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October 26th, 2003
Table Of Contents:
Click on the section titles below to be automatically taken to that section:
Part 1: Interest Rates, Commodities, Big Picture
Part 2: Gold Analysis
Part 3: General Market Analysis
Administrative Notes:
I will be adding new individual Gold charts to the Gold section later this week.
Last week I wrote the how the 10 Year Bond yields have been rising and are close to breaking a multi-year downtrend line. If the downtrend line is broken, then the 'era' of low interest rates may end and the Housing Bubble could burst which could have major negative implications to our economy. Remember that the 10 Year Bond Yield correlates with long term mortgage rates very well, thus when the 10 Year Bond Yield rises, so do mortgage rates.
So far so good, as the 10 Year Bond yield found resistance last week. However, if I were a betting man, I would bet that this downtrend line will eventually be broken. If the downtrend line is broken, then stocks in the housing sector might become great long-term shorts.
The CRB commodities index has been rallying and is getting close to breaking the resistance high of $251.60. Though, the CRB could pullback anytime, there is support at the 200 MA and the uptrend line. I personally think the CRB will eventually break out to new highs.
The chart below shows you that the CRB has been in a 21 year downtrend, in other words, commodities have been in a long term Secular Bear Market. Make no mistake, this is a very important chart: If the CRB Index breaks the downtrend line, then the Secular Bear Market in commodities will be over and a Secular Bull Market will likely begin.
Rising commodity prices lead to one thing, inflation:
One way to combat rising inflation is by raising interest rates. Now it doesn't seem so ironic why the 10 Year Bond chart above is close to breaking out of its downtrend line does it. If inflation starts to creep into the economy, then the Fed will have no choice but to raise interest rates - sorry?
Thus the big picture is becoming clearer to me: The General Stock Market entered a Secular Bear Market in March of 2000. Currently, the General Market has entered a short-term Cyclical Bull Market, however the Secular Bear Market is intact and this current Cyclical Bull Market will eventually end.
Commodities are close to entering a Secular Bull Market. Thus, commodities and precious metals will be the next big long term movers, not tech stocks. Interest rates will likely begin a long term uptrend and will be raised in an effort to combat rising inflation from the rising commodity prices.
Keep in mind, that this is the LONG TERM. In the short term, the Cyclical Bull Market could still last for while, also remember that next year is an election year. It will be interesting to see if the Market Mysteriously holds up so that President Bush has another chance to win again? This is for you conspiracy theorists to ponder.
Part 2: Gold Analysis
Normally I analyze Gold/Precious Metals last, felt like switching the order around this week.
Gold rallied nicely last week to break out of a small horizontal congestion pattern appears very bullish, Gold stocks are also doing very well with many breaking out to new highs. The big question is, will this trend continue and will Gold make a new high here?
While Gold itself appears bullish, the one thing that concerns me is the US Dollar: The Dollar made a new lower low this week, and now Positive Divergence has also appeared in the MACD. This may be a sign that a large bounce may soon be in store for the Dollar - see the chart below.
What concerns me is that if the Dollar soon rallies, it may cause a large pullback in Gold metal and Gold stocks. Most of the time Gold has an inverse correlation with the Dollar, i.e. when the Dollar falls, Gold rises, and vice versa. Of course, sometimes this indirect correlation reverses itself, though it is rare.
Therefore, if you hold a lot of Gold stocks with nice profits, I suggest that you place stops in order to protect your profits, just in case the Dollar bounces.
However, keep in mind that even though there is Positive Divergence, this doesn't mean that the Dollar will bounce here, the Dollar could fall further (the next major support is about 88.5). All I'm saying is, be aware and ready for a bounce in the Dollar, just in case and protect your profits in Gold stocks.
Below is a longer term view of the US Dollar. If the Dollar continues to fall, the next support level is about 88.5 - noted by the green dotted line.
As you can see below, Gold had a nice rally last week after breaking out of a small horizontal congestion pattern and is approaching the highs set back in September. I hope this is not a double top pattern that is signaling a pullback or a Gold top? The nearest resistance is the $395 high set in October.
It will be interesting to see if Gold can break the September highs.
Below is a plot of the gold metal on a longer term basis. Basically you see the same technical picture as above, but on a muli-year expanded view.
It will be interesting to see if Gold can break the September highs.
GOLDX is a Gold mutual fund I mentioned back in late July. This fund has done nicely since breaking resistance at $13.25. However, notice that it has now had a substantial run - this fund gives you the idea that Gold stocks themselves may be getting a little ahead of themselves.
Silver rallied nicely last week along with Gold. However, the inverted hammer candle stick formation on Fridays close may be hinting at a coming pullback.
Can you believe this, the HUI has formed a new high yet again. Will gains continue? Possibly, but if the Dollar rallies, then the HUI might be adversely affected - watch the Dollar chart closely.
On a 60 minute chart, Negative Divergence and a Bearish Rising Wedge have formed. This is a warning sign that the HUI may soon pullback.
Be sure to protect your Gold profits in case a strong pullback occurs.
Can you believe this, the HUI has formed a new high yet again. Will gains continue? Possibly, but if the Dollar rallies, then the HUI might be adversely affected - watch the Dollar chart closely.
What's cool is that the HUI officially hit the price target of $220 that I set back in May (via the triangle height price target calculation) - nice to see this happen.
Perfect bounce off the 200 MA which is also support. If Gold metal continues to lag, then the XAU might need to consolidate for awhile before breaking to new highs.
On a 60 minute chart, the XAU has strong resistance at $98.50, Notice the Negative Divergence to be aware of.
Be sure to protect your Gold profits.
Market Indicator Analysis
First the VIX:
The VIX or Volatility index is ratio of put options to call options. It is a useful indicator because it indirectly measures market psychology. The VIX is like a contrarian indicator, when it's low, it means that more people are buying call options, and thus are bullish on the market. Contrarian theory tells us that the majority of people are wrong about the stock market, therefore when the masses are overly bullish, the market is usually topped out and about to tank, and vice versa.
The VIX can be used in two ways:
1. Usually the VIX is used to indicate when the psychological levels of the market are overly bullish or bearish. Overly bullish levels are in the mid 20s and lower, while overly bearish levels are in the upper 40' and higher. Traders use these levels to indicate when the market is at extremes, such as oversold or overbought. The old saying applies, when the VIX is low it's time to go, when the VIX is high, it's time to buy.
2. The VIX can also be used to forecast the market direction because of it's inverse correlation to the market direction. For example, by using technical analysis, if you decide the VIX is going to fall in the short term, the market will usually rise, and vice versa. Normal pattern or technical analysis can be preformed on the VIX an attempt to decipher short term market direction.
Current Analysis:
The chart below is of the VIX (now VXO) plotted on a multi year time frame. You can clearly see the significance of this support level, and this level is a obviously a likely place for the VIX to find support.
Last week, the VIX quickly fell through support, but then bounced right back again to form a hammer candlestick. Also note the Positive Divergence via the MACD: Is this signaling that the VIX will soon put on a strong rally, thus causing the General Market enter a larger pullback?
Note the Positive Divergence that marked the last bottom of the BPCOMPQ. This Positive Divergence was the start of the current "Cyclical Bull Market" in stocks.
However, you can now see Negative Divergence in the BPCOMPQ. This Negative Divergence could possibly be sending us a signal that a market top is in or close to being in - ironically, will Negative Divergence be the end of this Cyclical Bull Market? Negative Divergence first appeared in late September, and since then, the market has been weak.
Major Indicies
Market conclusions:
The Nasaq, DOW, and S&P all rallied off their Friday lows to finish the day well off their lows. This bounce could continue until early this week, however personally I do not see the General Market rallying to make new highs at this time. Though I do think there is a good opportunity that the Market has a nice 'end of year' rally.
I think that any market bouce we get will set us up for good Shorting Opportunities.
The Nasdaq:
The Nasdaq pulled back quite hard last week and fell all the way to the 50 MA and to fill the gap that was formed in early October. Notice how the 50 MA has acted as strong support since the beginning of this rally in March, thus the 50 MA might again act as support and the Nasdaq might rally from here. Also notice the Hammer candlestick formation on Friday - this could be the start of another uptrend. However, one day the 50 MA will not hold.
Again, Negative Divergence shows its use fullness in prediction pullbacks: Note the Negative Divergence in the MACD, this was a warning sign a couple weeks ago that the last high was not healthy and that a pullback was likely.
Below is a chart of the Nasdaq with corresponding Fibonacci lines. These Fibonacci lines represent major support areas in the event of a large pullback.
38% = 1700
50% = 1610
68% = 1525
The 60 minute chart below gives you an idea of the sharp pullback that occurred last week. Notice the series of gap-downs that occurred. Gaps represent areas of support and resistance.
The Nasdaq fell last week to finally fill the gap that was formed on the last major run-up. The gaps that were formed last week may offer some resistance on the way back up.
The chart below is the tradeable fund SMH which represents the Semiconductor Sector. The Semiconductor sector strongly affects the direction of the Nasdaq. As you can see, SMH could pullback all the way to either the 200 MA or the uptrend line.
The fact that the Semiconductor index hasn't yet broken its uptrend line is still bullish for the General Market. However, if the uptrend line is broken, the the Nasdaq would likely enter a major pullback, quite possibly to one of the Fibonacci #'s listed above.
DOW Jones:
The DOW fell below 9690, as it did not act as a support level. The Next support is the 50 MA.
The S&P is pulling back and is trying to find support at the 50 MA. The S&P is much strong then the Nasdaq because it has lots of horizontal congestion that will act as support on the way down.
Those of you who have been with us for awhile know that I have been following the Russian Stock Market since late March. The Russian Market has really had a run since then and is finally pulling back. The Russian Market will likely need to consolidate for awhile before it is ready to rally to new heights. Because the Russian Market is in a bull market, I think a nice consolidation will represent new buying opportunities, via the TRF and other Russian Stocks.
Wow, what a run, I first recommended TRF at about $20.50 back in March - it hit a high at $34 recently, but is now pulling back. There may be some support in the mid $29's.
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