Market Clues

The stock market dipped until it hit a polytrendline and reversed course very quickly Tuesday afternoon. The daily chart of the S&P 500 illustrates how precisely the market found that support line:

That "W" polytrendline was at 1094.41 Tuesday; the S&P 500 Index made the day's low at 1094.72.

This is a market which wants to go higher this week. Yes, we are skeptical that the rally can extend into next week, but the Employment Report, which comes out on Friday morning at 7:30 am CDT, could turn this into a very big rally (as well as putting in a short term top). That's because that report has understated job creation for the past two months. Other reports on the economy have not confirmed the mediocre new jobs data in those employment reports. Also, the household survey has shown huge job numbers in direct contradiction to the establishment survey which the media obsesses about. This suggests that the previous reports were undercounting the number of jobs being created and that, at some point, those jobs that were missed are going to show up in this report, either as new jobs for August, or as revisions to prior months' data. If that happens Friday morning, the day before the long Labor Day holiday, it could hit a very illiquid stock market. This has happened before and it wouldn't be surprising to see the Dow up over 300 points in a flash. That kind of shock would probably put in a short term top.

We're right in the sweet spot of the Monthly Buying Spree. Given a little short-covering to add fuel to the fire, this month's rally could be a real barn-burner.

Bonds / Interest Rates

A large number of new jobs created could knock the bond market for a loop this week:

MyClues Home Page Link

The stock market dipped Monday, in line with the typical monthly seasonal we call the Monthly Buying Spree. The dip cooled some of the bullish enthusiasm among OEX traders, but not all the way into the overly-bearish category. The ratio of call and put dollar volume closed right in the neutral zone close to 1.00.

Not so for the QQQ traders, who welcomed the dip with a rush of call buying. QQQ traders have an enviable track record at calling short term moves in the market, so this cannot be reasonably interpreted as bearish. However, no indicator is perfect.

The last trading day of the month sees the broad market close up 70% of the time. As far as August is concerned, the tendency isn't quite as strong due to the fact that volume is typically light as traders take vacation ahead of the Labor Day Holiday (first Monday in September). This month, the market has sprinted up the hill and needed a pause. It also handily cleared the middle Bollinger Band, implying a test of the upper band is likely. We think that test will come on Friday. The middle band should now act as support.

Samll Cap stocks, represented by the S&P 600 Small Cap Index, have traced out a perfect lens pattern this year:

As the pattern suggests, the market has great freedom of motion within the pattern both up and down.

Gold Stocks

The gold stocks reversed sharply lower Monday, but since the last rally was able to penetrate the upper band, a retest rally is likely before a bigger reversal:

MyClues Home Page Link

After bottoming on Friday the 13th, the stock market rally continued at a sustainable pace last week. Although volume has slacked off during the last part of the summer vacation season on Wall Street, our exclusive accumulation-distribution indicator says that what volume we've had has been on the buy side for several weeks now:

The market has gone from the bottom of the range to near the top. On some measures, the market is overbought, which is bullish for the larger trend. We have been looking for a period of rest or retracement and the rate of growth in stock prices has slowed over the past few days. This is a welcome development and bodes well for the larger trend.

With the Monthly Buying Spree due to get started Monday, the bears could be in for a big surprise this week. According to our short term sentiment gauges, most option speculators are bearish (the QQQ traders, who are usually right about the very short term direction of the market, are quite bearish). On the larger picture this is very bullish because after a two-week rally, the fact that option specs are not wildly bullish tells us the rally has legs.

This coming week will see the release of the August Employment Report. The last two reports have shown a mixed picture when it comes to job growth. Most of this is due to data collection and reporting errors by the Bureau of Labor Statistics, whose so-called Birth/Death Model has artificially deflated the jobs numbers by actually subtracting new jobs from the number actually reported by businesses. Moreover, the two surveys used by the BLS, the establishment and the household surveys, are quite contradictory and very suspect. For instance, in the July household survey, the number of jobs created rose by a whopping 629,000, while in the establishment survey, only 32,000 new jobs were created. One of those surveys has to be wrong and it's very likely that the establishment survey is the one at fault for a number of good reasons (see The jobs numbers that you're not hearing about for an explanation of why that survey is wrong). The media, however, only reports the number for the establishment survey, so the impression given to the average reader is that few new jobs are being created and that the economy is not growing.

It's true that there was a "soft patch" in the economy over the summer, as Alan Greenspan so colloquially puts it. But, a look at the Federal Reserve's numbers shows that "soft patch" may already be behind us:

After hitting our upside target, the price of oil has been coming down. You may have noticed an interesting bearish divergence yourself at the gas pump during this last streak of high oil prices: Despite the fact that oil prices went to higher highs in the trading pit in New York, the price of a gallon of gasoline at the pump stayed well below its peak from two months ago. Did you think this divergence was a sign of a topping oil market? Apparently, it was. It was also a sign that it was oil speculators who were pushing the price of oil up, not the market. In fact, the supply-demand equation would argue for lower oil prices this year compared to last, as this article points out: Speculators blamed for high price of oil.

The falling price of oil should help the economy by putting more money in the pockets of consumers. It also should hurt bond prices because bonds hate a strong economy.

MyClues Home Page Link

This week in our Detailed Comments Page we look ahead at just how far this uptrend in stocks will carry. We think you'll be pleasantly surprised!

One of the better leading indicators for Wall Street is not in New York City, it's in London -- the Financial Times 100 (FTSE) Index. It has oftened warned investors of "The Shape of Things to Come." For instance, in the 'Twenties, the great speculator Jesse Livermore had London trading results wired to him in New York City early in the morning so he could get a jump on the action on the floor of the NYSE. Thus it was not surprising to find Livermore one of the big winners in the October 1929 Crash since he had advance warning of it from London.

While we're still waiting for most of the US indices to make their moves above prior trading highs -- even CNBC is identifying key swing points now -- London already took out its prior swing point on Thursday, as Tom O'Brien pointed out on his Thursday afternoon broadcast (archived at http://www.TFNN.com/). And, the FTSE did so right after breaking out above and then retesting as support that polytrendline we've been watching:

One thing Tom pointed out was the fact that it took the swing point out on lighter volume. While that is a negative, we don't think that is going to be enough to stall the rally for long, although we certainly will need to see volume pick up in September to confirm the trend. That's because this is August and you always have lighter volume in August. It's normal. Traders are on vacation. So, you have to allow for technical non-confirmations, especially with volume, at this time of the year.

One of the positives in the chart is that Thursday's rally cleared the 61.8% retracement point (4438.88) of the entire correction that started at 4601.60 in April. Another positive is that we're coming off that very bullish double bottom formation of July-August. At the rate the polytrendline is rising, we should be back to testing that April high by 22 September.

It's pretty amazing to see that the FTSE has tested that polytrendline eight times so far, with the latest test (successful as support) on Wednesday. It may very well come back to retest it as support again, especially since the index is pushing on the upper Bollinger Band. One development that would be very bullish would be for the index to close above that upper band. Normally, a close, preferably two or three, above the upper band is a good sign that the market is going much higher even if it does suffer a minor pullback to gather strength for the next assault on the band.

Now, what we would expect to see is more consolidation in both London and New York so that the market can put in a good upside performance next week. We may still see lighter volume next week due to the fact that the Labor Day holiday comes on September 6th and there may still be traders and investors on vacation next week, but we will want to see that polytrendline hold the market and help give it a shove up the hill.

Broad Market Under Accumulation

While the broad market has certainly taken its lumps over the past three months, the accumulation trend in the Rydex S&P Equally Weighted ETF has been on the upside during the entire period. This is pretty remarkable and suggests the broad market may just be heading for new, all-time highs in this rally:

This ETF is highly correlated to the performance of the Value Line Index, which was the best stock index by far last year as it recovered all of its bear market losses and went to substantial new highs. Recalling yesterday's chart, we said that the broad market could be in wave C up from the 2002-2003 bottom. If that's the case, new all-time highs should be seen in just a few weeks from now.

A measured move in RSP targets 155.83. The stock closed at 136.50 Thursday. That would represent a gain of about 14% from current price levels. If the Value Line Index were to make a similar measured move, it would target 1815.93, for an estimated gain of approximately $28,900 per futures equivalent contract. An alternate measured move using the high and low points of the entire correction yields an even higher target of 1862.67, very close to our original target of 1850.

MyClues Home Page Link

We went into Wednesday's session expecting initial weakness, then a sharp rally. And, that's what happened:

The 5-wave up sequence probably indicates the market needs a breather here. We'd especially like for the market to dip here going into next week's Buying Spree that's due to start on Monday. Retracements allow traders to take profits and latecomers to buy on dips and such a retracement here would help setup a rally phase next week.

We haven't looked at the broad market much lately since we expected the blue chips would be leading the charge up the hill. However, the broad market has been putting in a respectable performance as the VLE-DJ spread has been working its way back toward the upper polytrend channel line:

The key test for this indicator will be how it handles the upper channel resistance line. A failure there would likely redirect the spread in the downward direction, but a breakout would be considerably more bullish and likely signal that this rally is wave C of an A-B-C sequence starting in either October 2002 or March 2003. Wave B would be the 7-month water torture decline that has killed time rather than substantial price this year. If that is the case, wave C would carry the market into early 2005.

Sentiment

Our short term sentiment gauge did a great job of pointing the way up. Tuesday's readings showed OEX traders bearish and QQQ traders bullish. Since the OEX figures pointed toward a rally and the QQQ figures agreed, that's what we got Wednesday. Wednesday's figures show the OEX pit joining the QQQ crew in the bullish camp, so we think that this rally has just about run its course for now and will rest going into Monday.

MyClues Home Page Link

Ken Fisher (www.fi.com) sent us a report he recently prepared which included a very interesting study he did on stock market returns when the Federal Reserve raises short term interest rates. He studied the historical spread between short and long-term interest rates and identified thirteen major cycles of expanding and contracting spreads between long and short term interest rates. He found that "when the spread started contracting, usually as the Fed increased interest rates, the S&P 500 tended to outperform. In all thirteen cycles since 1955, the S&P posted an average gain of 5.9% and 10.7% in the first three and six months, respectively, after each contraction began. In fact, in the first six months the S&P rose over 3.9% in every instance."

He concludes that, "If the spread continues to contract, the historical trend suggests good stock returns for at least the next six months."

It's easy to see why initial Fed tightening is bullish. In most cases, the Fed is responding to rising inflationary expectations and rising demand for money from business and consumers. With real interest rates (nominal rates minus the inflation rate) still negative, monetary policy is still very expansionary. In other words, the first few interest rate hikes are analogous to the Fed easing back very slightly on the accelerator, still bullish for increasing earnings potential from stocks. It has not yet reached the point where it actually is stepping on the brakes and dimming the earning potential for the stock market as a whole.

Short Term Notes

This market doesn't seem to want to do much in the way of correction here despite being short term overbought, which is bullish. Also, OEX traders are leaning toward the bearish case while QQQ traders are leaning the other way, factors which are both bullish (QQQ traders tend to be right more than wrong, while OEX traders are just the opposite). And, the chart of IBM suggests we might see a trading low in place Wednesday afternoon which could help lead the market higher:

Of course, the contracting triangle is short term bearish and should lead to a decline for at least the first few hours of trading Wednesday. Here, we're using IBM as a proxy for the Dow Industrials. 3M is holding up better than IBM, which supports the idea of a very shallow retracement before the next leg up. The support polytrendline in IBM comes in about where a thrust down out of that triangle should find support, so the dip may be just enough to entice the short sellers into taking positions before the trap is sprung and the market leaps higher. With the Monthly Buying Spree due next week (August 30-September 3), we think the market has the potential to reach a minimum of 10200 on the Dow, with the upper Bollinger Band (currently just above 10500) a definite possibility for the next rally.

Gold Stocks

The price of gold in Rand declined Tuesday, sending Harmony lower. In fact, the price of gold also fell sharply in US Dollars. This occured just as the rising support polytrendline in Newmont rolled over its peak, which emphasizes the idea that paper profits need to be converted to cash for the next buying opportunity.

The next Employment Report is likely show strong job creation figures for the US economy, which could lead to a stunning rally in the US Dollar and a fall in gold prices. What we're seeing now may just be a preview of coming September attractions as the Dollar Index breaks out above the long term resistance in the DX Cash daily chart on the Daily Futures Charts page. (Note that, due to quote problems, the cash dollar index chart on the Daily Index Charts page is not up-to-date, so use the one on the futures page instead).

MyClues Home Page Link

The stock market rally entered its eighth day Monday and clearly showed signs that it needed a rest. After being driven hard by option short sellers last week, who successfully parked their options neatly on Maximum Pain, the market started a short term correction Monday. Two of the leaders, IBM and MMM, clearly warned of the downturn:

We can tentatively target the next trading low in the Dow using the polytrendline formed from recent intermediate highs (assuming Monday's high is not taken out in the meantime, of course):

Normal corrections retrace 38.2-61.8% of preceding rallies. The rally covered 347.19 points, so a halfway (50%) correction would see the market give back 173.60 points and find support at 9957.50. A minimal 38.2% correction would target 9998.49, while a maximal correction targets 9916.52. Anything more than that and a retest of the polytrend support line at 9801.40 (next Monday's value of the trendline) becomes a high probability target for a reversal. Remember, the intermediate trend is dead neutral here, gradually turning up as the Presidential Election nears.

What does this mean for traders (not investors)? When the intermediate trend is neutral, you must protect those trading profits by moving to cash (or short if you're a very nimble short term trader) and wait for the next buying opportunity to jump back into the market on the long side. Now, if the intermediate trend were strong on the upside, you could afford to just "sit" on your position. But, in this trend, you cannot afford that luxury.

And, whether you're bullish or bearish, you must realize that very light volume within a trading range will always allow a freedom of price movement. Thus, if the buyers are "out of the building", prices could return down to retest support in a hurry. Such a retest, especially if it occurs early next week right at the beginning of this month's "Buying Spree", would be a great low-risk buying opportunity, but only if you use a tight sell stop price.

Dollar Index Rallies

The US Dollar Index rallied sharply on Monday, breaking up and out of its recent downtrend. This either prolongs the trading range activity, extending it until the support polytrendline "catches up" to the index, or we will see the DX break above long term resistance. We think the former will happen and would represent a great buying opportunity (combined with a close sell stop order in the futures). But, if the market breaks out, we don't intend to chase the US Dollar higher.

However, we caution gold and gold mining stock traders to watch the US Dollar Index carefully and take action to protect yourself from big moves in the dollar index in coming days. US gold mining shares are particularly vulnerable to big rallies in the US Dollar Index. Even foreign gold mining shares are vulnerable even if the price of gold does go up when the foreign currency falls (witness the decline in Harmony Monday versus the rise in the price of gold in Rands).

The possibility that this rally is a wave b which is ending now, with a wave c to the downside about to get started, has to be seriously considered and profits protected:

MyClues Home Page Link

The stock market, after forming a turning point low exactly where the Bradley Model predicted it would,* has rallied sharply higher. The low was 9783.91 on the Dow and the high Friday was 10126.90, a rise of 342.99 points (3½%) in just six trading days.

If resistance at the early August high of 10203.60 fails to put a top into the rally, next current resistance at the upper band is at 10244.50. If the Dow can close above that upper band for three consecutive days, it would indicate a continuing trend move considerably higher. The Dow has closed above that upper band for only four trading days this entire calendar year. The first two times it did so only once. The last time it was two days. So, it not only needs to close above that upper band, it needs to do it enough times to confirm that it wants to trend higher on a consistent basis.

Gold Stocks

Here's a chart we published on the 30th of July which called the low in gold as priced in South African Rands:

The HUI Gold BUGS Stock Index has risen almost 23% from its recent low. Specifically, we identified Harmony as a benficiary of a rally in the price of gold on July 28th with the stock closing that day at 10.53. As of Friday, the stock closed $2 higher, for a gain of 19%. The rise was due entirely to the rise in the price of gold as measured in South African Rands. That price bottomed on August 6th at 2476.75 and closed Friday at 2740.76, a rise of 10%. If that rise in the price of gold is sustained, it will double Harmony's earnings. The chart certainly says the price of gold should continue higher in Rands:

MyClues Home Page Link

*(Note that the Bradley model is used to forecast potential turning points, rather than absolute highs and lows, so the dates on the chart should be viewed as such. If the market is falling as it goes into one of these turning points, we would then look for a potential bottom. According to the Bradley, this uptrend should continue into September 10th.)

Subscribers should continue on to our Detailed Comments Page for additional weekend market analysis.

OEX option specs went through the roof to buy calls on Thursday, putting a lid on the rally temporarily. It's true that with option expiration directly ahead, activity may have been distorted. Yet, option expiration is often a turning point simply because of position closeouts (profit-taking). Thus, the high level of call buying may be indicative of a sharp fall next week.

The leaders within the market continue to forge higher, however. Within the Dow, 3M is in a strong uptrend (really, a bounce off the sharp drop that stock took weeks ago):

But, as we pointed out earlier, the short term chart of IBM warns that this rally is very weak technically. A breakdown below the support trendline in this stock could pull the whole market down with it:

Summing up, option expiration Friday is likely to be a trend reversal and a decline into next week. Those who didn't get a chance to buy last week -- or who were waiting for a better opportunity -- are likely to get it next week as crude oil is due to peak on Monday:

Gold Stocks and the US Dollar Index

Gold stocks are benefitting both from the rising stock market and the falling dollar. But, next week could see the dollar start to find a bottom. Thus, be glad for the rally now and realize that it probably won't last too much longer (sorry, we'd love to be more bullish, but the charts are saying that the dollar will be pressuring US gold stocks soon):

MyClues Home Page Link

Wednesday's rally was a pleasant surprise (it's always nice to be wrong and still make money), but it shouldn't have been. We didn't consider the overriding importance of the fact that option short sellers needed this rally to book profits on option sales made over the last month. That's called "Maximum Pain" and it works best when the underlying trend is neutral. And, according to the polytrendline that's supporting this market, the underlying trend is dead neutral right now:

Now, realize that this rally could continue right into options expiration on Friday -- there's a Time Ratio High projected for early Friday -- but once the option short sellers have the opportunity to book their profits, they're not likely to keep pushing this ball up the hill for very much longer. Thus, logic says that we're going to see a retest of that support polytrendline, possibly as early as next week. Considering that OEX option spec sentiment is reaching into the overly-bullish zone now (typically preceding trading tops by two days), a big decline next week would be just the medicine this market needs to get a powerful and long-lasting rally started. A test of the upper Bollinger Band in the chart above would be a very bullish sign, but would also strongly indicate a short term peak is close at hand.

The Dow is likely to move to a new high on this trading cycle, which should be right-translated (meaning the high will occur somewhat past the time of mid-cycle). Since the cycle is approximately 20-22 weeks, if the low last week was the kickoff to the cycle, the market is likely to rally for no less than 9 more weeks and as much as 21 weeks. Rather conveniently for the incumbent, the Presidential Election is 11 weeks from now. And, we all know that a rising stock market is very helpful for an incumbent. Thus, time cycles definitely favor Bush getting re-elected for a second term.

Maximum Pain in the August QQQ options is at 34 and that contract closed at 33.88, just 0.12 under that figure, on Wednesday. This suggests that the NASDAQ-100 has already reached the price at which the major part of option time premium has just about disappeared. Option sellers should be covering their shorts by buying back both puts and calls for August at current prices, since the maximum advantage accrues to them at this price. Now, the September QQQ option Maximum Pain strike price is currently at 35, so a quick swing into that price range and above is very possible since there's a whole month to go until those particular options expire. There will be ample opportunity for the sellers to take the market back down to erase time premium from calls, for instance.

Cautionary Tale for Gold: US Dollar Heading Into a Bottom

The US Dollar Index continues to build a base for a big rally. This next one is likely to break above the downtrendline that stopped it on the last rally. The latest sentiment figures from WhisperNumber.com indicate the crowd is bearish the dollar. This sets up the preconditions for a big dollar rally and the buying power of a lot of bears rushing to cover their short positions:

This next rally should retest the 92-93 level at the very least, and has an outside chance to reach par (100). And, if normal relationships hold, it should do major price damage to the US Dollar price of Gold and US gold shares. The jury is out on that one, but we won't be the first to proclaim, "It's different this time!" Historically, a rising US Dollar will coincide with a falling price of gold in dollars. Of course, if the price of gold is rising in a foreign currency, it would benefit gold companies who reside in (and pay bills in) that foreign currency. A good example is the South African Rand and the South African gold mining shares (Harmony, for instance), where the Rand has fallen versus the dollar, causing the price of gold in Rands to rise and boosting the profits of gold companies in that country. So, for instance, if the Canadian Dollar falls hard (as we expect it will), the prices of Canadian gold mining companies are likely to rise as long as the price of gold in Canadian dollars rises. If the price of gold in Canadian Dollars falls, then you don't want to continue holding Canadian gold mining shares. That's why we have the charts on our Daily Index Charts page which chart the price of gold in several foreign currencies.

Crude Oil Edges Toward Our Target

The October Crude Oil contract reached to within 26¢ of our target price of $46.94 on Wednesday. Will it exceed our target? Yes, it's certainly possible. But, it does appear that the stock market has grown bored keying off the rally. Perhaps it sees it for what is: a temporary phenomenon best ignored. When oil prices crack, it could light a fire under equities, however.

MyClues Home Page Link

The market continued to rally Tuesday morning, but spent most of the day giving early gains back, as expected. Important time cycles are landing right now and this downward pressure is right in line. According to money flow, the rally cannot be trusted:

20-week, 39-week and 78-week cycles are all due in this late August period. And, many individual stocks, as well as indices, project Time Ratio Lows now as well. The rounding polytrendline in the Dow also tells us the market is forming a solid bottom, but is unlikely to rally significantly until that support polytrendline turns up:

Thus, this market remains a buy, but we're not out of the base-building area yet. According to the cycles and the polytrend support line, momentum should build going into the US Presidential Election in early November.

On the very short term, IBM led the move off the low last week as it bottomed on Thursday and the market didn't bottom until Friday, but that stock is flagging badly now and warning of a short term downtrend:

The pattern suggests a possible contracting triangle. If that's the case, we could see a brief thrust higher developing as that triangle pinches down, exhausting the buyers and ceding control to the bears at the top of the thrust. That move could completely play out in Wednesday's trade action.

Gold Stocks

The South African gold mining share rally of the last few days has been impressive, but due to currency fluctuations in the price of gold (which we alerted you to ahead of time), rather than a fundamental change in the underlying trend in gold shares. That's one reason to continue to treat this rally as a trade and not an investment. It's very likely the market has more work to do building a base. The HUI chart suggests both a near term ceiling approaching and a possible line of support:

Crude Oil

One of the most powerful negative influences on stocks has been the price of Crude Oil. At the October contract's high Tuesday, the commodity was 54¢ under our projected high of $46.94, so the rally is probably still going to pressure the stock market. Our next Time Ratio High in crude oil is the 23rd, but it's not a high probability target. Still, the fact that oil should be topping now at a time when the stock market should be bottoming is consistent on an intermarket basis.

MyClues Home Page Link

The market bounced on Monday as expected, but these brief intermissions in the downtrend just delay the ultimate rally by rekindling bullish hopes. The only thing that will put a solid bottom in place is that final "give-up", "sell at any price" mentality that cleans the clock of the weak hands. And, that clearly has not happened yet.

One indicator that points out that we haven't seen that washout yet was our option sentiment figures, which show that OEX traders, the bottom of barrel when it comes to investment I.Q., poured more money into calls Monday. The QQQ option traders, who are analogous to Einsteins compared to the baboons of the OEX pit, are not convinced that the rally was anything other than an opportunity to buy puts. Thus, another retest of the bottom is likely.

Crude Oil is still going up and that is an omnipresent negative for stocks. Also, interest rates haven't bottomed just yet either and we think that's a necessary prerequisite for a stock rally. Rising rates may not ultimately be good for the market, but during the early stages of a recovery, rising interest rates are a sign the patient is recovering.

What we'd like to see here:

• Rising rates.
• Falling oil prices.
• NASDAQ rallying more than the blue chips.
• Broad market rallying more than the blue chips.

Until we see those signs, any rally here is a fakeout. And, any decline is a buying opportunity for the rally that's going to come.

Gold Stocks Continue to Rally

The bull market is alive and well in the gold stocks, however. The XAU followed through with their breakout Friday:

MyClues Home Page Link

The stock market continued to build a solid bottom in last week's action. The early leaders have already bottomed and, under heavy accumulation, are beginning to move up, while the majority of stocks are still seeing selling pressure.

Our recently-introduced breadth oscillators are confirming the turn. We now have breadth oscillators based upon real operating companies, not the great mass of non-operating companies which pollute the standard advance-decline statistics. We now have Value Line, NASDAQ-100, S&P 500 and Dow Industrials Breadth Oscillator charts, with (pseudo-) ticker symbols formed by adding "AD" to their regular tickers (e.g., the Dow Jones Industrials Average Breadth Oscillator is "DJAD"). All of these oscillators will be found in the Daily Index Charts section of the website. Here is the Dow Jones Industrials Average and its Breadth Oscillator:

The picture is similar in the broader oscillators, with recent price lows in the indices failing to be confirmed by their respective breadth oscillators.

Gold Breakout Continues

The South African breakout in the price of gold that we had anticipated a couple of weeks ago continued on Friday and gold mining shares in that country soared. Harmony jumped 15% from Wednesday's close:

MyClues Home Page Link

Subscribers will find an updated Detailed Comments Page . . . .

Recently, we identified a bottom in the price of gold in South African Rand and added a new chart to our Daily Index Charts page to track this key price. We also quoted Harmony Gold's statement that for every 1% rise in the price of gold in Rand, corporate profits would rise 10%.

On Thursday morning, the South African central bank moved to lower interest rates. As reported on Moneyweb:

"So unexpected was the cut in South African interest rates on Thursday that the JSE Securities Exchange all share index shot up 300 points within minutes of the announcement by Reserve Bank governor Tito Mboweni.

"The gold index caught fire, exploding upwards by nearly 8% as Durban Deep (DROOY) gained nearly 12%, Gold Fields (GFI) nearly 10%, Harmony (HMY) nearly 9%, and AngloGold Ashanti (AU) nearly 5%."

This emphasizes the relationship between gold, currencies and interest rates. And, confirms the trend to a lower Rand and a higher price of gold in Rand. You can find charts of the price of gold in terms of Canadian Dollars, Australian Dollars, Euros, Swiss Francs, South African Rand and US Dollars in the G section of the Daily Index Charts page. And, you can find charts of the gold and silver stocks we track on our new "Daily Gold & Silver Mining Company Charts" page in the CHARTS & RESEARCH section of the website.

Crude Oil Pressures Stocks

For the broad market, the point of obsession was the price of crude oil. That price continues moving toward our target of $46.94 (October 2004 futures contract price target):

This straight-up move in the price of oil is going to end. And, when it does, the broad market is going to soar.

Better Breadth

We have added the new breadth oscillators we introduced to you earlier this week as a regular daily feature on the Daily Index Charts page of the website. Look for them under NDXAD for the NASDAQ-100 Index component stocks, SPXAD for the S&P 500 Index component stocks, and VLEAD for the Value Line Index component stocks.

MyClues Home Page Link

The stock market continues to shake the loose fruit from the tree and form a bottom. NASDAQ and the broad market continue to get hit hard and they are basically lost causes at this point. However, the blue chips are showing great strength in resisting the selling pressure. At significant tops in the market, the blue chips will rally to new highs while the broad market and NASDAQ fails to, generating bearish divergence. And, that's exactly what the market is setting up here.

We've been looking for the next trading low to occur on the 18th of the month. More evidence for a significant bottom at that time comes from our short term chart of long term interest rates, the TYX Index:

The TYX Index goes down when bond prices go up and vice versa. In recent years, the TYX Index has gone in the same direction as stock prices. So, for instance, interest rates have been generally falling since late July and so has the stock market, as this chart of the NASDAQ demonstrates:

With bullish divergence showing up near term, the rally should continue for at least a little while. But, will the low on the 18th fall below the preceding low? Yes, it probably will, but the leaders in this rally are not likely going to revisit those lows. However, if you're cautious and looking to buy the blue chip indices or stocks, the 18th is likely to offer a better risk/reward ratio overall. The interesting thing is that the 18th is just two trading days before options expiration this month. And, the QQQs are far underwater -- the put options are deep in the money. It will be very interesting to see whether the index will close with those puts still in the money on the 20th. It could be a whopper of a rally into expiration Friday.

Gold Stocks

A Time Ratio projection using the current contracting triangle pattern targets the 3rd of September for a significant trading low in the precious metals stocks. A caveat here is that triangles don't always work and this one might not resolve into a thrust decline. But, if it does, it is going to setup a great buying opportunity:

MyClues Home Page Link

The recent low which we were looking for ideally on Monday the 9th, appears to have occured right on schedule. Tuesday's Turnaround sent the market screaming higher, with the Dow up 130 points by the closing bell. The QQQ (NASDAQ-100 Index) closed at 33.21, about 5% below this month's Maximum Pain Theory value. So, there's room for the market to recover into the third Friday of the month (the 20th).

One of the biggest criticisms we have of the McClellan Oscillator, a technical breadth indicator which is widely followed, is that a majority of the stocks which go into its calculation are non-operating companies. According to Joe Granville, heard Monday at 5:20 pm EDT on Tom O'Brien's afternoon radio program (see http://www.TFNN.com/ for the archived program), only 47% of the stocks on the NYSE represent actual operating companies and not bond funds, preferred stocks, etc. Thus, the standard advance-decline data do not represent the broad market as they once did.

We've developed a breadth indicator, calculated like the McClellan Oscillator, which uses the component stocks of the Value Line Index, about 1650 stocks. The result is shown below:

As you can see, the current decline failed to move the oscillator to a lower low, which represents bullish divergence. Also, you can see that this indicator turned bearish several months before the actual top, so we probably have a leading indicator here and we could very likely see lower prices before the market turns up in a strong rally.

We will be adding this indicator to the Daily Index Charts page in coming days.

But, of course, that's what we've seen from our Value Line - Dow Industrials spread indicator, which has been operating within a bearish trend channel for some time now:

Gold & Silver Mining Company Charts

Please note that we have added a chart page entitled "Daily Gold & Silver Mining Company Charts" in the "CHARTS & RESEARCH" section of the website. This page should list every gold and silver mining stock in our chart database and make it easier to compare them.

Newmont is a leader in the gold stock group and its action Tuesday confirmed that the descending resistance line was powerful enough to turn the rally back. Obviously, this is a very important line for the stock, so when that line is broken through, we might see a much more vigorous rally in the gold stocks:

MyClues Home Page Link

One of the more interesting things about the July Employment Report released last Friday was the CES Birth/Death Model, which subtracted 91,000 jobs from the actual number of new jobs which were reported. Backing out that phantom loss of jobs number, the actual number of new jobs created was 123,000. Still not a great number (most folks think 150,000 is needed to account for population growth alone), but not nearly as bad as the headline 32,000 figure.

Now, historically, a large number of new jobs are created during the month of August which do not get reported until later months. So, the CES Birth/Death Model will add phantom jobs next month. We estimate this factor could add approximate 150,000 new jobs to the actual number reported. This strongly suggests that next month we are going to see a much higher figure. That "news" is likely to send bonds lower and stocks higher. That report is scheduled for release on September 3. It also could kick off a great rally in gold and gold stocks.

Although we're beginning to see some accumulation occuring in some gold stocks, they're only nibbles at this time. Any rally worth playing is likely to be preceded by substantial accumulation and, right now, buyers are just not convinced of the necessity for gold and gold stocks to move higher.

The market consolidated on Monday, the date which we have been showing as a likely turn date for several weeks using the Time Ratio technique. The markets ended pretty much exactly where they started, and on light volume. We're adding quite a few stocks to our list of stocks we analyze by computer each day, so look for some new names to appear Monday evening.

One thing that has been hammering stocks (besides the Employment Report) has been the price of crude oil. A minor new high is possible, but the divergences are quite bearish and prices are likely to be heading lower pretty soon. As you can see from the chart, the exponential rise in price is not sustainable, but once prices fell below the rising trendline, they are now attempting one last gasp rally to retest that trendline from below. This is doomed to failure, but a couple of dollars more would hit that measured move target:

MyClues Home Page Link

For two months running, the market has seen a very disappointing Employment Report which suggests the recovery from the mild recession of 2001 is wobbling badly. The data released by the Bureau of Labor Statistics Friday morning sent bonds and gold soaring and stocks plunging.

But, as we've pointed out before, the report has a huge error bar associated with it. While the company survey found only 32,000 jobs created in July, the household survey reported a whopping 629,000 jobs were created that same month, which caused the unemployment rate to fall to 5½%. With a discrepancy of well over half a million new jobs between the two surveys, one has to regard the numbers as basically garbage.

However, the market trades the numbers, not the reality. And, it didn't like the numbers at all. What's an investor to do? Well, the first thing is to look at stocks technically and see whether there are some diamonds being tossed out with the garbage. Indeed there are, which our technical indicators tell us are good buys at the present time.

But, why is now a time to buy stocks? We've been looking at the August 6-10 timeframe, with Monday the 9th as the center date in that timespan, as a potentially very significant low for some time from a Time Ratio viewpoint and the market certainly has obliged in that regard. Moreover, the action Friday is a typically emotional response which marks the end of a move, not the beginning. Yes, it's true that certain key trendlines and chart levels were broken — that's longer term bearish, of course, but it was just as bearish several months ago when the market broke its major uptrend line. We've seen the market hold within the trading range for eight months now. And, now that it has broken out to the downside, we suspect there is going to be some profit-taking that will reverse this trend and send the market back up in fairly short order.

Gold stocks on the whole did well on Friday as the price of gold soared on the news of an economy slipping back into recession. The downtrend in the market makes it more likely that the Fed won't be raising interest rates as had been feared for the past few months. However, even if the Fed does continue raising rates, it just makes it even more likely that the economy is going to slip into another recession (or, perhaps, the second leg of the recession of 2001). The next leg down is likely to be far more severe than the first leg because most of the fuel for recovery has already been spent (tax cuts, interest rate cuts, refinancing, war against terror, etc.).

Although a lower low in the stock indices on Monday is likely and a retest of the lows also extremely likely on the 18th of the month, the high relative strength stocks have already or are in the process of bottoming right now and may be up significantly by retest time. Therefore, we think now is the time to buy bargain stocks that look good technically (i.e., those which show good accumulation on our Acc-Dist indicator). We are moving to a 100% invested recommendation (200% if you like to leverage your investments) for stock market investors at this time, which means that you should buy technically sound stocks on dips between now and the 18th. There are likely to be a lot of bargain hunters buying Tuesday, so we could very well see a multi-hundred point rally in the Dow get started — and finish — this week, so it should be a volatile week for traders. Investors should look for those gemstones as stocks are tossed out with the garbage (and there are a lot of garbage stocks which are being tossed out!).

Be sure that you set a stop loss price after buying stocks. This should not be an actual stop loss order placed with your broker, but a mental stop. If the stock closes below the stop price, sell it and put the money raised to work elsewhere. 7-10% is usually a good stop loss price range to use.

We discuss the technical condition of several high-profile stocks in this weekend's Detailed Commentary this weekend. We also discuss the indices that are weathering this storm the best and are likely to power ahead.

MyClues Home Page Link

The market quickly dissolved the potential contracting triangle pattern in the NASDAQ on Thursday by breaking the support line and moving to a lower low. At this point in time, NASDAQ continues to be the weakest of the stock market indices.

We are coming into a strong Time Ratio Low over the next few trading days. The price area the market is in is the same area (except for NASDAQ) which has been repeatedly tested for the last five months (since March 24th). Each time the market has visited this price area, we've seen the bears throw in the towel and the bulls charge ahead:

A similar picture prevails in the Dow Industrials:

Friday will see the release, at 7:30am CDT, of the July Employment Report from the US Labor Dept. This is the biggest report of the month, so it will be important to watch the market's reaction to it. The expectation is for around a quarter of a million new jobs to have been created in July. If the number comes in far lower than expectations, as it did last month, it will be very instructive to see whether the market regards that as good news or bad news. If it reacts positively to disappointing news, the trading low is probably in place. If not, we may have some work to do at lower levels. Remember, it's the market's reaction to the news and not the news itself that is the key thing investors should watch. A strong market will ignore bad news. A weak market will not be satisfied even with good news.

Finally, today, we have the makings of a good bottom in our measure of the relative strength of the broad market as compared to the blue chips:

MyClues Home Page Link

The stock market was erratic Wednesday after holding support near the 78% retracment level in the NASDAQ. The rally had also retraced about 78% back to the previous trading high. This kind of behavior strongly suggests that the market is moving through a contracting triangle pattern which burns time and simply moves sideways until it has completed five internal waves (counted a-e), then thrusts out of the trading range in the same direction it went into it (in this case, down).

Another indicator which supports this argument is Money Flow, which flat-lined right as the pattern started:

One of the characteristics of the pattern is lessening volatility until wave e is complete. At that point, a thrust move kicks up volatility and panics the losing side into exiting their positions at the place where those traders should be doing exactly the opposite. The market is a contrary beast and don't ever forget it.

If this triangle continues on, we will see a rally in wave c, a decline in wave d and a rally in wave e. All of these moves should fail to exceed the last wave in the same direction. This is why volatility is said to decline as the triangle works itself out. But, if the support and resistance lines don't move (they probably will, though), the thrust down to finish this correction should bottom a couple of days before options expiration this month.

What causes triangles? It's easy to see from time cycles that triangles are due to a set of time cycles which are bottoming (in this case). The longer term cycle bottoms first, which causes the underlying trend to go neutral. The final cycle bottoms last, creating the thrust out of the pattern.

Now, if you planned to take a vacation in the first half of August, you picked the best time to do it if you wanted to get away from the stock market! Unless you're a daytrader or an option seller, it's going to be an increasingly hard market to trade. If you're an investor, the thrust out of the triangle should be a good place to take positions.

But, we're still watching . . . it's early days in this triangle if that's what it turns out to be. Don't get married to positions because things are going to change in the second half of the month.

Website charts and reports should all be updated by 9pm EDT Wednesday evening.

MyClues Home Page Link

Wave b Retraces Much of the Wave a Rally

The rally fizzled out very quickly this Turnaround Tuesday as the blue chips gave in to selling pressure (or the lack of buying pressure, which are two sides of the same coin). The intraday Dow Money Flow figures had warned that this decline was coming:

We also had a "heads-up" signal from OEX sentiment on Friday, which closed very close to the overly-bullish level, a warning that typically comes a day or two before trading tops in the market. Higher highs this week didn't elicit the same degree of bullishness, which itself represents a form of bearish divergence warning of a developing top.

But, the real big warning was given in the NASDAQ-100 (QQQ), which topped Monday right at a Time Ratio High:

Within the Dow, IBM was also showing weakness:

There are a large number of Time Ratio Low projections for the 9th (Monday), some for the 6th (Friday). We should see a trading low Friday with a retest on Monday if things work out according to the script. That would end wave b down (the rally which started last week and ended late Monday was wave a up). At that next low, we should get a strong wave c rally to, perhaps, the top of the Bollinger Bands on the stronger indices (don't hold out too much hope for the broad market or NASDAQ, though).

The QQQ option traders were bullish on the close and that probably is saying we're going to get a retracement rally Wednesday morning. It isn't likely to last. We need to get the OEX traders loading up on puts to get that wave c rally started.

Website charts should be finished being updated around 9pm EDT.

MyClues Home Page Link

The nice rally that got started a week ago is showing signs of reversing. The signs of a reversal are strong in the broad market and a bit less so in the blue chips:

The NASDAQ-100 proxy, QQQ, may have put in a trading high Monday afternoon if the Time Ratio High occured on schedule:

Note that the NASDAQ-100/QQQs tend to top 1-2 days ahead of the Dow Industrials/S&P 500 Index, although the lag time between those two tops can vary. A top in NASDAQ is a strong warning to longs in Dow and S&P futures to, at the very least, tighten up on sell stops.

The S&P 500 Index closed above its 20-day moving average, making it likely that the uptrend will continue up to the upper Bollinger Band. If the rally is corrective, wave a up should be finishing up now, with wave b down to retrace about half, perhaps more, of the rally, followed by a wave c rally to the upper band:

Short term, the Dollar Index could have one more rally left in it to actually touch the long term resistance line, which at this time closely coincides with the upper Bollinger Band:

After the Dollar Index completes this leg up and corrects, the reduction in pressure should help both gold stocks and the broad stock market rally.

MyClues Home Page Link