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May 16th, 2004
Table of Contents:
(click on the numbered sections below and you wil be taken to that corresponding section)
Crude oil and subsequently, gasoline prices, keep rising to new highs each week. As you can see from the chart below, crude oil hit a new high once again last week and is now solidly in the $40 range. Resistance has been taken out on the short term and long term charts which will now act as support on pullbacks. I live near St. Louis MO. and gas prices here are $1.99 for regular, and $2.19 for premium. I know in Chicago and California especially, gas prices for regular are way over $2.00, and even approach $3 a gallon in some areas. I own two cars: A Honda Accord which gets about 35 miles a gallon and a Twin Turbo Dodge Stealth which gets about 15 miles a gallon. These days, I usually drive the Honda and leave the Stealth under its car cover or drive it on the weakends.
The longer term chart of crude oil is very scary as it has taken out major resistance which will now act as support on pullbacks. This is the type of chart you would like to see on breakout stocks, not crude oil!
Crude oil could pullback in the short term, however these charts imply that much higher prices are to come. Remember, crude oil is the 'King' commodity, it effects the price of everything, i.e. inflation.
If gasoline prices stay high, or go even higher before the presidential election, Bush may have a hard time getting re-elected.
Likewise, stocks in the oil sector are doing nicely:
Interest rates keep going up, but in the short term, they may pullback some.
However, for the long term, interest rates are definitely going up. Higher interest rates will slow down and stop the so called, economic recovery in the long term. This country is based on debt, and higher interest rates will only hurt us. The trouble is, the Federal Reserve has no control over long term interest rates, they are controlled by bond traders. You had better refinance you house if you haven't already done so.
The prospect of rising interest rates have logically caused a strong pullback in the real estate sector, as evident from the chart below. I think real estate has a long way to fall over the next couple of years.
The Housing sector is also strongly influenced by interest rates and will be hurt by an increase in long term rates. The Housing Sector represents great long term shorts, and higher interest rates will burst the housing bubble. In the short term, the sector is close to support, therefore if you haven't yet shorted stocks in this sector, I would first wait for a bounce to occur.
Components in this sector are listed on the chart below and represent good long term shorts.
There are simply a ton of housing stocks, and most of them can be shorted, see the components above: WLS is a good example of just how far housing stocks could fall in the long term: WLS for example could eventually all the way to major support below $40! However, this will take a long time to occur, and the first major support at about $69 is the first price target.
In the short term, WLS could rally, I would short WLS on a rally with a loose stop above the downtrend line.
Market Indicators:
The NAHL indicator is giving a major sell signal for the Nasdaq and the general market itself by crossing below the 20 MA. This is a slow moving indicator and is good at forecasting long trends instead of short term day to day movements. This indicator should be a strong warning to anyone who is long or bullish the Nasdaq and general market.
The NASI chart is better for forecasting short term market movements and may be hinting at a short term market bounce via the positive divergence present in the MACD. However, I think any rally in the market will be short lived and shortable.
The VXO, has found strong support in the low 14's and now appears to be on a steady uptrend. Also notice how the 50 MA is about to crossover the 200 MA. Such an event would signal that the VXO would enter a major uptrend. Remember, the VXO is inversely correlated with the market, i.e. when the VXO goes up, the market falls.
Index Charts:
Today, lets start wit the Semiconductor Index as it strongly affects the NASDAQ, i.e. where it goes, the Nasdaq will eventually follow. The Semiconductor Index is very weak and in a strong downtrend.
However, what really sticks out for me is the bearish 50 MA crossover that recently occurred which is hinting that a large correction may be on the horizon. Whenever the 50 MA crosses the 200 MA, a large price movement usually follows. You can see what happened last time this occurred: In February 2003, a bullish 50 MA crossover occurred that started the huge rally of 2003. Let me reiterate, if the Semiconductors enter a big correction, so will the Nasdaq and the general market itself.
The Nasdaq chart is on the verge of breaking down. It has closed below the 200 MA, but is still just above support. If support fails to hold, then a fall to the next support level near 1780 is likely. Also note how the 50 MA is converging on the 200 MA. If the 50 crosses below the 200 MA, then a bearish crossover will occur that will likely begin a large correction. Remember in March 2003, a bullish crossover occurred.
Note the positive divergence taking place in the MACD. This may cause the NASDAQ to rally in very soon, but I doubt that it will be a sustainable rally given the chart of the semiconductor index.
The first Fibonacci support area on the Nasdaq is about 1815, a fall to this support area now seems very likely. However, based on triangle height measurement, I think the Nasdaq could fall to retest the 68% Fibonacci number around 1600.
This next chart further strengthens my opinion that the Nasdaq will eventually retest the 68% retracement level. Notice the last major that occurred during the fall of 2002, the Nasdaq retraced all the way to the 68% retracement level - I think it will happen again this year.
The DOW Jones:
The DOW Jones has broken a symmetrical triangle to the downside and is trying to find support in the zone shown in the gold band below. Some could argue that a bullish flag is also forming, however for this scenario to work out, the DOW needs to rally right away, otherwise it will fall and negate this pattern.
If support in the gold band fails to hold, then a fall to the next support at 9500 seems inevitable. Strongest support exists way down near the 9000 level. Also notice the converging 50 and 200 MA's: You can see what happened last time this occurred: In March 2003, a bullish 50 MA crossover occurred that started the huge rally of 2003. It would not be good for the 'Bulls' if a bearish 50 MA crossover occurs in the DOW.
However, in the short term, positive divergence in the MACD may cause a short term rally to occur very soon.
Long term view of the DOW shows the major support level at 9000.
The S&P resembles the DOW chart.
The NYA has already broke a symmetrical triangle to the downside and has formed a very bearish descending triangle which will likely be broken to the downside.
The DOW transports are converging into a large symmetrical triangle, thus suggesting a large price movement will soon occur. At this point, I'd bet the move will be to the downside, and notice how a bearish 50 MA crossover is about to occur.
If you still own internet stocks, then I suggest you exit them asap.
Retail also looks weak, avoid the component stocks as long picks.
In conclusion, There is no real good reason to buy stocks, and rallies are shortable. Probably, the best way to trade right now is to either day trade, or short the rallies. However, daytrading is probably the safest bet at this point. As you have seen on many of the index charts, the 50 and 200 MA's are converging. I would not be surprised to see bearish 50 MA crossovers on the main index charts very soon, especially since this has already happened on the semiconductor chart.
For those of you who don't want to short individual stocks, the USPIX, or Profund UltraShort mutual fund offers an easy way to short the market.
Notice how the 50 MA is getting close to crossing over the 200 MA? If this happens, this fund will be triggered long and is called a bullish 50 MA crossover. Notice what happened that last time the 50 crossed under the 200 MA (bearish 50 MA crossover)? A long term price target of about $42 is possible, which isn't too shabby percentage wise.
The Rydex fund is another well managed mutual fund that shorts the market. The Rydex looks very similar to the USPIX fund above, my advice is to take your pick.
Foreign Markets:
Most foreign markets are pulling back just like the US Indicies and I think this will continue. However, two foreign countries that interest me are China and Russia, as both have pulled back to major support levels.
GCH is an exchange traded fund (ETF) that is an easy way to invest in China.
TRF bounced off support last week near $30 which is a low risk place to accumulate TRF. However, in the short term, I think TRF could pullback or consolidate longer, but it is attractive at these levels.
3. US Dollar, Commodities, Precious Metals:
Gold has fallen to the support zone between $369 and $379 and could rally here. However, I don't think any rally that occurs here will be sustainable and will eventually pullback.
Realize that even if gold bounces at support, it needs to consolidate for months before making new highs.
The US Dollar is in an uptrend with strong support at the uptrend line and the 200 MA has been broken to the upside. The Dollar rally looks like it will continue and the first target is 94.15.
The Dollar is also rallying due to rising interest rates and a belief that the US economy is improving.
Realize that gold, silver, and corresponding precious metal stocks will remain weak as long as the Dollar is strong and in an uptrend.
The long term chart of Dollar shows the big picture: The Dollar has broken major resistance at the multi-year downtrend line. This is not good for precious metals and their corresponding stocks.
Gold Stocks
The HUI and corresponding gold stocks rallied last weak due to positive divergence in the MACD. However, major resistance at about $190 will be hard to break.
As you can see from the long term chart of the HUI, major support exists between $155 and $160 and the HUI appears to be finding support here. However, given the strong US Dollar, the HUI and gold stocks will not begin a major rally at this time.
Likewise, the XAU rallied last week due to positive divergence in the MACD, however resistance at $87.10 will be hard to break.
The XAU is also ralling off the long term uptrend line.
Silver metal has had a virtual meltdown since early April. However, silver is finding support near $5.5 that should keep it afloat.
Our old friend Palladium finally looks good again after a hard pullback to the support line. Long term investments in palladium can be entered here via coins or stock such as SWC and PAL.
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