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Happy Memorial Day, May 31st, 2004
Table of Contents:
(click on the numbered sections below and you wil be taken to that corresponding section)
1. Administrative Comments:
Keith will be out of town this week, thus he will not be in the chat room. He will be posting stock picks on the message board only because he cannot access the Breakpoint Trades web server from his location via his laptop. I will also be posting a few of my own picks on on the daily watch list this week, though probably not until Tuesday as I am also out of town.
I have began to change the charts over to a larger size, 700 pixels wide verses 620 pixels. Hopefully this is for the better, I'm not sure as I've gotten so used to the 620 size that I have always used. If you have any opinions, let me know.
2. General Market Analysis and Commodities
Normally I try to write a few paragraphs or a short essay, but I will have to keep it short this week as I am out of town visiting relatives.
Let's look at some charts:
The Nasdaq has rallied nicely over the last two weeks after bouncing off support in the high 1800's and one could argue that the Nasdaq is forming a large bullish flag. The downtrend line is a very significant resistance level and needs to be watched closely here, i.e. a 'Breakpoint'. If the Nasdaq can break this resistance line on good volume, then the bullish flag scenario might play out, however it may offer resistance and start another downtrend via a formation of another lower high.
Also note the converging 50 and 200 MA's, if the 50 MA crosses under the 200 MA, a bearish sell signal for the market will be generated.
The 60 minute time frame shows us that 1975 is the nearest support level on a pullback.
The Semiconductor index is a very improtant indicator for the Nasdaq and the general market itself, i.e. the direction the Semis go, the Nasdaq will eventually follow.
The Semiconductor index, just like the Nasdaq, has major resistance at the downtrend line, i.e. a 'Breakpoint'. This downtrend line is a very important line to watch this week as a gauge for the market. If the downtrend line can be broken to the upside, then the market might enter another rally that would last into the summer.
The DOW bounced predictably off the support zone marked in gold and is also forming what may be a large bullish flag formation. Once again, the downtrend line is a very important line to watch as a 'Breakpoint'. Once again, note the converging 50 and 200 MA's. Also, the broken uptrend line might act as resistance.
The 60 minute time frame shows us that 10100 is the nearest support level on a pullback.
The long term picture of the DOW is telling, major resistance at the multi-year downtrend since 2000, while major support levels at 10,000 and 9000 respectively. Conceivably, the DOW could rally all the way to the downtrend line near 10650 and still be in a long term downtrend.
Likewise, if 10,000 fails to hold, then a fall to major support at 9000 is very likely.
The S&P 500 very closely resembles the DOW chart above, however notice how the S&P found support on the 200 MA and that the 50 and 200 MA's are a little farther away from one another then on the DOW or S&P 500 chart.
The 60 minute time frame shows us that 1106 is the nearest support level on a pullback.
The NYSE composite has also formed what appears to be a bullish flag with significant resistance at the downtrend line.
The Industrial Equipment sector also seems to have formed a bullish flag suggesting the market will breakout to the upside.
In closing my commentary on the general market (Nasdaq, DOW Jones, and S&P 500) as well as other major indices such as the Semiconductors, the Industrials, and the NYSE, all have similar chart patters - i.e. possible bullish flag formations and converging 50 and 200 MA's.
Once again, the major market indices seem to be near 'Breakpoints', i.e. they are either on the verge of a major rally that could last a couple months, or on the verge of a major downtrend. At this point, it's hard to say whether the bullish or the bearish scenario will play out, just make sure to keep an eye on those 'Breakpoints'.
Interest rates are definitely going up for the long term, as evident from the 10 year yield chart below. As you can see, long term interest rates have broken out of a triangle pattern as well as a multi-year downtrend line.
Rising interest rates are never a good thing for economic growth, they are only good at combating inflation. Higher interest rates will also likely burst the housing bubble. Sorry, but your house can't keep on increasing 10-20% year after year.
The US economy is debt driven and higher interest rates will hit this country hard. The Federal Reserve has no control over long term interest rates, they are at the whim of Bond Traders.
Oh, by the way, in case you haven't heard, Alan Greenspan was re-elected to another 4 year term. This means more of the same, more liquidity injections and the printing of endless amounts of worthless paper money.
Over the last two weeks, interest rates have fallen, however the chart below shows us that rates have fallen to a support level (black dotted line) and will probably start back up anytime.
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.
The Housing sector is one that will likely get hit hard with rising interest rates. I suspect stocks in this sector will offer great long term shorts. I am currently short WLS, BZH, and MDC. However, this sector is very volatile and I could be stopped out on a bounce.
This sector is very hard to short, better to short on a rally instead of a break of support.
Let's look at a few indicators:
The VIX is very useful in predicting the market on a short term basis:
The general market has rallied nicely of the past couple of weeks and the VIX predicted this small rally very accurately. The VIX and the Market move in opposite directions, therefore once the VIX broke support of an uptrend line, this told you that the general market would rally.
The BPCOMPQ is overbought, but doesn't mean the market will crash here. This indicator is very slow moving and a long term indicator rather than a short term one.
On the other hand, the NASI gave a buy signal about two weeks ago. However, with this indicator, you can never tell if the buy or sell signal is short or long term.
The NAHL is trying to give a sell signal, but hasn't decisively yet. This indicator is also slow moving.
The NUAD indicator is consolidating into a possible descending triangle and has yet to give a buy or a sell signal.
The NYAD indicator gave a sell signal in late April after breaking support. Notice how the 200 MA acted as support, but that previous support is now acting as resistance.
3. US Dollar, Commodities, Precious Metals:
Gold had yet another great week as gains continue after gold found support in the gold region below.
However, in the short term, I think gold, and especially corresponding stocks could begin to pullback. On the message board this week on Friday I made the comment that gold and gold stocks were now short term overbought and would likely pullback in the short term.
The chart below shows that gold may run into resistance at the broken 200 day MA, also I suspect the $400 region will offer resistance in the short term. However, I welcome a pullback in gold as it will improve the technicals of the chart and offer a 2nd buying opportunity for anyone who missed the first buying opportunity in early May.
On a long term chart, the rally in gold was predicted easily by the long term uptrend line that was tested perfectly.
The US Dollar has finally broken the uptrend that began in February and has also broken a bearish rising wedge to the downside. This is of major significance and very bullish for gold, precious metals, commodities, and corresponding stocks.
However in the short term, I think the Dollar may soon rally, as support is near (marked in gold), which is the reason why I think gold and corresponding stocks may experience a small pullback over the next week or two.
Silver has found strong support at about $5.5 after a total melt down in April. However, the gaps formed will offer resistance and it will be months before silver can mend the technical damage caused in April.
The HUI bounced perfectly off long term support marked in gold. However it is now running into resistance, and I suspect it will pullback in the short term.
A closer view shows us that the HUI is indeed running into resistance. I would hold off purchasing any more gold stocks until the HUI pulls back and consolidates. What I am looking for is the HUI to pullback and form a higher low, this would represent a perfect buying opportunity.
The 60 minute time frame shows us that the uptrend line is the nearest support level on a pullback, followed by $190.
The other gold index, XAU, is running into resistance near 92.80. Once again, you can see why I think gold stocks will see at least a short term pullback as they are approaching resistance levels.
Besides Gold and Silver, Palladium is my 3rd favorite precious metal. Palladium is in a strong uptrend and is in the very beginnings of a bull market, unlike gold and silver that have been in bull markets now for a couple years.
Palladium offers investors the opportunity to invest in a young bull market that is just getting started.
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