1. Administrative Comments:
Be sure to check out the sector picks this week!
Synopsis of stock picks from hot sectors:
| Sector |
Symbol |
Breakpoint resistance |
| Oil Companies Major |
UCL |
44.30 |
| Oil Companies Major |
XOM |
50.50 |
| Oil Companies Major |
BP |
60.15 |
| |
|
|
| Oil Companies Secondary |
BR |
44.35 |
| Oil Companies Secondary |
CHK |
17.30 |
| Oil Companies Secondary |
COG |
44.55 |
| Oil Companies Secondary |
DVN |
39.12 |
| Oil Companies Secondary |
EOG |
72.50 |
| Oil Companies Secondary |
KMG |
61.15 |
| Oil Companies Secondary |
NBL |
61.40 |
|
|
|
| Oilfield Equipment |
KEG |
12.30 |
| Oilfield Equipment |
NOI |
32.15 |
| Oilfield Equipment |
PTEN |
20.45 |
| Oilfield Equipment |
VRC |
28.85 |
| Oilfield Equipment |
VTS |
25 |
|
|
|
| Advertising Index |
DCLK |
200 MA OR 8 |
| Advertising Index |
IPG |
12.70 |
| Advertising Index |
POS |
29.15 |
|
|
|
| Energy |
IMP |
59.75 |
| |
|
|
| Aluminum |
AA |
34.60 |
| |
|
|
| Broadcasting |
DISH |
33.90 |
|
CXR |
16.15 |
| |
|
|
| Electric Components |
ATSN |
10.30 |
| Electric Components |
CTS |
13.95 |
2. General Market Comments:
The market began the week slightly up, but then trended sideways, and by Friday, it finally pulled back strongly. Prior to Friday, the market had rallied strongly for the past 3 weeks
Just as I stated in the last few newsletters, the market is very strong and the primary tend is up for the market and should continue at least until January. In otherwords, this is simply a pullback in an uptrend. However, the market was way over extended in the short term and a pullback was needed to stabilize the charts on a technical level.
I think the market pullback, which began on Friday, may carry over till Monday and possibly Tuesday at the latest. The market historically does well the day before Thanksgiving, and the Friday after. Therefore I suspect the market will do the same this year as well.
The market was due to pullback, but how could a trader have seen this coming?
As you can see from the 60 min. chart of the S&P500 below, the market has been in a strong rally since late October - about 3 1/2 weeks with no significant pullback. After 3 1/2 weeks, the market overdue for a nice pullback, but how could a trader have seen this coming?
Whenever a stock or index has a significant rally, I look for negative divergence via the MACD indicator for signs that a pullback will soon occur. Negative divergence is defined by a stock or index making a new high, while the MACD makes a lower high. One can also look for negative divergence with other indicators, however I have found that MACD is the most reliable divergence indicator.
Take a look the 60 min. S&P 500 chart below for example: You can clearly see that negative divergence had been developing on the S&P 500 for the past couple of weeks. In reality, there is a triple negative divergence here, i.e. the S&P 500 forms three higher highs, while the MACD forms 3 lower highs. This was obviously a big red flag that a pullback was going to occur any day.
The only trouble with negative divergence, is that even though you know a pullback will likely occur, you do not know exactly when it will occur. Trendline analysis should also be combined with divergence trading to for timing purposes. In this example, the broken up trendine, and subsequent retest of the broken uptrend line was the sell signal or timing signal to be used along with the negative divergence.
Currently, the S&P has support at 1160 and about 1140. I suspect a pullback will end at one of these support areas early this week, probably on Monday or Tuesday. Remember, the market is in a strong uptrend on the daily charts, therefore pullbacks such as this are normal, and necessary, to sustain a healthy uptrend. Also, pullbacks in a market uptrend provide good buying opportunities.
I posted this chart on the message board on Friday. I apologize for not posting it sooner during the week. However, you can use this chart for educational purposes in the future: Again, whenever a stock or index has a strong rally, look at the 60 min chart for negative divergence as a signal that a pullback will soon occur.
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. Just as I stated above, the market pulled back strongly on Friday, and 2155 is now support on the Nasdaq, as it was previous resistance. I expect this pullback to be over shortly.
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!
Likewise the DOW is in a strong uptrend and the first target is the February 04 high at 10750. Currently the DOW is pulling back after failing to break the April high. However I expect this pullback to be quick and short. Once the pullback is over, I think the DOW will go on to break the resistance near 10585 and then go on to test the high at 10750 and possibly break it.
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.
Notice that the significant downtrend line was tested last week. I think there is a very strong possibility that this downtrend line will be broken to the upside.
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 rally to the low 1300s could easily occur once this short term pullback, which began on Friday, is over.
The NYSE is finally pulling back after a major runup. However, this pullback should be short and will setup the chart for another runup.
STOCK PICKS BASED ON STRONG MARKET SECTORS:
The oil sector looks bullish as crude oil rallied last week and may begin another strong uptrend here.
Likewise, the oil sectors look very bullish with many stocks near beakpoints:
The oil companies major index looks bullish with clean resistance just overhead:
Here are stocks to consider along with their breakpoints:
| Symbol |
Breakpoint resistance |
| UCL |
44.30 |
| XOM |
50.50 |
| BP |
60.15 |
Logically, the oil companies secondary looks strong and ready to breakout:
Here's a list of stocks to consider:
| Symbol |
Breakpoint resistance |
| BR |
44.35 |
| CHK |
17.30 |
| COG |
44.55 |
| DVN |
39.10 |
| EOG |
72.50 |
| KMG |
61.15 |
| OXY |
59.45 |
| NBL |
61.40 |
The Oilfield equipment sector looks very bullish as it has broken an ascending triangle to the upside: Stocks to consider trading for breakouts are:
Here's a list of stocks to consider:
| Symbol |
Breakpoint resistance |
| KEG |
12.30 |
| NOI |
32.15 |
| PKD |
4.20 |
| PTEN |
20.45 |
| VRC |
28.85 |
| VTS |
25 |
Here's a few other stocks in the energy sector that look good:
| Symbol |
Breakpoint resistance |
| IMP |
59.75 |
The advertising index has resistance just overhead. The following stocks may benefit once resistance is taken out:
| Symbol |
Breakpoint resistance |
| DCLK |
200 MA NEAR 8 |
| IPG |
12.70 |
| POS |
29.15 |
The aluminum index has resistance just overhead. The following stocks may benefit once resistance is taken out:
| Symbol |
Breakpoint resistance |
| AA |
34.60 |
The Broadcasting index has resistance just overhead. The following stocks may benefit once resistance is taken out:
| Symbol |
Breakpoint resistance |
| DISH |
33.90 |
| CXR |
16.15 |
The Electric components index has resistance just overhead. The following stocks may benefit once resistance is taken out:
| Symbol |
Breakpoint resistance |
| ATSN |
10.30 |
| CTS |
13.95 |
4. Gold and Precious Metals Analysis:
The chart of gold metal looks fantastic as it has broken a bullish ascending triangle to the upside. Gold closed over $440 on Friday an is a high not seen for 16 years!
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 is once again at a critical point: Last week, gold stocks under performed relative to the metal, thus the ratio fell. The ratio is currently at the 50 MA breakpoint! In other words, the ratio needs to rally and bounce off the 50 MA this week, or it will break through it and produce a general sell signal for gold stocks.
THIS CHART IS VERY VERY IMPORTANT IF YOU OWN GOLD STOCKS. Watch it closely everyday. I will keep you posted via the message board, so make sure to check the message board daily. Also, be aware that this chart only updates after the market closes.
If the ratio rallies off the uptrend line, I will add to my current gold positions significantly, especially if the small downtrend line is broken near 0.550 on a ratio basis.
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In order for gold and gold stocks to really take off, gold needs to start out performing against other currencies besides the US Dollar.
The chart below is a plot of the gold metal relative to the South African Rand. As you can see, gold has been under performing relative to the RAND for a year and a half. However, the ratio is currently near a significant downtrend line, which if it can be broken, will signal an end to the downtrend.
Why is this bullish? Because there are quite a few gold stocks on my gold stock section that are based in South Africa, and their profits are directly affected by the strength/weakness of the Rand relative to gold metal. If the downtrend line below is broken to the upside, then profits of these South African bases gold stocks could soar.
Gold stocks that are based, or would be benefit from a weak RAND are: AU, DROOY, GOLD, HMY, GFI, RANGY. Out of this list, my least favorite is DROOY
As an example, lets take a look at GFI: As you can see, GFI looks great on a weekly long term chart. Resisance near the 15 price level is very significant and a large price appreciation may occur once this resistance level is broken, coupled with a weak RAND dollar.
For now, the gold bull market is simply a function of the falling US Dollar. Therefore, you should keep an eye on the dollar for any signs of strength or possible rally which would cause a pullback in gold.
The Dollar has broken support at 85 to 84.5, but be on the lookout for an oversold bounce.
Also, the Dollar has broken support of a large descending triangle. The height of this triangle is approximately 5 points. Subtracting this from the base of 85 gives us a price target of about 80 for the US Dollar.
The long term picture shows us that the dollar has support at about 80 going back to 1995. Notice how this exactly matches our price target based the triangle measurement above!
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