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September 7th, 2003 Newsletter



Table Of Contents:

Click on the section titles below to be automatically taken to that section:


Part 1: General Market Analysis

Administrative notes:

I was in the chat room on Friday and several members commented to me about how well their trading has been doing since joining Breakpoint Trades. One member stated that his account is up over 300% since joining! Another said he is up over 200%, and another stated he is up 160% since joining in July, while many others said they are up 100% or more. These are just staggering percentages when you think about it. Sure, the market is up nicely this year, but nothing close to these percentages. In fact, these would be astounding returns even in the high flying 1990's. When you consider the fact that this website has only been online since the middle of March, these returns seem even more impressive as they have been made in only a matter of a few months.

Anyway, I would like to document some of the members success stories in a 'Testimonials' sections on the website. Therefore, I'd really appreciate it if some of you would email me your success stories.

Please send your success stories or testimonial to me: matt@breakpointtrades.net

Last week I mentioned the concern about higher oil and gas prices that could result if crude oil broke out to the upside. Thankfully this is now longer a concern as crude oil broke the up trend line of the triangle to the downside.

Last week I wrote: "One thing I've been noticing over the past few weeks is that many of the breakout stocks I have been playing and doing the best with (besides Gold stocks) are in the Biotech Sector. I did a check of hot sectors and found that the Biotech Sector is currently one of the hottest sectors. The chart below illustrates this very well as the Biotech Index ($BTK) has formed a Bullish Flag that could break to the upside at any time. If this sector breaks the flag to the upside, then expect many more breakouts to show up from the Biotech Sector."

Last week, the Biotech sector broke out to the upside of the bullish flag. This is very bullish and may cause biotech stocks to rally much further, and send BTK to the $500s. I suspect that biotech stocks will continue to show up on the watchlist as good breakout candidates.

Last week, the TLK tradeable Indonesian fund (from the Foreign Investments section) broke out of its bullish flag on major volume to form a new high. I hope some of you caught this one, I did.

A few weeks ago, I high lighted the 10 year bond yield chart and discussed the dangers and repercussions it would have on our economy via much higher interest rates if it broke the down trend line to the upside.

Well, thankfully the Ten Year bond yield did not break the down trend line and is turning back down. This action has helped housing stocks in the short term and is probably one of the major reasons why the general market itself has rallied the past few weeks.

However, even though it's falling now, I bet that it will eventually rally and break that down trend line, thus causing interest rates to rally and the general market to crash, especially housing stocks. However, this could take some time and may not happen for months.

VIX analysis:

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 daily VIX chart isn't telling us anything different then it has for the last month. It is near support and could rally here causing the market to fall or it could fall to break support and cause the market rally to be extended. The VIX isn't very useful at this point, only that it is at low levels which usually signal the market is over bought. However the market can remain in overbought and oversold states for some time.

Below is a long term chart of the VIX. IT looks like the VIX may fall to multi year support at 18 which could provide the market with one more short rally. This longer term chart is probably more useful then the short term VIX chart above.

The general market rallied early this week thus causing the Nasdaq to breakout to new highs and the S&P 500 to break out of its horizontal rectangle pattern to the upside. These breakouts on the major indices may be bullish for the general market, especially the S&P 500 breakout. However, remember that a simple break of resistance is sometimes not enough. I would like to see the major indices pullback and form higher lows or confirm their former resistance levels as supports.

While the major indices look bullish on a technical basis, it's hard to imagine them rally much further without a major pullback soon. Note that September and October an historically bearish months for the stock market.

First the Nasdaq:

The Nasdaq has shown amazing strength this year. The current Nasdaq up trend began in March when the Nasdaq was in the 1200s and has rallied all the way to the 1850s. While the daily chart of the Nasdaq is technically strong, I can't but help thinking that this rally can't go on much further without a significant pullback.

Notice the inverted hammer candlestick that was formed on Friday of last week? This could mark an interm high for the Nasdaq and I suspect the Nasdaq will pullback early this coming week, possibly starting on Monday. As of yet, it's too early to say if this is the exact top of the market, however it is probably a short term top. Also keep in mind that September and October are usually bad months for the stock market.

Below is a longer term view of the above Nasdaq daily chart. Like I said above, the Nasdaq may have hit an interm high last week and may likely pullback. On a pullback, 1815 might act as support.

If the Nasdaq pulls back and finds support and begins another rally, the price target would be about $1945, denoted by the red dotted line.

Below is a chart of the Nasdaq on a 60 minute time basis. If the Nasdaq pullsback this week, there may be supports at the gap, then 1815, and the up trend line.

DOW daily chart:

Current Analysis:

The DOW made a new high last week, but pulled back on Friday. There is support at the up trend line and 9350 on a continued pullback. Last week might have marked an interm top for the DOW and the general market.

Below is a chart of the DOW on a 60 minute time basis. Note that the Stochastics are oversold and there is strong support at the up trend line on a continued pullback.

The S&P 500 daily chart:

The horizontal rectangle has been broken to the upside at 1015. The general market now has the potential to rally to new highs again this year, possibly sending the S&P to 1050 at least. However, the S&P needs to confirm that 1015 is now support. Realize that just breaking 1015 is not enough, the S&P needs to form a higher low and possibly confirm 1015 as a support.

Below is longer term view of the above S&P 500 chart. Here you can see where I come up with the 1050 price target (which is the resistance low set back in May 2002). However, the S&P needs to confirm that 1015 is now support. Realize that just breaking 1015 is not enough, the S&P needs to form a higher low and possibly confirm 1015 as a support.

Below is a very long term view of the S&P 500. The horizontal rectangle has been broken to the upside at 1015. The general market now has the potential to rally to new highs again this year, possibly sending the S&P to 1050 at least. However, the S&P needs to confirm that 1015 is now support. Realize that just breaking 1015 is not enough, the S&P needs to form a higher low and possibly confirm 1015 as a support.

Part 2: Gold Analysis

Gold metal looks very strong here, as it has broken the Symmetrical Triangle to the upside and taken out the $375 May resistance high. The next resistance area is about $380, and then the high set back in February. I think Gold will eventually rally to new highs and will see $400 plus a share later this year.

Based on triangle height measurement, a generic price target of Gold is about $425 - 430!!! I arrive at this figure by measuring the height of the triangle and adding it to the breakpoint. The height of the triangle is about $60 ($380 - $320 = $60), add this to the breakpoint at $368 = $425 to $430. Also note this corresponds almost exactly with the resistance level from the long term chart as seen further below. However, realize that this will take some time to come to fruition with pullbacks along the way.

The US Dollar appears to be breaking, or close to breaking, the up trend line that began in June. If the Dollar begins another down trend, this could be the fuel that launches Gold to the $400's in the short term, as will be discussed later in further detail.

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. Here you can see two triangle formations, triangles are simply consolidation patterns before a large price movement. Amazing to see two such beautiful triangle patterns together on a chart.

On an ultra long term, gold is above a 15 year down trend line. If the recent consolidation on gold is broken to the upside, gold has a shot at $425. Again, note how this correlates nicely with my computed price target based on triangle height measurement - The height of the triangle is about $60 ($380 - $320 = $60), add this to the breakpoint at $368 = $425 to $430.

The HUI broke out of a "text book Ascending Triangle", with the breakpoint at 157.8 in July. This breakout level was significant for gold stocks, especially those in the HUI index. Anytime a multi year resistance level it is broken, an explosive price appreciation usually occurs, which we are enjoying right now. What's exciting is that a long term price target of the HUI is in the 200's based on height measurement of the triangle (75 + 158 = 228 or about $225-230). The HUI could pullback at anytime to digest its gains, however I think any pullback will be temporary and I would use it to buy more gold stocks.

Currently, the HUI is very strong, however I think there is a good possibility that the HUI may pullback soon. The HUI is very close to the round # of $200 and may have some trouble breaking this area on its first attempt. However, even if the HUI can't break $200 right now and pulls back, I think it will represent yet another buying opportunity.

Early in the summer I mentioned that the HUI could easily run to the $200s once the resistance high of the triangle was taken out. Not to toot my own horn, but so far, I've been right on.

Unfortunately you cannot play the HUI directly like you can with the XAU, you can only play the stocks within the HUI, (components of the HUI)

Gold stocks in the HUI may be getting a bit over extended in the short term. The HUI is very close to the round # of $200 and may have some trouble breaking this area on its first attempt. However even if the HUI can't break $200 right now and pulls back, I think it will represent yet another buying opportunity.

Remember that gold is in a bull market, therefore the easy strategy is to hold long term core positions and accumulate on dips.

If the HUI pulls back in the short term, the 60 minute chart below shows you the possible support levels, the closest being about $195, 190, and strong support at the up trend line.

The XAU is also doing very well, and has rallied nicely since breaking out of the Symmetrical Triangle. The XAU has rallied to a new high, breaking the $89.10 high set back in may 2002. This is very bullish and sets up the XAU for more gains. Note that based on triangle height measurement, a rough price target for the XAU is about $110. Unlike the HUI, the XAU can be bought directly, and is optionable.

Below is a closer view of the XAU index. the red dotted lines might act as support.

If the XAU pulls back in the short term, the 60 minute chart below shows you the possible support levels, the closest is the gap and strong support at the up trend line.

One must not lose site of the fact that gold is in a long term bear market. Therefore, despite what individual gold stocks may do in the short term, many of the long term charts look very bullish, click on the stock symbols in the table below. When you look at the gold charts in the table below, you will see that gold stocks are breaking out of multi year bullish stock patterns such as Ascending and Symmetrical Triangles. Gold stocks may pullback sharply in the short term, however the weekly charts show that you should be holding gold stocks for the long term.


Weekly Long Term Gold Charts

< $2
 
 
 
$2 - $5
$5 - $10
HL  
 
 
$10 - $20
> $20
 
 
 

The US Dollar:

The US Dollar has been on a strong up trend since June. However, last week, the Dollar fell and has fallen below 97.6 which was a support level and appears to either have broken, or is close to breaking the up trend line. I would like to see one more down day will confirm that the US Dollar has broken its up trend line.

If the US Dollar begins a new down trend here, this could be the fuel that launches Gold to the $400 plus price level. Also realize that a falling Dollar could end the general market rally we are currently enjoying in the DOW, S&P, and Nasdaq.


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