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October 3rd, 2004
Written by Matthew Frailey - matt@breakpointtrades.net
Table of Contents:
(click on the numbered sections below and you will be taken to that corresponding section)
The Market did great last week, all the major indices rallied and look much stronger than they did the week before. Technically, the DOW and S&P 500 are at major downtrend resistance lines and could break these to the upside this week. If this occurs, a nice end of year rally may occur. The Nasdaq is really starting to strengthen as a result of the Semiconductors which have formed a nice basing pattern and likewise may continue to rally. The strengthening Semiconductors makes me think that the Market has a very good chance at an end of year rally.
The Election debates have begun and it's down hill from here for the elections. This is typically the 'feel good' time of the year and the Market typically does well this time of year.
However, what's interesting to me is that it's not simply the major indices that are doing well, it's everything! Virtually every market sector is strong all the same time, even commodities. Also, nearly every foreign stock market I've looked at is rallying and breaking out.
Essentially, every market and index on Earth is going up in unison? Very strange indeed, but obviously not a market that you want to short!
However, as you will see in the last section of the newsletter (gold section), commodities are breaking out and will likely continue to do so years from now. Commodities represent raw materials, and if raw materials are going up for the long term, then logically the price of everything has to go up, as everything is essentially made of raw materials and commodities, especially oil. My point is, that commodities have entered a long term secular bull market that will send commodities upwards for the next 10 years at least. In the short term, while everything may seem rosy as the world markets all go up in unison, rising commodities will likely put an end to this party one day. Inflation has to eventually enter the US Market in a big way as well.
First, let's see what a few market indicators are telling us:
NASI - Nasdaq Summation Index
The NASI has done a very good job thus far at predicting market tops and bottoms.
Really, there are three signals that work together to either give buy or sell signals on the NASI chart. Ideally you want to see at least two concurrent buy or sell signals
There are three indicators than can buy or sell signals on this the NASI:
#1. Whenever the 5 day MA crosses the NASI line, it produces a buy/sell signal.
or
#1. Whenever the Parabolic SAR gives a buy/sell signal.
#2. Whenever the MACD crosses, produces a buy or sell signal.
#3. When ever the Stochastics cross 20 or below 80.
All three buy signals were triggered in mid August.
The NASI gave a buy signal for the Nasdaq, and the general Market, about 7 weeks ago in early to mid August. This indicator has proven very useful.
Currently, The NASI has yet to give a sell signal on via the Parabolic SAR, but the MACD has. So far we have a mixed signal, we shall see if a sell signal is soon generated, or a whipsaw buy is generated.
NYSI - NYSE Summation Index
The NYSI works similarly to the NASI: The NYSI gave a sell signal last week but may be about to whipsaw and give a buy signal.
We shall see....
The weekly BPCOMPQ gave a buy signal three weeks ago for the Nasdaq. Is this the start of a new uptrend, or will a whipsaw sell signal soon be generated.
Semiconductor and Nasdaq Correlation:
The Semiconductors are very important to the strength/weakness of the Nasdaq:
The Semiconductors are basing nicely and if resistance can be taken out, then the Nasdaq will rally as well.
Small Cap and Large Cap Correlation:
Small caps usually lead large caps in a healthy Market. So far that has been the case since mid August. Once this indicator changes direction and heads down, so will the Market.
The VIX moves in an indirect correlation to the Market, e.g. when the VIX goes up, the Market falls, and vice versa. It's the direction of the VIX that is important. If you can predict which way the VIX will trend, then you can essentially predict the Market itself.
Note how the VIX broke the uptrend line back in mid August? This event set the VIX on a downtrend, which caused the Market to rally strongly. This breakdown was a major buy signal for the Market.
However, notice that last week the VIX broke down once again? This breakdown last week is what set the market rallying.
Again, it's not the level that's important, but the direction the VIX is moving.
4. Major Indices, Nasdaq, DOW, S&P, other:
Nasdaq:
60 min chart
The 60 min chart shows us that an uptrend line was broken two weeks ago and is being retested. Resistance at 1925 has been taken out and may act as support, if not, the gap near 1900 and 1875 may act as supports on pullbacks.
The Nasdaq is still the weakest of the three major indexes (Nasdaq, DOW, S&P). However the technical picture continues to improve week after week for the Nasdaq. Last week the Nasdaq broke out of a bullish flag consolidation pattern and is now on a course to test the significant resistance at the downtrend line just under 2000. The volume is also picking up which is bullish, support lies at the uptrend line.
Long Term:
On a long term basis, the Nasdaq has formed a multi-year symmetrical triangle with major support at the uptrend line and major support at the downtrend line. Remember, technical analysis shows us that when a symmetrical triangle is broken, it usually produces an explosive price movement in the direction of the break.
The direction this triangle breaks will set fourth the next major trend for the Nasdaq and the Market.
Here's another view of the Nasdaq using the Elliot Wave concept: The Nasdaq may be embarking on wave 5 of an Elliot Wave pattern. If true, wave 5 would cause the Nasdaq to rally the rest of the year.
Notice that the Nasdaq entered a bullish uptrend in October of 2002, which also ended a bearish wave 5 count.
Semiconductors:
Nice basing pattern on the Semiconductors with clean resistance just overhead. I think the Semiconductors have a strong chance at breaking the horizontal resistance line as well as the downtrend resistance line. This would bode well for the Nasdaq and the Market in general. I would focus especially on semiconductor stocks when looking for breakout or swing trade setups.
60 min:
The 60 min chart shows that the DOW has broken a downtrend resistance line and resistance at 10200 is just overhead.
Daily Chart:
The 1 year chart of the DOW shows us that it is in a downtrend channel with major resistance at the downtrend line. If the downtrend line can be broken on good volume, the first targets would be 10500 and 10750.
Long Term Chart:
The long term chart of the DOW resembles a bullish flag, however major resistance is at the 4 1/2 year downtrend line.
The 60 min chart of the S&P shows us that the S&P is trying to break resistance at 1130.
Daily Chart:
The 1 year chart of the S&P resembles the DOW chart, however it is technical a little stronger. The S&P is in a downtrend resistance channel, but is on the verge of breaking the downtrend resistance line. If the downtrend line is broken, the first targets are the dotted lines. The dotted lines are very important resistance zones as well because they represent previous highs and if they can be taken out, it would be very bullish for the S&P.
The S&P 500 could rally to the 61.8% Fibonacci line if a strong rally insues.
The next chart gives us the 'big picture' long term view of the S&P 500. Notice that the 22 year uptend line has been broken, which likely ended a secular bull market for the S&P.
In technical analysis, when a trend line is broken, it is often retested on a pullback. This could occur once again and gives plenty of room for the S&P to rally some more before finally topping out.
5. Market Sector Breakdown Along With Various Stock Picks From These Sectors:
As I stated in the first section of this newsletter, nearly every sector of the market is rallying, and this includes nearly every world market.
With everything rallying, I'm not going to pick sector charts this week as there are simply too many to list, most of them look good.
I would continue to focus on commodities, but I would also focus on semiconductors and telecommunications. Both of these sectors look great and I would focus on breakout stocks in these sectors:
6. Insider Buying / Technical Supported - Stock Picks:
The Insider Longs section continues to get larger each week. In my opinion, this list is a preferred list of long candidates for those of you who work, travel, and thus don't have the time to trade all day.
Stock picks presented here are supported by recent, and or, long term insider buying, and are further confirmed by technical analysis. Each week, I receive a list of stocks with recent insider buying from another service I subscribe to. I receive about 50 new picks a week. I look at each of the picks, and only select the ones that also have decent chart patterns. It is my belief that stocks with strong technicals, along with insider buying, can be held for much longer periods of time (good swing trade candidates) rather then simple day trades.
Subscribers who work and or travel extensively, might find this section useful as these stocks can generally be held for longer periods of time, with confidence, knowing insiders are buying along with strong technicals.
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Symbol
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BP Price
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Comments
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10/03
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N/A
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33.50
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Insider buys about $720k of BFS for an average price of $31.21 |
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10/03
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N/A
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37.16
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Beneficial owner buys about $10.2 million worth of ESI for an average price of 35.51 between 9/24 and 9/30
1st target = 38.75, 2nd target = 43
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9/26
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N/A
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17.55
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4 company insiders buy 4.8 million worth of stock for an average price of 14.33 between 9/22 and 9/24 |
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9/26
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N/A
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7.25
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A director buys 100k shares for an average price of 6.73 pm 9/24 |
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9/19
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N/A
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23.50
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Beneficial owner buys about $35 million worth of stock on 9/10 or an average price of $26.22 |
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9/19
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N/A
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see chart
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Beneficial owner buys 200k shares on 9/14 for average price of $13 |
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9/19
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N/A
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13.50
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Tons of insiders have been buying MWY shares over the past 8 months. The most recent insider purchased shares in late July for an average price of $11.21 |
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9/12
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N/A
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19.70
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A beneficial owner buys 65,834 shares for an average price of $17.37 betweem 9/2 and 9/8/04 |
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8/29
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9/16
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see chart
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I went long at $24, but resistance is at downtrend line
Tons and tons of insider buying by one of the Beneficial Owners.
Long term price target is the high at $29 , buy near support at 24 or when the downtrend line is broken
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8/10
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N/A
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$2.70
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One of the board of directors bought 776,475 shares for an average price of $2.45 on 8/3. |
7. US Dollar, Gold, Precious Metal Stocks, Commodities:
US Dollar:
When discussing gold and precious metals, the US Dollar is paramount and holds nearly all the power over the direction of gold, thus it should be discussed first and foremost. Eventually, gold will move up regardless of what the Dollar does, but at this point in time, the two are still linked closely together in an inverse correlation.
The Dollar below appears to have broken a symmetrical triangle to the downside which is extremely bearish for the Dollar, while extremely bullish for gold, precious metals, and corresponding stocks.
The Dollar is beginning to break down as the support uptrend line has been broken, however the important support is at 87 at the bottom of the gold band below. If 87 fails to hold, then the Dollar will technically be in another downtrend and a test of the early 2004 lows near 85 will be imminent. This of course will have extremely bullish implications for gold and precious metals, commodities, and corresponding stocks.
Gold stocks have really been on a tear lately, and are getting a little ahead of themselves in the short term, as they have run up in anticipation of the Dollar breaking down.
Realize that the broken uptrend line below on the Dollar could be retested on a bounce - support is often retested shortly after it has been broken. If the Dollar does bounce to retest support, then gold stocks will likely pullback which would give a great opportunity to go long and load up once again.
Further expanding the Dollar chart confirms the important symmetrical triangle. Whenever a symmetrical triangle is broken, a large price movement usually results in the corresponding direction, equal to roughly the height of the triangle.
Currently, the triangle in the Dollar appears to have broken to the downside which is fantastically bullish for gold.
For you gold bugs out there, a breach of 87 will set fourth a powerful rally in gold and precious metals that will last many months.
Pullbacks in gold and precious metals stocks are buyable and give opportunities to load up in preparation for the next runup. Remember, in bull markets, it is profitable to buy on pullbacks.
The inverted Dollar chart below is simply another way to look at the Dollar. On an inverted chart, up is really down and down is really up. This is one pretty triangle and it's currently breaking to the upside, which is very bearish for the Dollar and bullish for precious metals and corresponding stocks.
Just like the Dollar, gold metal has logically consolidated into a symmetrical triangle and is breaking out the upside. This chart of gold looks extremely bullish and the first target is the high set back in April of about 435.
Notice how gold seems to consolidate into symmetrical triangles prior to large price appreciations? This is likely the beginning of a large rally and a great time to load up on the metal. Remember, technical analysis shows us that symmetrical triangle breakouts tend to produce large movements in the direction of the breakout.
The first target is about 435, and the longer term target is about $500!!! A big move is upon us folks.
The next chart is essentially the same chart as above, but plotted on a logarithmic scale. The chart below is as pretty as a supermodel. Notice how the logarithmic scale shows us that the uptrend line was never broken and stayed intact during major pullbacks which occured over the last couple of years.
The chart also shows you why it is sometimes important to look at a stock or index using a logarithmic scale: For example, an uptrend line cannot be drawn connecting the lows on the linear chart above, but the logarithmic scale below allows us to do this.
Gold metal looks fantastic on a long term basis: The chart below shows us that gold has strong resistance near in the gold band region, but once this is traversed, a price target of $500 should be easy to hit. Currently, gold looks like it may be forming a bullish cup and handle.
Gold likely entered a Secular Bull Market when it broke the downtrend line and ended it's long 20 year Secular Bear Market. Remember, secular bull markets last about 10-20 years on average, which means gold will do well for years to come!
Silver Metal:
Logically, Silver looks good and has consolidated into a nice pattern after the technical breakdown in April. Silver has consolidated into an ascending triangle with clean resistance at about 7. A longer term price target would be about $8.5, however the gap between $7.5 and $8 will be hard to overcome on the first attempt.
The chart below is the HUI/Gold metal ratio: This chart shows that gold stocks are currently out performing gold metal. This chart is a great indicator and can be used to know when to go long or sell gold stocks:
When the trend is up, it is a good time to buy and hold gold stocks. When the trend is down, you should sell gold stocks. Notice how the indicator broke the downtrend line in mid August, this was a BIG signal to go long gold stocks.
However, currently, the ratio is going a little parabolic and may pullback soon. I would use any pullback as an opportunity to load up on gold stocks in preparation for the next big runup.
Below is a chart of the HUI plotted on the same time frame as the ratio above. You can compare and see for yourself that the major rallies in the HUI match up well with the ratio.
The HUI, Gold Bugs Index has been on a tear and the first target is $240. I would use this area as a place to take some profits, but I would also use any pullback as an opportunity to load up on gold stocks as the trend is now up and may stay up for many months, especially if the Dollar breaks 87. The first target is about $240, the 2nd target is about $250, and after that it's off to new highs.
Here's another supermodel chart, the HUI on a long term weekly basis: The HUI has broken a bullish flag to the upside on the weekly chart and may be embarking on a long term rally, depending on the US Dollar.
Palladium Update:
Palladium was a major mover for us early this year as it ran from about $225 to about $330.
Currently, a very bullish scenario is setting up with Palladium as it has broken a downtrend resistance line after finding support at about $200.
There are essentially two major palladium stocks, PAL and SWC. However, out of the two, I prefer the chart of SWC.
SWC has a well defined downtrend line that is on the verge of breaking to the upside. The first price target would be about $17.5 on a breakout.
However, the long term chart of SWC is what really stands out for me:
SWC has formed a beautiful symmetrical triangle and has a huge long term upside potential of about $40 and an intermediate upside potential of about $24.
Commodities:
The CRB is a composite of 17 commodities and is on the verge of breaking out to the upside, resistance is at 285. This chart bodes well for stocks which are commodity based such as precious metals, and utility stocks.
The big picture chart of the CRB shows us that commodities entered a long term secular bull market in late 2003 when the downtrend line was broken. Currently, the CRB is flirting with resistance near 285, however the next target is about 335!!!
This is not good for the world economy in the long term and inflation has to be just down the road for the US Economy. When the price of commodities goes up, the price of everything logically has to go up as well because everything is made up of raw materials. In the long term, I can't see how inflation cannot enter the US Market in a big way.
Copper metal looks wildly bullish as it has broken out of a symmetrical triangle and is currently at resistance near $140. Copper stocks look good as well and my favorites are PD (which should hit $100 easily), FCX, PCU, WLV, RTP, MAD - well....in reality they're all good!
Of course, the king commodity of them all is crude oil. Crude oil has been on a tear, but is overbought in he short term and I would not be surprised if it pulls back here. However, oil is in a strong uptrend that will likely last for some time, a pullback will likely be temporary.
The long term chart of oil is one scary chart: Based on this chart, I think $60+ could be in store for the future. However, this is a long term chart and pullbacks to the dotted lines could occur.
The long term uptrend line is just over $30, so it could take a long time for oil to reach $60 + if a pullback occurs.
Realize that oil is in a long term uptrend as long as the uptrend line stays intact!
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