top out at any moment, however what's interesting is that I cannot find very many bearish charts?  Most of the charts I pull up on the indices, sectors, as well as individual stocks are bullish, i.e. it is hard to find charts that look like good shorts. Therefore, I wouldn't be surprised if the market holds up for awhile yet, or at least drifts sideways. Eithe way, if you are playing breakout stocks, I would begin to take profits more quickly.

Sector charts can be nice to trade in that they will offer stability, i.e they will never gap down 50%, that can happen with individual stocks. Therefore you can put a larger % of your capital into them.  I play sector charts along with my breakout stocks.

Many sectors remain surprisingly strong such as Biotech, particularly PPH, Energy sector denoted by XLE (which I have been long for two weeks) and Ulilities, denoted by UTH and RTH, both of which I went long last week. Other strong sectors include the Financials (XLF), and health care (XLP)

Some weak sectors are the retail sector which broke to the downside of a bearish rising wedge, as well as the materials sector, XLB.

Part 3. Gold, analysis

Gold has definitely been strong since early April. Gold found support near 325 and has rallied ever since. Last week I wrote that gold had recently broken through minor resistance at about 342, the target now is about 355 to 360, as denoted by the blue line.

Currently, as I write this, gold is up and has it a high of almost $359, or basically the target range. The question is, what will gold do from here? This 355 - 360 range represents a technical resistance or 'breakpoint'. Gold metal is at a critical stage and will either find resistance here and head back down, or break resistance and continue it's impressive gains.

If gold heads back down here, look for the previous resistance at 342 to act as support. However, if resistance can be taken out decisively, then 375 would be approximately the next target.

Currently the US dollar is still in free fall and shows no signs of bouncing yet, therefore the coninued weakness oft the dollar could cause gold to break this the 360 level. However, keep in mind that a pullback or at least a sideways consolidation could happen soon. Gold has been on a 'tear' ever since retesting support in the low 320's without a pullback.

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Also, note the long term chart of the XAU below: While not as bullish as the HUI, it is still a nice looking chart. It has rallied nicely over the last few weeks of off it's long term uptrend support line, resistance is the downtrend line of what is a Symmetrical Triangle. Resistance looks to be near 80, this chart is bullish and points to more upside in gold stocks. Also note that the XAU could pullback to the low 60's still and be within the triangle pattern. Again, long term holders of gold stocks should hold their stocks unless the XAU and HUI break to the downside.

However, I believe the patterns will eventually break to the upside, thus causing gold stocks will be much higher later this year.

However, please note that this chart and the one above are weekly charts, thus they move slowly. Thus the HUI and XAU will probably take weeks to months to rally up to their respective uptrend lines.

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On a short term or daily basis, the XAU broke resistance in early may at 132 which sets the stage for more gains in gold stocks. 132 should now act as support in case gold pulls back.

The XAU on a daily short term basis is also very bullish, and has a near term target of 75, as denoted by the green dotted line. Support lies at about 70 (red dotted line) and at the 50 moving average.

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