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October 10th, 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)
1. Administrative:
2. Market Comments:
3. Major Indices: Nasdaq, DOW, S&P:
4. Market Sector Breakdown:
5. Insiders Buying / Technical Supported - Stock Picks:
6. Gold, US Dollar, Precious Metals Stocks:
1. Administrative Comments:
I got back into town early this weekend, therefore I'm posting a newsletter.
First thing, I added 5 more gold stocks: OZN, CGR, CLG, FNX, and LIHRY, be sure to check them out. We cover 49 individual gold stocks and 5 silver stocks, all on multiple time frames.
Click Link ----- Gold Stocks
I also put the silver stocks on their own list on the gold stocks section.
2. Market Comments:
First thing, WOW, what a week for Gold and precious metals stocks. The US Dollar is breaking down and gold is breaking out. Gold stocks are starting to get ahead of themselves and a pullback will likely occur fairly soon. However, I would use any good pullback as a major opportunity to load the boat on gold stocks. Gold has likely about to embark on a major uptrend that will last for many months. This is how you make big money, by riding a major trend up, instead of daytrading. Daytrading has its place, but not with the gold sector, you will make far more money buying on dips and holding these golds for the majority of the run up. More in depth analysis in section 6 below:
Mark my words folks, I think gold will one day be over $1000 an ounce and gold stocks will be as hot as internet stocks were in 1999. Gold and commodities are in a secular bull market that will last many years.
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The Market started off about even early last week after a big run up the week before. However, the Market quickly weakened and fell hard on Thursday and Friday with the Nasdaq, DOW, and S&P all closing down for the week.
The good news is the run up has been on good volume, while last weeks pullback was on weaker volume. Therefore, the trend is still up, and support levels are close on the major indices, however things could change quickly if the indices continue to weaken and supports do not hold. On the other hand, this pullback could also quickly end and the markets could turn around. This is typically the 'feel good' time of the year, so it's possible the indices could quickly turn around and rally.
Currently, the Market could go either way and this is a traders market. The daytraders do best in this kind of Market. Swing trading is difficult in this Market (except for commodity based stocks like gold and energy) because trends are prone to quickly reverse at anytime. For example, a stock might breakout on good volume, only to fizzle out the first or second day.
My advice is to day trade if you can, or wait until a clear trend is established, whether it be up or down.
However, the one area swing trading is working, and should continue to work well is gold and commodities. Gold stocks especially are on a tear and will likely continue to do so. Therefore, the gold and precious metals sector is the place swing traders should be focusing on - more on this below:
The furious run up in crude oil is spooking the Market, and for good reason: Oil is the king of commodities and affects the price of everything. Almost everything you own, oil was used in some way to produce and transport it.
Crude oil has been on a tear, hitting new all time highs. However, two things to consider: First thing, oil is still far below the inflation adjusted price of $66.20 a barrel in 1981.
Secondly, the chart of crude oil below looks parabolic to me. Unfortunately I cannot draw a curved line on Stockcharts, but you can see the parabolic nature of crude oil below. I think there could be a little more upside in oil, but that it will likely end soon in a blow off top. World and future demand for oil will is huge and will only get increase, especially with China and India who are growing at double digit numbers. However, in the short term, oil is getting overbought and should pullback soon.
As I stated above, the long term chart of oil is a scary thing and is in a strong long term uptrend. With demand from China and India ever increasing, oil will continue to go up over the long term.
The chart below shows us that oil bottomed in late 1998 and has many uptrend support lines. The long term support line is at about 32, so unless oil were to pullback below 32 dollars a barrel (which is highly unlikely), then oil is in a long term uptrend.
With oil on the run, and the US Dollar breaking down, commodities are in a major bull market.
DO NOT BELIEVE THE GOVERNMENT WHEN THEY SAY THERE IS NO INFLATION!!! Just take a look at the chart below which is a composite of 17 various commodities. How can there be no inflation when the price of all our raw materials is going up? You know the logical answer to this folks!
Commodities are in a secular bull market that will last for many years to come.
The big picture chart of commodities shows us that commodities are now at levels not seen since 1984, and the uptrend will only continue.
3. Major Indices, Nasdaq, DOW, S&P, other:
Nasdaq:
60 min chart
The lines below on the 60 min. chart shows us the support areas: The NASDAQ closed near a support level on Friday at about 1920, however this is minor support. The uptrend line near about 1890 to 1900 is the far strong support and a good 'breakpoint' to be aware of this week. If the uptrend line fails to hold, then the Nasdaq could tumble to the next major support at about 1820.
The Nasdaq pulled back last week at the 200 MA and never made it to the major resistance downtrend line. However, there is support at the uptrend line near 1890 to 1900 which is the 'breakpoint' to watch this coming week.
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.
The Nasdaq will not be on a clear trend, and trading will be choppy, until this triangle resolves itself, which could be either to the upside or the downside.
The Nasdaq 100 looks very similar to the NASDAQ chart: Major resistance at the downtrend line, while support at the uptrend line.
Semiconductors:
As you know, the direction of the Nasdaq is strongly affected by the Semiconductors and the Semiconductors must rally for the Nasdaq to rally. If the Nasdaq rallies, but the Semiconductors do not, then the NASDAQ rally is doomed to fail.
Currently, the Semiconductors are very weak, but have formed a nice basing pattern with clear resistance at about 1100 and especially the downtrend line - the MACD is also positive. If the Semiconductors can rally, the Market should too.
Keep a close eye on the Semiconductors next week, because what they do will likely determine the fate of the Market. If the Semis can rally, then so can the Market, but if the Semis weaken and fall, then so will the Market.
60 min:
The 60 min chart shows us that the DOW ended last week on an uptrend support line, which also forms a symmetrical triangle. There is also support at 10,000. These areas are the major breakpoints to note for the coming week.
Daily Chart:
The 1 year chart of the DOW shows us that the DOW is in a 10 month downtrend channel with major resistance at the downtrend. What you also notice is a symmetrical triangle with support at the uptrend line and 10,000. The DOW really needs to strengthen this coming week, other wise this triangle will be broken to the downside and a test of 9750 would likely occur.
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 closed near an uptrend support line last week. The uptrend line and the horizontal line near 1100 are the closest major support areas.
Daily Chart:
The 1 year chart of the S&P resembles the DOW chart, however it is technical a little stronger. Last week, the S&P briefly broke the downtrend line, but quickly fell back. Look for support at the uptrend line.
A longer term chart shows us that major resistance exists overhead for the S&P, while support lies at about 1075. This long consolidation pattern will eventually resolve itself either to the upside or the downside, and when it does, the resulting movement will be large.
The NYSE is stronger than the three major indices as it has broken it's downtrend line and even taken out the previous high of 6640.
4. Market Sector Breakdown Along With Various Stock Picks From These Sectors:
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:
Sectors Page
Telecom looks great, beautiful chart:
With commodities on a tear, basic materials logically look great.
Surprisingly, Banks look pretty good:
Extremely weak sector, good shorts here:
Airlines look very weak, logical with oil prices.
5. 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 - except of course for gold and silver stocks.
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.
Note: more insider buying this week occurred in ESI, TV, and MWY.
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Symbol
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BP Price
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Comments
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10/10
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N/A
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see chart
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Insider buying of 100k shares for an average price of 12.75 on 10/1/04.
A buy if the downtrend line is broken to the upside
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10/10
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N/A
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50 MA
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One of the Beneficial owners bought 2.5 million shares for an average price of 0.77 on 10/6.
Might be worth a chance if the 50 MA is taken out
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10/10
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N/A
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33.50
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A Director buys about $2 million worth of stock for an average price of 3.21 on 9/30/04
A buy if the downtrend line can be broken on good volume
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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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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. |
6. 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.
Wow, what a week for Gold!!! The Dollar is breaking down, while gold and precious metals are running up and look fantastic.
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 breaking down and has broken a symmetrical triangle to the downside which is very bearish for the Dollar while very bullish for gold and precious metals and corresponding stocks.
The Dollar is also forming a bearish descending triangle with major support at about 87. This support area is the last hope for the Dollar: If 87 fails to hold, then the descending triangle will have been broken to the downside and it will be all over for the Dollar, and the beginning of a major price run up for gold, precious metals, 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 - therefore be careful when establishing new positions.
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.
The triangle in the Dollar has been 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 run up. 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.
Gold metal looks fantastic here after breaking the triangle to the upside. The first price target is about 430-435, which is also major resistance.
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.
However, folks one day I think we'll see go over $1000 an ounce and gold stocks will be as hot as internet stocks were in 1999 - mark my words.
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 occurred 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.
Also, notice that gold is currently forming a very bullish ascending triangle: A breakout from this triangle will cause a major rally for gold metal and corresponding stocks - the major breakpoint is 435.
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 resistance at $7, which has been cleanly broken to the upside. The major price target is about $8.5, however the gap between $7.5 and $8 will act as strong resistance on the way up.
First thing, I added 5 more gold stocks: OZN, CGR, CLG, FNX, and LIHRY, be sure to check them out. We cover 49 individual gold stocks and 5 silver stocks, all on multiple time frames.
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.
The chart below is of the HUI Gold Bugs Index plotted on a 60 min time frame. The HUI has been on a tear lately and has rallied over 10% in about three weeks. The uptrend line near 230 is support as well as the horizontal lines. It's hard to say when the HUI will pullback, but it's going to at some point.
I would use any good pullback as a major opportunity to load up on gold stocks. Seriously folks, gold stocks could be major performers the rest of the year. You can make big money by riding a trend, and it's far easier and less work than day trading.
The HUI, Gold Bugs Index has been on a tear and hit it's target of $240 last week. Just as I stated below, gold stocks will pullback at some point, and when they do, LOAD THE BOAT! The uptrend is support as well as 220.
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.
The other gold index, the XAU, has also been on a tear and will pullback eventually. The horizontal lines below are support levels. Again, I would use any good pullback as an opportunity to buy more gold stocks.
The XAU almost hit it's first target of $106 last week. I would like to see the XAU consolidate before taking out this resistance level.
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. The first major target is about $255, or the $38% Fibonacci number. Realize that pullbacks will occur along the way.
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 was broken last week. This downtrend line might now act as support on a pullback. I like this stocks and my long term target is about $24. I will use pullbacks to buy more.
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.
This chart is supermodel gorgeous.
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