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May 23rd, 2004
Table of Contents:
(click on the numbered sections below and you wil be taken to that corresponding section)
1. Administrative:
2. General Market Analysis:
3. US Dollar, Commodities, Precious Metals:
1. Administrative Comments:
Currently, the size of the charts I use on this newsletter and the website are 620 pixels wide. However, I am thinking about increasing the width size of the charts to 780 pixels. Most of you who use stock charts are familiar with the various size charts available.
The reason I think increasing the width size of the stock charts is a good idea is because it would increase the resolution of the charts. For example, on daily charts that are 620 pixels wide, you start to lose details and resolution greatly after about 10 months. By increasing the size of the charts to 780, I could increase the time frame and still keep the resolution.
Also, as some of you have probably already seen from the message board, I am going to start including my futures trades for the Nasdaq and S&P 500 as well as a few other trades. Note, that I do not trade futures like a day trader, I may trade them only a few times a week. My favorite strategy is to go long NQ futures (Nasdaq) or ES futures (S&P) when I see positive divergence in the MACD. I have been very impressed at how well this method has been working and decided to share it with you. However please note: When I make an NQ or ES futures trade, there will be about a minute or two lag before I can post it on the message board. Please also note that futures trading is extremely risky and my trades are for informational purposes only.
Here is a graphical representation of my NQ futures trades last week: You can clearly see the positive divergence where I went long and the two places I was stopped out. Also note how the stochastics were also oversold during the positive divergence - if I see both positive divergence in the MAD and oversold stochastics, I go long NQ or ES futures. If the chart happens to be a 5 minute time frame, then the trade might only last a day or two, as in the example below. However, if I see a similar situation on a 60 minute or even a daily chart, I will try to hold the futures for many days to catch a large movement.
Yes, I do not have a problem holding futures overnight! I always use stops to protect myself. Futures trade 23 hours a day, which means that my stops will execute during the night if bad news happens. I have not been burned by this strategy, and I have been stopped out in the middle of the night before. However, very very rarely hold over the weekend.
2. General Market Analysis and Commodities
The general market continues to churn and consolidate sideways to slightly down, which you can see by the daily charts via the converging 50 and 200 MAs. The Nasdaq and DOW Jones are now slightly below their 200 MA's while the S&P is still above it. I'm currently leaning to the bearish side as most of the charts below and market indicators suggest a larger pullback may be in store for the general market.
Long term chart of the Nasdaq: In the long term, if the bearish triangle proves correct, the Nasdaq will likely retest the long term support zone marketed in gold.
This also corresponds with triangle height measurement: The triangle is about 270 points in height, subtract that from 1880 and you get 1610 as a price target which corresponds nicely with long term support.
As you can see via the Nasdaq, the chart from last week has not changed much and support near 1880 is still holding. The Nasdaq is consolidating into a possible bearish descending triangle with support in the 1880s and resistance at the downtrend line. A break of support, will cause a pullback to the next strong support zone marked in gold near 1780.
However, for the long term, the important thing to note is the converging 50 and 200 moving averages. If these two MA's cross, then a bearish crossover will occur and the Nasdaq will likely set on a large downtrend that will likely last the rest of the year or longer in duration. Also notice how the Nasdaq is below the 200 MA, which may now act as resistance.
On the bright side, there is a slight positive divergence in the MACD and some could argue that this pattern is not a descending triangle, but a large bullish flag. In otherwords, anything could still happen; either a large correction, or a breakout to begin a new rally. We'll know soon enough, however at this time, I lean to the bearish side.
Also, based on Fibonancci, the 68% retracement level for the Nasdaq is about 1600. Notice how well this conforms with the chart above. The reason I am leaning to the bearish side is that I see multiple analysis confirming one another.
When discussing the health of the Nasdaq, we can't forget the Semiconductors: 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 DOW chart looks similar to the Nasdaq chart above, i.e. the converging MA's, it's below the 200 MA, and right at support. Major support exists at 9000, which is also confirmed by the long term chart.
Note, the recent consolidation could be bearish flag, be sure to keep an eye on this next week.
DOW long term chart. Major support at about 9000 if the DOW breaks down here.
The S&P 500 chart looks similar to the Nasdaq and DOW, but it is still above its 200 MA. The S&P broke a symmetrical triangle to the downside in early May, which began the fall. Once again, some could argue a bullish flag exists, however at this time I am leaning to the bearish side and I think the recent consolidation could be a small bearish flag.
The long term chart of the S&P 500 shows long term support at 965 if the S&P breaks down here.
The NYSE composite looks bearish after breaking a descending triangle to the downside. The NYSE has temporarily found support at the 200 MA, however notice how I stressed the word temporarily. The NYSE has also found resistance at former support which is now resistance. Therefore, the NYSE will probably begin another downtrend very soon and a fall to 6000 is probable.
Lets look at a few market indicators:
The NAHL is clearly giving a sell signal as it has crossed the 20 day moving averaged to the downside. Note how this indicator gave a buy signal in April 2003, and it is finally giving a sell signal - take heed.
Next is an indicator I haven't shown in awhile, BPCOMPQ. Historically, the BPCOMPQ is overbought when it is over 50 and oversold when it is below 30. Last year the BPCOMPQ stayed well above the overbought region most of the year, analogous to how stochastics can sometimes stay overbought for a long time. The BPCOMPQ gave a market buy signal via positive divergence in the late fall of 2002, which was perfect.
The BPCOMPQ actually gave a sell signal in late March after it broke a horizontal rectangle to the downside. You can see this was predicted by negative divergence in the MACD. The BPCOMPQ has also taken out support in the high 50's and now looks like it will eventually fall to the oversold region under 30, which would represent an oversold condition. Note, this indicator moves very slowly, in other words, it the Nasdaq will have to fall a long way before the BPCOMPQ reaches the oversold region.
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.
Interest Rates:
Interest rates are going up for the long term as evident by the mulit-year chart below. Greenspan also confirms that he will raise long term interest rates. The first target is 5.5% on the 10 year yield. However, in the short term, I wouldn't be surprised if we see rates pullback a little, as the rise has been too steep in the short term.
In the long run, interest rates are going to rise, how does one take advantage of this: One way is to short stocks that are sensitive to rises in interest rates, such as real estate and housing stocks. Another way is buy a mutual fund that moves inverse to interest rates via shorting the 30 year bond.
RRPIX is a mutual fund that rises along with interest rates by shorting the 30 year long bond. Long term, we all know interest rates are going up. RRPIX represents a very safe long term investment that you could hold for many years.
Below is the 30 year T bond Yield (interest rates) plotted with the same time frame as RRPIX. You can see how RRPIX moves exactly with 30 year interest rates.
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.
Short WLS on a rally with a loose stop above the downtrend line.
Market Indicators:
Commodities have fallen to support and will likely bounce here, especially if the US Dollar breaks down through the bearish rising wedge that is now forming - see the gold section for more details.
Here's a 22 year chart of the CRB index: Notice that is found resistance at the 1984 high, but the long downtrend line is over. I suspect the CRB will soon find support and begin another uptrend that will take out the 1984 highs. Commodities strongly effect inflation (especially oil) and I suspect inflation will come upon us in a big way soon.
The king of the commodities, crude oil, finally pulled back last week on talk of OPEC increasing production. However, don't even think about breathing a sigh of relief yet. Oil took out resistance in early May and this level will likely act as support on a pullback. Even if the horizontal line fails to hold, the uptrend line likely will.
The long term picture of oil gives you a better picture. Oil is definitely going up in the long term, especially once the US Dollar begins another downtrend.
MISC. A few stocks to watch:
UCOMA has a very low PE ratio of about 1, has a bullish falling wedge, and a very slight positive divergence in the MACD.
Two weeks ago I high lighted FARO noting that it had positive divergence in the MACD. This was a good call, FARO was about $18 at the time, and closed at $25.75 on Friday, and more upside looks likely. Positive divergence is very useful in prediction bottoms.
I went long CYBX on Friday with a stop at 19.25. Note the positive divergence and bullish wedge formation.
APT has a slight positive divergence in the MACD, look for a possible bounce.
USAG is an aerospace security stock that could benefit from the IRAQ war. It is a bullish falling wedge and a slight positive divergence in the MACD.
3. US Dollar, Commodities, Precious Metals:
Gold has bounced nicely off the support zone between $369 and $379. However, don't expect gold to rally straight up, I think gold will consolidate in a sideways to slightly upside trend over the next few months. This would be a great time to buy the physical metal itself, such as via gold bars, and coins.
Also, as I have mentioned in the past, you can open a bank account which is backed by gold, i.e. your balance moves in accordance with the price of gold. For convenience sake, this may be the best option as you don't have to store the physical metal and find buyers when you want to sell, in other words, this is a liquid way to own gold.
I personally have a savings account with Goldmoney.com that is backed by gold and moves in accordance with the price of gold. It is very convenient, and I can deposit or withdraw money at anytime.
visit www.goldmoney.com for more details:
The US Dollar is still in the uptrend that began in February. The Dollar uptrend is caused the price of gold and especially corresponding gold stocks to fall hard this year.
However, the good news for 'gold bugs' is that the Dollar uptrend is in danger as a bearish rising wedge is forming with support at the uptrend line and resistance at the upper line. If the uptrend line is broken to the downside, then 'gold bugs' should break out the champaign and celebrate as this would be very bullish for gold and corresponding precious metal stocks. Be sure to keep an eye on the Dollar chart of you are long precious metal stocks.
It's been a great week for gold stocks, which is welcome change from the blood bath meltdown since April.
As you can see, the HUI has rallied nicely since May 10th, notice that my favorite indicator, positive divergence, predicted this rally nicely. I am really starting to fall in love with positive divergence, it seems to work so well.
Anyway, the next resistance levels on the HUI are 191 and 200.
As you can see from the long term chart of the HUI, major support exists between $155 and $160 and the HUI found perfect support here.
Here's a daily view of the HUI and note the resistance levels at 191 and 200. After 200, the major resistance is at about $208 - $210.
Likewise, the XAU resembles the HUI, nice uptrend predicted by positive divergence.
The XAU found nice support off the multi-year uptrend line.
After a virtual meltdown in April, silver found support at $5.5.
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.
Here's a few gold stocks to give you an idea of the big picture and how they might fair in the short term:
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