Breakpoint Trades - Newsletter

Happy Halloween!!! 2004

Written by Matthew Frailey - matt@breakpointtrades.net

1. Administrative Comments:

none

2. Market Comments:

The Market had a good week ahead of the election as all three indexes recovered nicely, though no major resistance areas were taken out. The Nasdaq has been outperforming the other major indexes and will likely continue to do so especially if the Semiconductors breakout (which are very close to doing so). The DOW is technically the weakest of the three major indexes: Money may be flowing from the DOW to the stronger Nasdaq, and the scandal in the insurance sector is also weighing heavily on the DOW.

As long as the indexes hold up, it's looking more and more like the Market may have an end of year rally based on the charts. Also, historically November and December are the strongest months of the year for the Market. Also, statistics show us that if the incumbent party wins reelection, then the Market typically does very well for the last two months, but if the incumbent party looses, then the Market does poorly. Obviously, history does not always repeat, but if it does, then if Bush is reelected then the Market will do well for the last two months, but if Kerry is reelected then the Market may do poorly.

Gold had a good week and continues to look great; the Dollar continues to weaken and gold metal looks fantastically bullish as it has formed a large ascending triangle. Gold may breakout here, but there is also a strong possibility that it pulls back here one more time. Personally, I'd like to see one more pullback.

One of the reasons for the Market rally last week was the pullback in crude oil. This pullback was inevitable, but don't get too complacent: Oil has many support levels underneath that will keep it from crashing.

Wow, natural gas has almost doubled in about a months time!

The FED has raised short term interest rates by 0.25% the last two times and judging by the following chart, it seems that another 0.25% rate hike is priced in. Therefore, expect the FED to raise rates by another 0.25% during the next meeting.

The Nasdaq has a good week and closed right at a significant downtrend resistance line. If this line can be broken on decent volume, then the first target is the previous high at about 2055.

A larger time frame shows us that the Nasdaq is on the verge of breaking a large symmetrical triangle to the upside. Technical analysis tells us that large price movements usually occur when symmetrical triangles are broken to the upside.

The DOW is the weakest of the three major indexes: Last week, the DOW rallied exactly where it needed to, right at the bottom of the channel. If this channel had been broken, then the Market would be breaking down right now instead of on the verge of an end of year rally.

Hmm....isn't it funny how the DOW rallied exactly where it needed to??? Maybe the governments Plunge Protection Team pumped some money into the Market???

This long term chart of the DOW still suggests a possible bullish flag. However, the major resistance is the 5 year downtrend line.

The S&P 500 also rallied just exactly where it needed to, hmm... very interesting. Support at the uptrend line and resistance at about 1145 to 1165.

The NYSE is bullish and is on the verge of breaking resistance near the dotted lines. These resistance areas may be taken out if George Bush wins.

As I've been stating for the last couple of weeks in the newsletters and on the message board, the Semiconductors are on the verge of breaking out. The downtrend resistance line just over 1100 would take out resistance and a run to about 1200 could easily occur.

The Semiconductors also strongly effect the Nasdaq, so if a breakout occurs, then the Nasdaq will likely take out the downtrend resistance line.

Also, I'd focus on semiconductor stocks for breakout candidates.

Here is a list of semiconductor stocks to consider for breakouts:

BRKS, ADI, CMOS, RMBS, PMCS, FDRY, NSM, ADI, ASML, STLW, VESA, VTSS

My favorite sector is the precious metals sector, as will be discussed in further detail below:

A few Indicators:

The NASI has whipsawed and has now given us a buy signal via the parabolic sar and the Stochastics suggesting that the Market could indeed give us that end of year election rally.

The direction, NOT the level is what's important for the VIX. You can see that the VIX broke support of an uptrend line in mid. August. This break caused a strong market rally that lasted until mid September.

Currently the VIX has formed another uptrend line: For the Market to have an end of year rally, this uptrend line must be broken to the downside. However, if pattern also resembles a small ascending triangle which would be bearish if it's broken to the upside.

This chart is important and one to watch over the next couple of weeks. The direction this chart breaks will set the market tone for the rest of the year.

The perentage of chart in the Nasdaq that are above their 200 MA has continued to increase since August and is on the verge of breaking a resistance line. Such a breakout would be bullish for the Nasdaq.

GOLD Analysis:

The chart of gold metal looks fantastic as it has formed a very bullish ascending triangle with resistance at about 433 to 435.

Gold will either breakout here, or it will pullback one more time and breakout later this year. Personally, I'd like to see one more pullback before breakout.

The long term chart of gold looks great and shows us how important the 430s resistance area is. A break of this level will likely send gold to the next resistance zone of $500.

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. This is very bearish for the Dollar, while subsequently very bullish for gold, precious metals, and corresponding stocks. The next major support for the Dollar is about 84.5 to 85 noted by the red dotted line and will be tested eventually.

However, I must point out that the Dollar may put on a bounce in the short term very soon to restest the broken support at 87. This 'retesting' of broken support is a common occurrence in technical analysis. Such an event would cause a pullback in gold and gold stocks, and present a good buying opportunity. If this occurs, I will buy more gold stocks on the pullback as gold is in a powerful bull market.

The US Dollar looks weak as it is trying to hold support at about 84.5 to 85. A bounce could occur here, which would give gold one more pulllback. Realize that if bounce does occur here it will be short lived as 87 is not strong resistance. A bounce in the Dollar would also produce buying opportunities.

Longer term chart of the Dollar: simply a never ending series of breakdowns. However, I would like to see gold eventually de-couple from the Dollar. When this occurs, then the 'real' gold bull market will begin, the bull market you've been witnessing the last few years is just 'kids stuff' compared to what you will see when gold finally de couples from the Dollar.

Silver metal also looks bullish and now has firm support at $7. However, the gap between 7.6 and 8 will offer resistance.

Gold Stocks:

was reading an article from www.zealllc.com, where Alexander Hamilton discussed how he was looking for a way to predict how to stay in gold stocks for the duration of a major run-up and how to know when to exit.

http://www.zealllc.com/2004/huipara.htm

I think I found a simple way to accomplish this: One chart I really like is the HUI/Gold metal ratio. 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.

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

Here's a close up view of the chart above: