The market is hanging on by a thread that is in danger of breaking down. The general financial news has been good lately: We are still in earnings season and earnings have been very good, and key economic data shows the economy is improving and growing. However, the market has been reacting negatively to good news, but what factors are causing this anomaly? The most likely reason is fear of higher interest rates: Basically, today when the investment public hears good news about the improving economy and expanding corporate profits, they think higher interest rates are in store, and they are likely right as the charts will indicate below. Even though Greenspan said the US economy is strong enough to absorb higher interest rates, the investment public does not believe it, and neither do I. The fragile economy, while showing signs of strengthening, is teetering on the edge of a knife and higher interest rates would likely cause it too loose its balance on that narrow edge.

The main hurdles to the US economy are the insane personal and corporate debt, the huge trade deficit, and jobs that are transferring overseas. All this has to be dealt with, and there is no easy fix. It will likely take many years before these imbalances can work themselves out, as well as the Dollar loosing much more of its value.

In fact, the greatest contrarian investor of all time, Warren Buffet, has increased his bet against the falling US Dollar over concerns of the huge trade deficit.

Buffet Article

"`We think that over time that the dollar is likely to decline in value against some of the major currencies,'' said Buffett, 73, in an interview before Berkshire Hathaway Inc.'s annual shareholder meeting in Omaha, Nebraska. In the last few months, Berkshire has added ``more than a little bit'' to its foreign currency holdings, he said. They were last disclosed at $12 billion as of yearend." Anyway, as you can see, Buffet does not believe the US economy is on the verge of a major recovery either.

The War in Iraq is really starting to wear on the nation, and even the hardcore pro war and Bush supporters are starting to question the wars validity and justification. The public is constantly barraged with horrible news about Falluja and more US soldiers who have been killed. The public also sees that the not just the terrorists, but many countries around the world are anti American, and this anti American sentiment seems to be spreading. The high cost of the war is in the many billions of dollars and the public wonders if it is all worth it. Gas prices are also a major concern and the general public is starting to feel the pinch. Even Greenspan warned that high fuel prices could weakening a the economic recovery. With all the negativism, it's hard to envision the stock market rallying to new highs. Remember, the market trades on emotion, fear and greed.

Higher interest rates are definitely in store, and the charts confirm this: Bond traders control long term interest rates while the Federal Reserve controls short term interest rates. However, the Fed. is really a slave to the bond traders: When bonds fall, interest rates go up, and vice versa. When bond traders are nervous about the economy, they sell long term bonds, which causes yields to go up, which are analogous to rising interest rates. The Fed. will not let long and short term interest rates deviate too far, therefore if long term bond yields go up, they will have to raise short term interest rates to narrow this divergence. Also, per Warren Buffet, higher interest rates are needed in the long term to increase foreign investment, which would help the trade deficit. In otherwords, the US needs a constant suppy of foreign money to finance its large trade deficit.

As you can see on the charts below, long term interest rates have broken out and are ready to run. 10 year rates have broken a multi-year downtrend line and a bullish flag. The next target is 55, or 5.5% - noted by the dotted line.

Shorter term time frame shows that 10 year rates have broken a bullish flag to the upside.

Five year interest rates are also rising, the first target is 40, or 4%.

The prospect of rising interest rates have logically caused a strong pullback in the real estate sector, as evident from the chart below. I'd say there is much more downside in this sector, as it has formed a bearish rectangle, the components are listed below.

The Housing sector is also strongly influenced by interest rates and will be hurt by an increase in long term rates. The Housing sector is on the verge of breaking support of the 200 MA.

I think it's not a question of if interest rates will go higher, it's when and how far. I think stocks in the Housing Sector offer fantastic long term shorts. However, shorting these stocks will require patience as they are subject to big whipsaws. However, if you can stomach the whipsaws and hold for the long term, housing stocks probably have a long long way to fall.

Components in this sector are listed on the chart below.

I mentioned OHB last week as a short candidate for the housing market, last week OHB broke support and triggered short. However, you will need to give it a lot of room as bounces could be vicious.

WLS is another interesting stock in the housing sector: WLS is one of the stronger housing stocks, but has a long way to fall in the long term. Once again, if you decide to short this, you need extreme patience.

TIN is another housing stock that is converging in a symmetrical triangle pattern, shortable if the triangle breaks to the downside. You could also short TIN close to the downtrend resistance line.

RND is yet another housing stock that may be shortable, it has formed a series of lower highs and the 50 MA has already crossed under the 200 MA.

Index Charts:

The Nasdaq chart does not look good here, it has closed slightly below the 200 MA and is quickly approaching support at 1900. The Nasdaq now resembles a bearish descending triangle and a fall to 1800 is very possible here.

The first Fibonacci support area on the Nasdaq is about 1815, a fall to this support area now seems very likely.

The Semiconductor Index strongly affects the NASDAQ, i.e. where it goes, the Nasdaq will eventually follow. The Semiconductor Index is very weak and has broken support of a bearish descending triangle. Unless the Semi's recover, the Nasdaq is toast.

A glimmer of hope remains however, notice that positive divergence has appeared in the MACD indicator below, signaling a bounce may be near.

The long term chart of Dollar shows the big picture:  The Dollars major resistance point is the red downtrend resistance line which is a major 'breakpoint'.

Once again, let me re-iterate how important this chart is:  If the Dollar finds resistance at the downtrend line and begins to head back down, then gold will recover and break out to new highs. However, if the Dollar manages to break the downtrend line, then gold and corresponding precious metal stocks will likely experience a VERY large pullback that would scare even the most devout 'gold bugs'. Precious metals and corresponding stocks would then need to consolidate for many months before recovering an uptrend. Gold is also pulling back due to rising interest rates.

This chart is very important if you follow precious metals, and even commodities. Keep a close eye on this chart. If the Dollar breaks this downtrend line, all commodities will likely experience a strong pullback, not just gold and silver, but other commodities such as oil, copper, aluminum, steel, etc.

As you can see from the long term chart of the HUI, major support exists between $160 and $150. I personally think this area will finally be the bottom.

However, it will be many months before the HUI heads back to new highs as it consolidates above support.

Lets check out some long term charts of a few gold stocks:

NXG is a gold stock that is nearing long term support at about $1.5. I would consider it low risk to buy NXG near support for the long term. This is a multi-year chart

Rangy has fallen to long term support at about $2.65, low risk accumulation at this point.

On a multi-year basis, AAUK has strong support at $18.80

On a multi-year basis, BGO is nearing a long term uptrend line with support at about $2.10