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Labor Day Weekend, 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)
2. Market Comments, Long Term Investment Ideas, and Miscellaneous:
The major indices moved very little last week and the volume was very light as many traders were on vacation. The major indices did pretty much as I said they would last week: In last weeks newsletter, I stated that the Market would likely pullback early in the week and then rally later in the week, which is exactly what happened, except for Fridays pullback. The market pulled back strongly on Monday and Tuesday morning, however it rebounded Tuesday afternoon and rallied until Thursday.
The Market was weak on Friday following negative news from Intel who lowered forward guidance on Thursday night. Fridays employment numbers were not great, but were basically in line with expectations.
The major indices look like they may want to pullback here: It is now September, which is historically the weakest month of the year. Also, all three major indices are at resistance levels and could pullback. For example, the DOW Jones and S&P 500 are both near major downtrend resistance lines.
The Nasdaq is by far the weakest of the three and is also at resistance. The question is, can the Dow Jones and S&P 500 rally or just hold up if the Nasdaq is falling? Probably not for very long.
Another thing to note is that the 50 MA has now crossed below the 200 MA on all the major indices and many sector charts (except commodities). This bearish crossover is potentially very bearish.
Take the DOW Jones for example: Notice how it has rallied to a downtrend resistance line, but also take note of the bearish crossover of the 50 and 200 MAs. Note the large price movement that occurred the last time the 50 MA crossed the 200 MA. Will the crossover that recently occurred also cause a large price movement, but to the downside? It may do so and the DOW and the rest of the market needs to rally and break resistance, otherwise the likely hood of a long term decline strengthens
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Long Term Investment Ideas:
The Market is showing signs that it could be on the verge of a major trend change to the downside. As stated above, the 50 MA has crossed under the 200 MA on most index charts which is potentially an ominous sign for the long term.
USPIX is one of my favorite bear funds that moves twice the inverse of the Nasdaq 100. Minimum investment is $15,000. A long term price target is in the low $40s, which would represent a damn good return on ones money.
A closer view of the USPIX confirms the 50 MA has crossed up over the 200 MA.
One of my other favorite long term investment ideas is the Rising Rates Fund, RRPIX. Long term Interest rates are definitely going up in the long term and likely bottomed last week.
RRPIX moves about 125% of the inverse of the 30 year long bond.
Notice how this fund bounced exactly off an uptrend line. I think this is a great place to accumulate this fund. This fund moves about 25% for each 1 point change in long term interest rates. You won't get rich off this fund, but it seems like a sure bet to me over the long term.
For the past month I have been looking to short the Long Bond as I think long term rates will begin to rise again. The 30 year yield rallied strongly on Thursday and Friday and seems to have hit a bottom. Notice how the 30 year yield rallied exactly off the uptrend line. Resistance exists at the downtrend line, however this looks like a logical bottom to me and probably the start of higher long term interest rates. On Thursday I shorted the 30 Year Bond (which moves opposite of Yield) and I plan to hold this position for as long as I can and possible to add to it.
I am looking to short the 30 year yield futures, ZB is the symbol.
Here's another reason to believe long term rates are going up is the next chart below: This chart is the ratio between the 30 year long term yield and 3 month yield.
My favorite indicator, positive divergence, indicates this indicator will soon turn up. For this to occur, long term rates have to rise since they are the numerator.
3. Market Indicators:
First, let's see what the market indicators are telling us:
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 all three signals confirm one another, however I think having at least two concurrent buy or sell signals is good enough:
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.
#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 3 weeks ago, and the general Market has bounced nicely since then. The NASI is still in an uptrend, therefore we have to assume the Market will hold up. However, the NASI may run into resistance at the downtrend line. Only when the NASI gives a sell signal, should we assume the Market will enter an extended downtrend.
Synopsis: This indicator is bullish as long as it remains in an uptrend:
The BPCOMPQ has rallied since mid August, not surprising given the Positive Divergence.
The BPCOMPQ could potentially rally to the resistance at about 43, which was the previous low set in March.
It's also possible that the NASI and the BPCOMPQ will coincide in the future and confirm one another, i.e. once the NASI gives a sell signal, the BPCOMPQ could be at resistance.
Currently, in the long term, the bearish event of the 50 MA crossing under the 200 MA for the most indices has me worried.
Synopsis: This indicator is bullish as long as it remains in an uptrend:
The Bullish Percent index is has rallied a bit since mid August, which is logical given the positive divergence in the MACD. Hard to say how long the BPSPX could rally, but it may have trouble in the high 50's, which was the previous low in March.
Currently, in the long term, the bearish event of the 50 MA crossing under the 200 MA for the most indices has me worried.
Synopsis: This indicator is bullish as long as it remains in an uptrend:
The percent of stocks above the 200 MA is trying to break the downtrend line, which is positive.
Synopsis: This indicator bearish to neutral:
However, the major RED FLAG I currently see is the Semiconductors: The Semiconductors are strongly correlated with the Nasdaq. The Semiconductors need to either out perform, or at least match, the Nasdaq in performance.
The chart below is the Semiconductors / Nasdaq ratio. As you can see, the Semiconductors are greatly under performing the Nasdaq, which is not a good sign for the Nasdaq or the Market, at least in the short term.
Synopsis: This indicator is bearish:
Small caps usually lead when the market does well, which is currently happening and healthy. The indicator below is a ratio of the Small Caps to Large Caps. The direction of this indicator is what's important, when the trend is up, the market is doing well and can support a rally (thus indicating that small caps are leading. However, when the indicator is down, it indicates the market is weak and declines will likely continue.
Synopsis: This indicator is bullish as long as it remains in an uptrend:
NYAD makes new high, signaling more upside for the Market:
Synopsis: This indicator is bearish:
The VXO or VIX, has fallen to lows once again during the market rally the last few weeks. However, positive divergence in a big red flag here and signals that the VIX will eventually recover and enter a major uptrend.
It is the direction, not the level, that is important on the VIX.
4. Major Indices, Nasdaq, DOW, S&P, other:
Nasdaq:
The Nasdaq pulled back on Monday and Tuesday last week which was not surprising given the negative divergence on the MACD.
Currently, the Nasdaq has support at about 1820-25 and stochastics are oversold.
Daily chart of the Nasdaq is not pretty and is a descending triangle.
Major resistance at about 1875 to 1900 will be very difficult to overcome, if it even happens.
The Nasdaq is the weakest of the three major indices.
The Fibonacci chart of the Nasdaq is very interesting, notice how the Nasdaq bounced exactly off the 38% retracement of the rally from October 2002 to the highs of January 2004!
However, also take note of the bearish crossover of the 50 MA under the 200 MA. Note what happened the last time the 50 MA crossed over the 200 MA, will this same price movement occur once again, but this time to the downside?
On a long term basis, the Nasdaq bounced off an uptrend line. If the markets decide to rally hard this fall, then the Nasdaq could potentially rally to the downtrend line.
The uptrend line must hold, otherwise a fall to 1600 or 1500 is likely.
The Semiconductors are in a strong downtrend and have broken multiple supports:
The extremely weak semiconductors is not a good sign for the Nasdaq. However, some positive divergence exists in the MACD, though unless it rallies soon, this divergence will be lost.
The DOW pulled back on Monday and Tuesday last week which was not surprising given the negative divergence on the MACD.
Currently, the DOW has support at the uptrend line.
The 1 year chart of the DOW shows that it is near a major downtrend resistance line and an important breakpoint.
A longer term view of the DOW: Notice how the 50 MA has crossed below the 200 MA.
Is this the beginning of a long term downtrend? This potentially bearish situation can be negated by the DOW needs to rally and break the downtrend resistance line.
Long term view: Is this a bullish flag pattern?
The Downtrend resistance line needs to be broken, otherwise this will turn into a bearish pattern.;
The S&P has support at the uptrend line on the 60 min chart.
A longer term view of the S&P 500: Notice how the 50 MA has crossed below the 200 MA.
Is this the beginning of a long term downtrend? This potentially bearish situation can be negated by the S&P 500 needs to rally and break the downtrend resistance line.
The NYSE has resistance directly overhead at the downtrend line and support at about 6210.
Also take note of the 50 MA which has crossed below the 200 MA.
The Russel 1000 also resembles the DOW Jones and S&P 500: It's near a downtrend resistance line and the 50 MA has crossed below the 200 MA.
5. Market Sector Breakdown Along With Various Stock Picks From These Sectors:
As I stated in the first section, many indices and sectors are near resistance levels and the 50 MA has crossed under the 200 MA in most cases, except for most of the commodity based sectors.
The strongest sectors I see are: Aerospace, Aluminum, Coal, Banks, Basic Materials, Industrial Diversified, Electric Utilites, Gas Utilities, Oil Stocks, Steel, Telecomunications:
Hot Aerospace Stocks:
Hot Gas Utilities stocks:
Hot Electric Utility stocks:
Hot Electric Utility Stocks:
Hot Industrial Diversified Stocks:
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.
Comments:
This list is doing so well, I hope some of you are playing these, very rewarding.
I only added two new picks this week, and both of these stocks are thinly traded, therefore use extra caution with them. On another note PRCS is beginning to look interesting here and may breakout very soon. Interesting to also note that over 70% of the insider stocks have triggered long, which is impressive in my opinion for a stock watchlist.
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.
Triggered Insider Picks are Highlighted in Grey
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Symbol
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BP Price
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Comments
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9/4
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8.20
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Two insiders bought over 7.5 million dollars worth of stock between 8/20 and 8/26/04 form an average price of $7.
Very thinly traded stock, so be careful with this one. Resistance is about $8.20 with a target to fill the gap at about $10.5
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9/4
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see chart
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8 company insider buy about 114k shares on 9/1 for an average price of $10.79
careful, thinly traded stock
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8/29
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see chart
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Triggered long on 9/1, but has fallen back below the downtrend line. Stops just under the uptrend line at about $4.40
One of the beneficial owners bought 147,000 shares on 8/24/04 for an average price of $4.88.
Buy if the downtrend line is broken to the upside
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8/29
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5.25
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Triggered Long on 9/1 but pulled back and I was stopped out. May still run, but I will soon remove this one.
Two company insiders bought a total of 300,000 shares on 8/24/04 for an average price of $5
Buy if resistance at $5.25 is taken out.
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8/29
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see chart
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One of the beneficial owners purchased 500,000 shares for an average price of $16.05 on 8/20/04.
AN looks like a buy if the downtrend line is broken to the upside and the price target is $19
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8/29
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see chart
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New insider buying on between 8/30 and 9/2, may trigger soon
One of the beneficial owners bought 117,950 shares between 8/20 and 8/24/04 for an average price of $24.42.
HTV is a buy if the uptrend line is broken on good volume. Long term price target is the high at $29
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8/29
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see chart
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Triggered Long on 9/1, set stops below the downtrend line or a very loose stop under the uptrend line.
One of the beneficial owners bought 54,000 shares between 8/19 and 8/24/04 for an average price of $23.42.
Buy near the uptrend line and place stops just below it.
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8/29
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see chart
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One of the beneficial owners bought 500,000 shares on 8/24/04 for an average price of $9.75.
The volume can be light on this one, but is a buy if the downtrend line is broken to the upside. place stops under the uptrend line.
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8/21
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$21.30
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Triggered Long on 8/30 ong very strong volume. To insure a profit, sell 1/2 of your shares and reset your stop to your buy in price to insure a profit. Let the rest run.
Insider buying of 150,000 shares on 8/16 for an average price of 20.08
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8/21
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$19.75
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Triggered long on 8/27 on strong volume. Reset stops to about $19
LET THE REST RIDE AND MOVE STOPS UP ACCORDINGLY.....
Insider buying on 8/18, at 19.08
Resistance at 19.75 and support at uptrend line
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8/21
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$21.70
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Triggered long on 8/27 on huge volume. TIE split shares 5:1 last week. Sell 1/2 shares and reset stops to original buy in price which will insure a nice profit.
LET THE REST RIDE AND MOVE STOPS UP ACCORDINGLY.....
Insider buying of about 1/2 million dollars by one of the benefical owners on 8/13 for an average price of 19.95.
Resistance = 21.70, support at uptrend line
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8/21
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$50
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Triggered long on 8/22, took out resistance on good volume. Reset stops to buy in price.
LET THE REST RIDE AND MOVE STOPS UP ACCORDINGLY.....
Director buys 14519 shares on 8/18 for an average price of 47.66.
Resistance at 50
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8/21
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$11
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Insider buying of 62,000 shares on 8/17 for an average price of 9.31.
Resistance at 11, support at 9
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8/21
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see chart
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Triggered long on 8/31, took out resistance on good volume. Reset stops to buy in price to insure a profit.
3 directors bought about 2 million worth of stock between 8/13 and 8/18 for an average price of 11.08.
Nice pick up in volume, but I would wait for a pullback before buying STMP.
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8/21
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see chart
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Insider bought 150000 shares on 8/20 for an average price of 8.25.
Resistance at downtrend line, targets 10 and 12
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8/10
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$2.70
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Looking good here, nice pickup in volume, may soon trigger
One of the board of directors bought 776,475 shares for an average price of $2.45 on 8/3.
Looks like a good buy if $2.70 resistance taken out.
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8/8
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$14.35
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Triggered long on 8/16, took out resistance. Reset stops original buy in price and sell 1/2 to insure a profit.
LET THE REST RIDE AND MOVE STOPS UP ACCORDINGLY.....
nsider buying on 7/30 for an average price of $12.50
Resistance at $14.35, and first target at $15.70
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8/8
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See Chart
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Triggered long on 8/31, however volume was light. Place stops just under $4
2 company insiders bought about $10 million worth of stock on 8/2 for an average price of $14.75.
Support at the uptrend line, and a low risk place to buy
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8/8
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See Chart
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Triggered long on 8/16, took out short term resistance. Keep moving stops up
5 corporate insiders bought over 35 million worth of stock between 8/4 and 8/5 for an average price of $20.20
No pattern here and the chart doesn't look that good, however with the insider buying, might want to keep this one on the radar. Support is at $20
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8/1
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See Chart
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8/16 Triggered long, by breaking symmetrical triangle to the upside. - new insiders keep buying each week
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
Strong uptrend line, nice symmetrical triangle
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8/1
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See Chart
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Triggered long on 8/30 by breaking downtrend line. Volume is real light on this one, so becareful. Set stops a few % below the downtrend line.
5 beneficial owners bought about $5.5 million worth of stock on 7/23 for an average price of $3.54.
Represents a buy if the downtrend line is broken.
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7/25
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See Chart
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Triggered long by breaking flag on 8/16. Nice run so far, sell 1/2 shares and reset stop to original buy in price to insure a profit. Next breakpoint is just overhead.
LET THE REST RIDE AND MOVE STOPS ACCORDINGLY....
Very large insider buying: Beneficial owner buys a total of $173 million worth of stock for an average price of $33.33 on 7/16/04!!!
Could be bought if the downtrend line is broken to the downside.
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7/17
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See Chart
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Finally Triggered long on 8/28, let's see where it takes us. Stops in just under $10
16 company insiders recently purchased shares for an average price of $10. 1st price target = $10.75, 2nd price target = $12.50
Huge pick up in volume, as well as positive divergence to boot.
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7. US Dollar, Gold, Precious Metal Stocks:
US Dollar
When discussing gold and precious metals, the US Dollar is paramount and holds nearly all the power over the direction of gold. Eventually, the gold will move up regardless of what the Dollar does, but at this point in time, the two are still linked closely together.
The Dollar could do anything at this point: It is still stuck between support and resistance. Support is at the utprend line and resistance is at about 90.45. If the Dollar breaks support, then gold will enter a major rally. However, if the Dollar breaks resistance, then gold will enter a major downtrend.
It's still a waiting game, but it will likely be decided in the next few weeks.
However, when one looks at a slightly longer term view of the US Dollar, you can see that a very large symmetrical triangle is forming. As students of technical analysis, we know that symmetrical triangles usually produce very strong price movements, either up or down.
This chart is very important in my opinion: If it breaks to the upside, then a large rally will occur in the Dollar, thus resulting in a very strong pullback in gold. However, if this triangle breaks to the downside, then a large decline will occur in the Dollar, thus resulting in a very strong rally in gold and precious metals.
As you can see, the Dollar is at a very important Breakpoint, which also means that gold is a well.
This next chart is very interesting: Basically it is the US Dollar chart inverted with the symbol $ONE, which equals to 1. Up is really down and down is really up:
This chart could break either way, but it is beginning to breakdown to the downside (which is really up). It's not confirmed yet, but a break below 0.011 will confirm it.
Gold Metal
Gold metal pulled back last week due to the strengthening US Dollar is still between support and resistance. Eventually gold will move up regardless of what the Dollar does. Gold chart still looks bullish, but if the Dollar rallies strongly and begins a new uptrend, then this minor pullback could get ugly.
Gold metal has support at the broken downtrend line near $400, and the uptrend line in the low to mid $390s.
Longer term view: Gold has support at the broken downtrend line and the uptrend line. What the US Dollar does in the near term will determine the fate of gold.
Longer term view of gold metal. Note how it tends to form symmetrical triangles prior to a big movement. Let's hope that move is up.
The HUI has strong resistance at the downtrend line and support at the uptrend line.
However, what gold stocks do here will ultimately depend on the strength or weakness of the US Dollar. If you follow precious metals, it is safer to wait and see what happens with the Dollar before speculating on gold and precious metal stocks.
60 min. chart: Support at about 200 and 190
The long term chart of the HUI appears to be forming a bullish flag and is on the verge of breaking out to the upside.
However, once again, the HUI's direction will depend on what the Dollar does, which is at a Breakpoint.
The HUI/Gold ratio has broken a downtrend line, thus hinting that gold stocks are currently, and will continue to out perform gold metal.
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