1. Administrative Comments:
I apologize for the late posting of the newsletter.
2. Misc Comments:
Not much to add from last week, the market is in full blown rally mode and the index charts look great. Just as I stated last week, the market looks like it will finish the year strong, though there will be pullbacks along the way, the trend is up. The market is in 'idiot mode' in other words, you can buy about anything and it will likely be up in the next two months. This is useful, because long trades will be more forgiving, and if a stock goes against you, it has a good chance of turning back up again. Think of the current market as a rising tide and the individual stocks as ships. In other words, a rising tide raises all ship.
In the short term, however the market will pullback soon as it has been going straight up lately. In this market, pullbacks are buying opportunities.
The DOW Jones World Stock Average (which is a composite of the worlds major markets) shows that not just the US markets are doing well, but nearly every foreign market as well.
The FED raised interest rates last week by another 1/4 point to 2.0% and was a non event.
Gold and precious metals also performed well as gold metal made a new 16 year high, and gold stocks did okay as well. However, even though gold hit a 16 year high, I don't think it's ou of the woods just yet; I'd like to see 440 taken out first. Gold stocks had a good week, but their action concerns me: For example, the US Dollar fell big time on Friday, but the HUI was only closed up $4.62! The HUI should have been up $10 plus dollars, in my opinion, from the big drop in the Dollar. This 'lagging' of gold stocks is something to keep an eye on, as a good pullback may be on the horizon. Tighten up you stops or lock in some profits if you own gold stocks.
A ratio of 30 year long term vs. 3 month short term rates shows us that huge positive divergence is developing in the MACD, thus signaling an imminent bounce in the ratio. For the ratio to bounce, either long term rates have to rise (which is likely) or short term FEDs funds have to fall (unlikely). Therefore, the most likely scenario is that long term rates will rise.
As you can see, long term rates are on the move and have broken a downtrend line. The broken downtrend line will now act as support. I am going to short long term bonds to take advantage of rising long term rates. The symbol for the 30 year bond is TYX, and the 10 year bond is TNX.
Crude oil pulled back once again last week and is currently at an up trend support line. Either crude rallies off this line or it crashes through it. Of course, as you can see, oil will remain in an up trend as long as supports at $42 and about $40 remain intact.
Oil stocks have pulled back nicely during the past couple weeks, but many of them are now looking like they are ready to run again.
3. Market Index/Sector Analysis:
The Nasdaq looks awesome as resistance at 2155 has been taken out. The next resistance levels are 2100 and 2155. However, a pullback is likely to occur soon, but it should be temporary.
A larger time frame shows us that the Nasdaq is has broken out of a large symmetrical triangle which is very bullish. The Nasdaq could easily run up to the next resistance area after the Jan. 04 high at 2155 is taken out which is about 2330!
It looks like the Nasdaq is currently in wave 5 of an Elliot Wave pattern.
Likewise the DOW looks bullish as it has taken out resistance at 10500, the next target is 10750, though it will likely pullback first before achieving that target.
This long term chart of the DOW resembles a bullish flag that has been broken to the upside. However, the important resistance line is the 5 year downtrend line. If the downtrend resistance line can be broken on good volume, then it's off to the races for the DOW as it will likely go in to the 11,000s.
The S&P 500 looks fantastic as it closed at a new 2 1/2 year high on Friday on good volume. More gains are likely in store for the S&P this year. Again, a short term pullback will likely occur soon as it's getting short term overbought.
The long term chart of the S&P shows us that a run to about 1300 could ensue.
The next chart shows us the 'big picture' of the S&P 500: Note that a 20 year uptrend line was has been broken. In technical analysis, broken uptrend lines are often retested and become resistance.
If this occurs again, then the S&P has a lot of room left to the upside to rally before running into the broken uptrend resistance line.
What can I say, very bullish. I sound like a broken record....
Let's try something new: I'll list a few sectors that are close breaking out, then provide a list of stocks, along with breakpoint resistance, to consider for trades.
The Broadcasting Index looks good as it is just breaking resistance:
Stocks to consider trading for breakouts are:
CCU, resistance = 34.30 and TZA, resistance = 70.70
The coal sector looks very bullish as it has broken an ascending triangle to the upside: Stocks to consider trading for breakouts are:
CNX, resistance = 39.25, and MEE, resistance = 30.80
As I stated above, oil stocks look bullish as they have pulled back and consolidating.
Here is a list of stocks to consider for trading via breakouts:
XOM resistance = 50.50, KEG resistance = 12.30, UCL resistance = 44.20, VRC resistance = 28.85
The semiconductor sector looks bullish as it has broken a downtrend line which is now acting as support. Stocks to consider trading for breakouts are:
TXN, 35
NSM, 16.75
AFOP, 1.07
XLNX, 31.25
SMTC, 21.50
SMI, 11.45
COHU, 16.20
KEM, 8.31
A few Indicators:
The Semiconductors have under preformed the Nasdaq all year long. However, the ratio chart tells us that they like they are on the verge of reversing this trend especially if the resistance lines can be broken.
Once the Semiconductors begin to rally, the market will really take off.
The direction, NOT the level is what's important for the VIX. Each time the VIX has broken support of an uptrend line, the market has rallied.
However, as I stated above, the market is getting over bought in the short term. Positive divergence in the VIX is hinting at this:
The ratio chart of the small caps to large caps is also hinting at a short term market pullback. Notice the negative divergence present in the MACD.
4. Gold and Precious Metals Analysis:
The chart of gold metal looks fantastic as it has broken a bullish ascending triangle to the upside. However, as I stated above, I am not convinced of the move just yet. I would like to see gold break 440.
Gold and precious metals also performed well as gold metal made a new 16 year high, and gold stocks did okay as well. However, even though gold hit a 16 year high, I don't think it's out of the woods just yet; I'd like to see 440 taken out first. Gold stocks had a good week, but their action concerns me: For example, the US Dollar fell big time on Friday, but the HUI was only closed up $4.62! The HUI should have been up $10 plus dollars, in my opinion, from the big drop in the Dollar. This 'lagging' of gold stocks is something to keep an eye on, as a good pullback may be on the horizon. Tighten up you stops or lock in some profits if you own gold stocks.
The strength/weakness of the Dollar is the some important factor in determining the direction of gold as the two are inversely correlated. The Dollar has broken major support at 87 of a descending triangle as well as the final support between 84.5 and 85 which is very bullish for gold.
However, broken supports are often retested, therefore the Dollar may soon bounce to retest the broken support between 84.5 and 85. When the Dollar bounces, it will cause a pullback in gold and corresponding stocks.
I am personally long a basket of gold stocks, and I love the fundamentals for gold in the long term. However, the following long term weekly chart of the US Dollar concerns me greatly:
The Dollar has broken support at 85, and the next support level is about 80. However, notice that the Dollar has now been in a strong downtrend for 2 1/2 years. Also, positive divergence via the MACD is beginning to manifest itself. Furthermore, stochastics are now way below 20, and actually near about the 5 level! You can see that every time stochastics have been this low, the Dollar has rallied. Therefore, I think there is strong possibility that the Dollar rallies strongly in the near term.
Therefore, if you own gold stocks, it would be prudent to tighten up your stops, and/or lock in some profits.
Gold Stocks:
The HUI/Gold metal ratio is very useful in catching the long term trend in gold stocks. This chart is very useful because gold stocks tend to out preform or under preform the metal at times. When gold stocks are out preforming the metal is the time to own gold stocks, and when they are under preforming the metal it is time to sell or short gold stocks.
Take a look at the following graph of the HUI/Metal ratio chart:
Notice that major buy signals are generated when simple downtrend lines are broken to the upside. Also notice that when the buy signals are generated (via green arrows) that the ratio chart rides the 50 MA up nicely for a long trend? Sell signals are then generated when the ratio chart finally drops below the 50 MA.
Also, a the trending indicator, ADX can also be used as a sell signal. The ADX consists of three lines, ADX, +DI, and -DI. Notice that a reliable sell signal is also produced whenever the +DI falls below the -DI.
By simply following this chart, you could buy a basket of gold stocks whenever a buy signal is produced and ride them to fantastic profits by simply using the 50 MA as a simple sell signal. Notice that the major price run ups lasted about 5 to 6 months on average and produced huge gains.
Currently, a buy signal was generated in mid August when the downtrend line was broken. Thus, if you currently hold gold stocks, then simply hold them until the 50 MA is broken. From past analysis, the current rally should last for at least a few more months. Obviously, the time to go long heavy in gold stocks was in mid August. However, this chart gives me more confidence to continue holding my gold stocks for the duration of the run.
By employing a simple strategy like this, I think one can make huge profits much easier then trying to time the daily and weekly ups and downs than can whipsaw your account. Also, it's much easier for those who work and have jobs, as you can buy at designated times and simply hold until a sell signal is produced.
A close up of the chart above shows us that the HUI/Gold ratio touched the 50 MA early two weeks ago and then rebounded nicely off of it. So far so good, continue to hold your gold stocks if you are a longer term swing trader, but keep an eye on the US Dollar!
Currently a downrend line can be drawn, which is acting as resistance. This small downtrend line must be broken for gold stocks to begin their next up leg.
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Just as I stated above, the HUI has broken resistance at 240, however I was sort of unimpressed with the movement on Friday despite the large drop in the US Dollar.
Palladium metal is looking very bullish once again and has the potential to really take off soon.
Currently, my favorite palladium stock is PAL. I currently own shares of PAL.
The other main palladium stock is SWC. However, SWC apparently has bad management and I would avoid it. Also, as you can see, the chart has broken down.
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