September 26th, 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, Long Term Investment Ideas, and Mics Comments:

3. Market Indicators

4. Major Indices: Nasdaq, DOW, S&P:

5. Market Sector Breakdown:

6. Insiders Buying / Technical Supported - Stock Picks:

7. Gold, US Dollar, Precious Metals Stocks:

1. Administrative Comments:

Made a few changes to the insider section as well as the market indicator section. On the insider section, new and untriggered picks are now at the top, while triggered picks are below in grey. Picks that have been stopped out are in red.

I am constantly improving the site and will continue to do so. This website has now been online since March 2003 and has only gotten better.

2. Market Comments, Long Term Investment Ideas, and Miscellaneous:

The Market pulled back last week on all the major indexes. The the Fed also raised interest rates by 0.25% to 1.75%. on Tuesday The DOW Jones and S&P 500 found resistance at their respective 10 month downtrend resistance lines, both of which are in a downward channel. The Nasdaq is the weakest of the three major indexes and also pulled back last week, likely due to the pullback in the Semiconductors.

The market indicators of the NASI, NYSI, and VIX are very close to giving sell signals: Note that these three indicators all gave buy signals back in mid August. These three indicators seem to work in tandem and are very reliable in predicting intermediate market trends lasting about 1-3 months. If they give a sell signal, then expect the market to pullback for at least several weeks. However, that said, I do not think a pullback here will be the start of a major downtrend. Likely, a pullback would last a few weeks to a month and then a rally would begin in November and last till early January. - see the market indicators section below for more details.

Oil is really spooking the market as it has been rallying hard this month. Oil stocks are also rocking. The chart below shows that oil has support at the uptrend lines. As long as oil continues to march north, the Market will remain weak. This is not good for the economy in the long run as it causes all commodities to become more expensive.

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Surprisingly, long term interest rates continue to fall, despite the FED raising long term rates. The chart below shows that long term rates broke a support uptrend line and it would seem that lower rates are yet to come. Apparently, Bond Traders think there's trouble ahead and do not believe the FED that the economy is in good shape.

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3. Market Indicators:

First, let's see what the market indicators are telling us:

NASI - Nasdaq Summation Index

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 at least two concurrent buy or sell signals

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.

or

#1. Whenever the Parabolic SAR gives 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 6 weeks ago in early to mid August. This indicator has proven very useful.

As noted above, the 5 MA can give whipsaw signals:  I've found that the Parabolic SAR gives buy/sell signals without as much noise:

Currently, the NASI is very close to giving another sell signal for the Nasdaq: The NASI is very close to crossing changing direction and crossing below the 5 MA. Also, the MACD look like it may soon turn over and the Stochastics are way overbought and could turn down at any time.

However, if a sell signal is generated shortly, remember this indicator can whipsaw quite a bit. However, the fact that the MACD and Stochastics are high makes me think a sell signal may not be a whipsaw, but a true sell signal. Generally, the first few weeks of October are weak.

However, I do not think the market will simply sell off: Market tops take a while to form an I think a pullback here will be temporary and last a few weeks at most. Then the markets could be set up for one last rally in November till the end of the year.

Using the Parabolic SAR, notice that fewer whipsaw buy/sell signals were given, but all the major moves were caught. Once again, no sell signal from the NASI just yet, but it may give one soon.

NYSI - NYSE Summation Index

The NYSI works similarly to the NASI: Note that the NYSI is either very close, or has already given a sell signal via the 5 MA and MACD crossover - still waiting on Stochastics to cross below 80 to give a third sell signal.

Semiconductor and Nasdaq Correlation:

The Semiconductors are very important to the strength/weakness of the Nasdaq: The Semiconductors found resistance near 1060 and are pulling back. The volume picked up on the sell off but I think a pullback in the Semiconductors will be temporary as positive divergence is forming in the MACD. The Nasdaq cannot rally unless the Semiconductors rally, therefore if the Semiconductors remain weak, then the pullback in the Nasdaq may continue and the NASI will likely produce a sell signal.

Small Cap and Large Cap Correlation:

Small caps usually lead large caps in a healthy Market. So far that has been the case since mid August. Once this indicator changes direction and heads down, so will the Market.

The VIX moves in an indirect correlation to the Market, e.g. when the VIX goes up, the Market falls, and vice versa.

Currently, the VIX is in an uptrend and forming a small bullish ascending triangle. If the VIX breaks this triangle to the upside, the Market will pullback strongly. Subsequently, the NASI, NYSI, and other indicators will likely give sell signals near the same time.

Note how the VIX broke the uptrend line back in mid August?  This even set the VIX on a downtrend, which caused the Market to rally strongly. This breakdown was a major buy signal for the Market. If you look above at the NASI and NYSI, you will also notice that they also gave buys signals near the same time the VIX broke the uptrend line.

This is a good example of how to use multiple market indicators together to predict Market trends with very good accuracy.

On a daily chart, the VIX also looks like it is generating a sell signal via the MACD.

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4. Major Indices, Nasdaq, DOW, S&P, other:

Nasdaq:

60 min chart

60 min:

The 60 min chart shows that the DOW broke support last week at 10200, but has support near at about 10000.

Daily Chart:

The 1 year chart of the DOW shows it is in a downtrend channel or possible bullish flag and is between support and resistance. Major resistance at the downtrend line and major support near 9750. However, I suspect 10000 will offer short term support. Technically speaking, the S&P has also formed a 4th lower high and will likely continue to pullback.

The S&P 500:

60 min:

The uptrend line in the S&P 500 was also broken last week and now sits at a support level near 1100. If 1100 fails to hold as support, then a pullback to the next support, at about 1080 could easily occur.

Daily Chart:

Sectors Page

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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.

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.

- Triggered Insider picks are Highlighted in grey below and

- Positions stopped out are in red

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7. US Dollar, Gold, Precious Metal Stocks:

US Dollar:

Gold metal, like the Dollar, is still confined within a triangle and waiting to see what the Dollar does. Obviously, if the Dollar breaks to the upside, then the gold triangle will break to the downside and vice versa.

Longer term view: Gold has support at the broken downtrend line and the uptrend line and resistance at the downtrend line which forms a nice symmetrical triangle.

Notice how both the US Dollar and Gold metal have formed symmetrical triangles together? Obviously a big move is upon us, whether it be up or down, we should get confirmation in the next few weeks.

The next chart is essentially the same chart as above, but on a logarithmic scale. Pretty looking chart:

Silver Metal:

Silver has technical broken down and now appears to be forming a bearish flag. However, if the Dollar breaks down and gold rallies, then Silver will likely recover.

Gold Stocks:

PAL is a Palladium stock and a buy signal triggered last week as it broke a downtrend resistance line on good volume.

SWC is another bullish Palladium stock with resistance at the downtrend line. Once the downtrend line is broken, a buy signal will be generated.

For the long term, I like SWC the most: It has a huge long term upside potential of about $40 and an intermediate upside potential of about $24.

Once the triangle breaks to the upside, a long term buy signal will be triggered for SWC!

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