1. Administrative Comments:
Not feeling to well this weekend, so the newsletter is posted later than usual as I have not felt well enough to work on it.
2. Market Comments:
It was generally a tough week for the market: Oil fell early in the week, but then rebounded, thus causing more inflation fears. The Dow is the weakest of the three major indices and closed below the psychological 10,000 support level. The Dow Jones was especially hurt by the huge pullback and scandal currently going on in the Insurance industry - AIG, ACE, HIG are stocks being targeted.
The Nasdaq is the second weakest, thanks to the under performing semiconductors. The S&P 500 is the strongest of the three indices, but is not really that strong and is currently resting on support at 1100 which could fail this weak.
Again, I have to stress that swing trading is very difficult at this point. It's best to either day trade if possible, or simply stay out of the Market until a clearer trend establishes itself.
The charts of the major indices look weak and could continue to pullback. Also, many market indicators such as the NASI, BPCOMPQ, and the VIX has given sell signals. However, with only 2 weeks left until the election, anything can happen, so I would be careful putting lots of money on the short or the long side. Take profits quickly in this environment!!!
Also, we are currently in earnings season and I suggest NOT holding any position into an earnings announcement. Doing so is a pure gamble and is generally a hard core rule among traders not to hold through earnings.
The one area that you could probably swing trade is the precious metals area, gold and silver. This sector could be on the verge of a big run up, though the US Dollar still needs to break major support at about 87. My advice for trading gold and silver stocks is to buy on major pullbacks and sell on major rallies, rather than buying on breakouts.
Now let's look at a few charts:
The NASI gave a sell signal on Wednesday. The MACD and Stochastics have also given sell signals - this is bearish for the market. Could this be the start of a downtrend that will last for several weeks or a month or more? Or is it a whipsaw signal which is quickly reversed as happened many times in the fall of 2003??? I'm not sure, but with the election near, I am not personally going to bet against the market at this time. A better time to short the Market might be in January 2005.
The BPCOMPQ indicator also gave a sell signal last week, on Friday which is bearish for the market.
Likewise, the BPNYA also gave a sell signal for the market.
The VIX broke down in mid August, which was began a large rally in the market. However, a sell signal was generated when the VIX broke the downtrend line to the upside.
The MACD is in an uptrend on the VIX, and until it crosses down, the market will remain weak.
On to the Indices:
The DOW is very weak: Notice that it broke a symmetrical triangle to the downside last week and also took out support at 10,000. The next level of support is marketed by the gold band between 9750 and 9780.
Bases on a long term chart of the Dow, one could still argue that it resembles a bullish flag. However, the DOW has to stay within the downward channel for this pattern to remain intact. It's hard to imagine the Dow entering another major up leg, but I guess anything can happen.
The uptrend line on the Nasdaq is still intact near about 1900 which is a 'breakpoint' - e.g. the Nasdaq will either rally off it, or break it and enter a downtrend.
The long term chart of the Nasdaq still neutral and well inside the large symmetrical triangle pattern.
THE DIRECTION THIS CHART BREAKS WILL DETERMINE THE NEXT MAJOR TREND OF THE MARKET. I consider this Nasdaq charts one of the most important charts for the market, keep an eye on it.
The S&P 500 was stopped by resistance at about 1145, and now has support at about 1100. If this support level fails to hold, then a fall to 1080 to 1065 could occur.
Constricting moving averages suggest a large move is upon the S&P 500. Will it be a down move?
The S&P 100 is in a well defined downtrend channel with major resistance at the downtrend line. However, last week the OEX broke the uptrend line of a triangle and may be on a course to test support at about 520.
As I stated in the first section of the newsletter, the Insurance Sector broke down dramatically last week on scandal. Of course, before this chart even broke support, the pattern was bearish e.g. descending triangle.
Oil hit a high of $57 a barrel last week: Oil will eventually pullback, but there are now many layers of support below that will keep it from outright crashing. Greenspan recently stated that he did not thing the high oil prices would hurt the US economy very much - yeah right. Greenspan is the engineer of the bubble in the stockmarket and excess debt - he'll say anything for his legacy.
The next support levels on oil are: $50, $45, $42, and $40. As you can see, oil has a lot of support below.
Dan Bernard (Chicago Board of Trade) says oil could hit $75 a barrel before it's all over: see article:
Bloomberg.com:
The long term chart further confirms that oil is in a major long term uptrend, and will be in an uptrend as long as the long term uptrend line near about $32 remains intact.
Do you see what I mean now? A fall to the low $40s or even high $30's would cause analysts to proclaim that the bull market in oil is over. However, this chart tells up that unless the bottom uptrend line is broken, oil will remain in a bull market.
Inflation may high the second half of this decade pretty hard.
Of course, not just oil, but all commodities are in a major bull market as evident from the chart below: How can inflation not hit the US with the price of raw materials going up? Do not believe the government when they say there is no or little inflation.
Governments have agendas and can lie, but charts do not!
One sector in the market I do like is the Telecom sector: Nice breakout and prior resistance appears to be holding as support.
The long term chart of the Telecom sector is beautiful to behold: Nice bullish multi-year ascending triangle:
One could take advantage of this bullish chart by going long a few of the components, but a simple way would be to buy a telecom ETF:
TTH and IYZ are telecom ETFs that mirror the index charts.
The Insider long section continues to do well, here are a few that look interesting:
BFS is nearing the resistance of 33.50 and could break this week:
SAMC is a small BB stock, but fairly significant buying from one of the owners: A break of 0.80 would be a buy with a target of about $1.00
The insiders keep buying MWY every week, which is one reason why I keep it here. However, MWY is nearing support at the 200 MA, if that fails, I'll remove it from the list.
Another sector that looks strong is the precious metals sector: Resistance was broken at 110, and is holding as support. This looks like a good place for the uptrend to begin once again:
Precious Metals:
The chat of gold metal is supermodel pretty: After breaking a symmetrical triangle, a bullish ascending triangle is now forming with resistance in the low $430s.
The long term chat of gold looks great as well: you can see the major resistance marked in gold below: A price target of $500 is achievable if the gold band is broken.
Of course, strongly effects the price and direction of gold, and the two are linked in an indirect correlation: Once inflation begins to hit the economy in a big way, I suspect gold will go up no matter what the Dollar does, but at this time, the two are still closely linked together.
Currently, the Dollar looks weak and is on the verge of breaking a bearish descending triangle to the downside. 87 is the important support area to keep an eye on. If 87 is broken, the Dollar will likely fall to the next support level near 85. This of course, would cause a big rally in gold and corresponding stocks.
Expanding the chart to give a better view:
This long term chart of the DOW does concern me a little though: Notice how the MACD is fairly high, which suggests a positive divergence will develop. This chart has the potential to rally eventually, just keep this in mind. If this occurs, then gold will pullback strongly.
Paul Van Eeden from Kitco.com warns about an eventual Dollar rally: see the following article:
Paul Van Eeden - lower gold prices:
Gold Stocks:
Gold stocks look good and are trying to rebound after a strong correction early last week. This correction was needed as gold stocks were getting ahead of themselves. The HUI high resistance at $240 and was turned away. The HUI will likely rally once again and eventually break this resistance level. The uptrend line is support and a good place to buy.
The 60 min chart of the HUI shows us that the HUI simply pulled back to the uptrend line, no big deal. As long as the uptrend line holds, then this current rally will remain intact.
The long term chart of the HUI shows us that it has broken out of a year long bullish flag pattern. The broken downtrend line is now support. This chart is very bullish for the HUI in the long term.
In fact, the HUI is up an amazing 614% from November 2000 to the December 2003 highs! How can analysts ignore this powerful and very obvious bull market???
The final chart, and a very important chart if you own and trade gold stocks is the HUI/Gold metal ratio. Basically, gold stocks tend to outpreform the metal and under perform the metal at various times. The chart below is very useful because when it is in an uptrend, it is a good time to own gold stocks, and vice versa.
You can see below that the chart fell back to test support and has rallied off it. If this support breaks, then here is another support line just below it.
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