Major market turning points are usually characterized by many of these tools. That was clearly the case in 2007 when everything fell neatly into place to call the end of a bull market that had started in 2003.

Bull markets don’t go straight up. And this one is no exception.

To a somewhat lesser degree that has also been the case starting this June, signaling a medium-term up trend. And that’s why I still expect it to continue during the coming months.

But even the strongest bull markets aren’t one-way affairs. They’re often interrupted by short-term corrections typically lasting six to eight weeks with prices falling 10 percent to 15 percent. And right now I think such a correction has just begun.

Here’s why …

All Major U.S. Stock Market Indexes Are
Bumping Against Important Resistance

These technical resistance points are important enough to warrant the beginning of the first large correction since this medium-term rally began in March 2009.

Let’s start with the S&P 500 …

As you can see on my first chart, this index hit the resistance line going back all the way to its October 2007 high.

Source: Bloomberg

This trend line is very significant, because it defines the bear market of 2007 to 2009 when the S&P 500 lost 57 percent. And I think it’s highly unlikely that this resistance line will be broken through on the very first try.

It’s much more likely that the market — which is already tired after the huge runup of the past months — will have to retreat from here to gather enough strength to overcome this technical hurdle.

Next, have a look at chart below of the Dow Jones Industrial Average …

On a first glance you may think there isn’t any resistance below 11,000, especially if you only look back two or three years. But if you go back a bit further, to 2005 and 2004, you can see the massive resistance around the 10,000 area. This marks the lower boundary of a very massive trading range.

Source: Bloomberg

Next, the Nasdaq Composite …

The Nasdaq has already reached the equivalent of 1,200 in the S&P or 11,000 in the Dow … the short-term bottom of 2008, before all hell broke loose. This is a very obvious resistance point.

Source: Bloomberg

Now, take a look at the Dow Jones Transportation Average …

The Transports are showing a huge topping formation that began to form at the end of 2005 and lasted until fall 2008. When it broke to the down side, a crash wave ensued.

As you can see on the chart below, this index is now back to the lower boundary of that huge formation, a classic resistance area that’s not easily broken.

Source: Bloomberg

Finally, let’s examine the Dow Jones Utility Average …

The Utilities have been relatively weak since their March low. But they, too, are bumping against resistance now. This index formed a very nice topping formation from 2006 to 2008, thus a bit shorter than its cousin, the Transportation Average. But the result when it was broken was the same: A market crash in 2008.

Source: Bloomberg

Even though this index has risen much less than the others, it has still entered a massive resistance area stemming from its trading range last fall.

Five Different Resistance Patterns

So here you have it. Five indexes showing very different chart patterns. But they’re all hitting major technical resistance areas at the same time! This makes for a very strong picture of a market that’ll have difficulties rising any further without a correction first.

In Fact, Other Technical Indicators Are Equally Weak …

The whole technical picture has become very fragile during the past weeks:

• Volumes have been dismal: Declining when the market rose and rising when it retreated.

• Momentum indicators show multiple negative divergences: They did not rise to new relative highs during the past three up-waves in the market.

• Market breadth shows a similar picture: The ratio of advancing to declining stocks was lower at each of the past up-moves in the market.

• Put-call-ratios were back to frothy levels: The equity only put-call-ratio fell to 0.52 a few days ago, a level often associated with short-term exhaustion.

All in all I get the impression that the first big correction of this medium-term up trend is already underway. I expect it to last until late November and bring prices back 10 percent to 15 percent.

However, I don’t expect this correction to herald a major trend change. Hence, I suggest you consider using it as a buying opportunity.

Best wishes,

Claus Vogt 
Money and Markets

This investment news is brought to you by Money and Markets. Money and Markets is a free daily investment newsletter from Martin D. Weiss and Weiss Research analysts offering the latest investing news and financial insights for the stock market, including tips and advice on investing in gold, energy and oil. Dr. Weiss is a leader in the fields of investing, interest rates, financial safety and economic forecasting. To view archives or subscribe, visit http://www.moneyandmarkets.com.

But Now Another Important Market
Has Given a Clear Buying Signal …

As you can see on the following chart, crude oil prices have been hovering between $60 and $75 for roughly four months. At the same time the Price Momentum Oscillator (PMO), which signals the strength of a price trend, has corrected its overbought readings by coming back down to the zero line.

Source: www.decisionpoint.com

While the price of oil was going sideways, this momentum indicator was creating an interesting bottoming formation.

Then, last week, an important event occurred: The price of oil broke above its upper boundary, and the PMO finished its consolidation. Both lines on the chart, price and momentum, were thus giving key buying signals.

My analysis tells me that the next price target stemming from this four-month consolidation formation is approximately $100 per barrel.

That’s not particularly good news for you or me as consumers. After all, we’ll have to pay more to fill up our gas tanks, heat our homes, and more.

So it’s difficult for me to understand how some pundits can claim that rising oil prices might be a good thing for the economy …

The way I see it, higher prices are like an additional tax for American and European consumers and businesses alike. They’ll dampen the still-nascent economic recovery before it gets real traction.

As governments shift their printing presses into overdrive, you can expect inflation to surge.

What’s more, rising oil prices are in step with the message coming from gold’s price advance. Here’s why I say that …

Rising Prices Are Caused By
Governments’ Policies …

Rising gold and oil prices are symptoms of the inflationary monetary and fiscal policies that have been implemented. These were without doubt global governments’ absurd and counterproductive answers to the popped real estate bubble.

My basis for this conclusion is very straightforward: If governments continue printing boatloads of money, the prices for goods and services have to rise sooner or later. There’s no way they won’t!

And whether it happens sooner or later depends on certain circumstances, such as changes in the velocity of money or money demand.

The breakouts in gold and crude oil are like early warning indicators. And the commodity markets are clearly telling us that inflation will rise sooner rather than later and will become a major problem for the world economy.

Fortunately as investors, we can turn that problem into a tremendous opportunity. And my colleagues and I will continue to show you how to do that every chance we get.

Best wishes,

Claus Vogt
Money and Markets

This investment news is brought to you by Money and Markets. Money and Markets is a free daily investment newsletter from Martin D. Weiss and Weiss Research analysts offering the latest investing news and financial insights for the stock market, including tips and advice on investing in gold, energy and oil. Dr. Weiss is a leader in the fields of investing, interest rates, financial safety and economic forecasting. To view archives or subscribe, visit http://www.moneyandmarkets.com.

Source: www.decisionpoint.com

On that date, I said, “This breakout of a huge triangle is a clear technical buying signal.” I added that the minimum price target of this triangle formation was roughly $1,100. This was well above major resistance in the $1,000 area, thus hinting that another major breakout and buying signal would take place soon.

Well, that’s exactly what happened last week!

Gold Hit 1,059 …
Triggering Another Major Buy Signal

Take a look at the weekly chart below. It gives you a good perspective of how important this breakout to new high ground actually is. As you can see, it signals the end of a medium-term correction that began in March 2008 and the beginning of the next medium-term up trend of a secular bull market that started in 2001.

Source: www.decisionpoint.com

The minimum price target of this huge consolidation pattern is $1,300. And I believe much larger gains are certainly possible.

Also consider this: Four weeks ago the Hulbert Gold Newsletter Sentiment Index (HGNSI) stood at 25.2 percent. Now, four weeks later and gold nearly $100 higher, the HGNSI has actually fallen to as low as 18 percent! A rising market accompanied by a declining number of bulls is a rare development. And it’s clearly bullish.

Longer Term Fundamentals
For Gold Are Very Bullish, Too

There are many fundamental reasons to own gold.

Besides the technical buying signals I’ve given you today, I want to repeat the major fundamental arguments for owning gold:

• As a consequence of the current financial and economic crisis, government debt is going through the roof — not just in the U.S., but all over the world.

• Worldwide central banks are printing money like there is no tomorrow.

• Gold demand is rising due to wealth creation in emerging economies where gold still plays a large role as a store of value.

• Gold demand is even rising in the West as more investors doubt the wisdom of central banks and governments.

• Gold supply is stagnating or even slightly shrinking — despite the metal’s price rise since 2001. This is because it’s getting ever more difficult and expensive to get gold out of the earth.

• Finally, central bankers who were eager to sell government gold at much lower prices a few years ago, are getting increasingly reluctant to keep doing so. Emerging market central banks are even buying.

As long as most of these catalysts for higher gold prices remain in place, I expect the long-term bull market to continue. And much higher highs are very likely.

Best wishes,

Claus Vogt
Money and Markets

This investment news is brought to you by Money and Markets. Money and Markets is a free daily investment newsletter from Martin D. Weiss and Weiss Research analysts offering the latest investing news and financial insights for the stock market, including tips and advice on investing in gold, energy and oil. Dr. Weiss is a leader in the fields of investing, interest rates, financial safety and economic forecasting. To view archives or subscribe, visit http://www.moneyandmarkets.com.

Perhaps this analogy can help in understanding the differences in scale. Imagine that it is October 1929. A boy is standing on the sidewalk, playing with a tennis ball. He holds the ball at eye level, and then just lets go and allows it to drop. The ball hits the sidewalk and bounces, up to the boy’s belt line (in March 1930), and then falls back to the sidewalk, to a low in 1932.

Now it’s year 2000. The stock market is at a new all-time high. The boy’s grandson is standing on the sidewalk, playing with a tennis ball. He holds the ball at eye level, but instead of just dropping it, he slams it hard onto the sidewalk and it bounces, not just up to the boy’s belt line, but way up over his head (in October 2007) and then it starts to drop. That’s where we are now. The ball is on its way down. You know that when it hits the sidewalk it will be traveling at a higher rate of speed than that in the first example.

The Rally of 2009 is just a blip in that descent. It hasn’t changed a thing. Stock market bull rallies within underlying bear markets are instruments of deception. They hypnotize the investing public into believing that “recovery is here” and that “the worst is over.” Typically, at their end even the experts, the “elect,” the chronic bears, will be won over and will succumb to the allure, whereby they join the herd on the run to the cliff. It happened to Isaac Newton, a very bright man, in the South Seas Bubble; it happened to super-bear investor and market analyst Robert Rhea in 1930; and it has happened now in the person of a usually-bearish Nobel-prize-winning economist who has thrown in the towel by turning bullish at precisely the wrong time.

We note other evidence of the end of this stock market rally, in the form of a repetition of the old merger and acquisition mania: Kraft sets up a hostile acquisition of Cadbury-Schweppes; Hewlett-Packard makes a big buy; Xerox makes a big buy; Abbott Laboratories wants to buy a Belgian company’s prescription-drug business. All of this busy-ness is emblematic of a stock market peak and impending reversal. “They’ll do it every time.”

I think the Dow Industrials’ high at 9917.30 on September 23 is the highest we will see the Dow for many, many a moon, if ever, in our lifetimes. I have posted on my blog a forecast of the S&P 500 at 500. It will quite some time before the S&P gets there, but it’s on the way.

William Kurtz
September 29, 2009
http://www.candlewave.com
http://www.candelaabra.com

At any rate, we did get the lower close yesterday (Friday), so the bearish intimations of the Hanging Man have been “confirmed.” The patterns in the NASDAQ 100 were quite similar

Now what? We don’t know which way the NASDAQs (or the rest of the market, for that matter) will head from this point. It could be that the market is now consolidating, in preparation for a higher push into the Dow 10000 range (or even higher), which could happen; or it could be that the Rally is over, the tops are in, and that prices will generally decline from this point forward. It could also be that prices will just muddle along sideways for quite a while.

We don’t spend a lot of time contemplating all of the reasons why the markets should continue higher, or why they should not. We have been Long since right after the markets turned up on July 13; we have trailed the insistent price rise since then with trailing safety sell-stops; and if the markets do turn lower our pro.fit will be locked away in Cash by stop-outs. When and if that happens, then we will think about what to do next.

However, there are many observers who do spend a huge amount of time arguing one way or the other about it. We here tend to stand off on the sidelines, watching the fray with some bit of detached amusement, on the basis that the argumentation seems to consist of a good deal of sound and fury signifying not much. If the market goes up, we are happy with our Long position; if it goes down, our accumulated unrealized pro.fit turns into Cash. Not bad.

I would like to invite your attention to a new article by Richard Graham in the publication “Seeking Alpha” on the question of the direction of the market. It’s at http://seekingalpha.com/article/155933-why-this-rally-will-continue?source=article_sb_popular/ The article has generated PLENTY of comment on the state of the recovery and the likely direction of the market, pro and con, which follows right after the article itself. I have a short comment of my own in there, too, writing as “candleman.”

The article contains the comment that “When the front cover of Newsweek says that the recovery will be sluggish, it is safe to say that everyone knows the recovery will be sluggish…”. That is true. When a major popular sentiment is enshrined on the cover of a national newsmagazine, “everybody knows” it. We are then very late in the cycle, too. Financial author Paul Macrae Montgomery brings this phenomenon to life in his “Magazine Cover Index,” which holds that when popular sentiment rises to the point at which “everyone knows” something to be so obviously true that it is honored on the cover of a national newsmagazine, “everyone” is probably wrong.

If that thesis holds true this time, that means that – since “everyone knows” that the recovery will be sluggish – it will NOT be sluggish.

Unless – unless – the underlying premise of both sides of the argument is wrong, and the recovery is ALREADY over, in which case the tiff between the pro’s and the con’s is like rearranging the deck chairs on the Titanic.

William Kurtz
http://www.candlewave.com
info@candlewave.com

It’s no different this time. We have been patiently waiting for a credible Candle chart signal that the Great Rally of 2009, which began on March 6, has come to an end. Various forecasters, ourselves included, believe that it is possible that the Dow Industrials could reach 10000 before the Rally tops, rolls over, and the advance in prices finally comes to a reversal.

Of course, opinions vary as to the nature of the Rally itself. The more optimistic commentators believe that the Rally is probably a resurgence of the great bull market which came to an all-time top in October 2007, whereupon it gave many indications of a permanent reversal of trend. Others, like ourselves, believe that there was a massive change of underlying trend in October 2007, from Up to Down, which means that this Rally has not been evidence of a resurgent (but still alive) bull market, but rather that it is only a bull rally in an underlying bear market.

The difference between the two outlooks could hardly be more fundamental. Each of them colors everything its proponents consider when watching the development of prices and Candlestick chart patterns during this Rally.
Our own belief is that the Rally will come to an end somewhere between present prices and 10000 in the Dow. Price action today has been very informative, and hints that we may have seen the top. Whereas prices across the major Indexes are down from yesterday’s close, it appears that the “big chips” (large-capitalization issues) are holding up better than the mid-caps, the small-caps, and the NASDAQs.

We have been watching the candlestick indicators all during trading hours today. A bearish “Dark Cloud Cover” pattern developed early, which morphed into an “Outside-Down Day Bearish Engulfing Pattern” as prices continued to decline. At the Close, assuming that our incoming electronic data are accurate as of this writing, it appears that the latter will be the “Daily” candlestick formation which will go forward into tomorrow. I’m almost ready to go out on a limb and call this the end of the Rally.

The identification of Candlestick reversals is one of the most challenging and enjoyable aspects of market-watching. Hardly anything can be more satisfying than ferreting out a reversal pattern even before it is born, and then observe it having an effect on subsequent price action exactly as one has predicted and as the literature describes the usual products of the pattern.

William Kurtz
http://candelaabra.com/

Half of the marbles are white, the other half are black. You remove one marble, write down the color, and put the marble back in the container. Then repeat the process, again and again.

In the short run you may experience streaks of drawing one black marble after another. It might happen three times in a row, five times in a row, even ten times in a row.

However, these short-term results do not change your long-term outcome — the fact that you’ll draw black marbles half of the time and white marbles half of the time.

When investing, this same law holds true. Some decisions will turn out to be losers. In the long run, though, you’ll earn money if your methodology has an edge.

Let me explain …

A Disciplined Approach
Is My Edge …

Is Buffett just a lucky guy, or does he hold an edge when investing?

The “random walk” approach to markets supposes that 50 percent of the marbles in the bucket are white and 50 percent are black. Accordingly, nobody can achieve more than the market’s average performance, and Warren Buffett was just an incredibly lucky guy.

I don’t think that premise is true. And I believe that Buffett’s long-term success proves this point.

In my opinion, the world of investing does not always deal with 50:50 chances … sometimes there are buckets with more black marbles than white ones by a wide margin and vice versa.

My indicators are geared to inform me when this is the case. And they tell me when the buckets hold special opportunities or unexpected risks.

I may still encounter a streak of losers in the short run. But in the long run, I’ll make money because my winners will outweigh my losers by sticking to my disciplined approach.

How My Approach Works …

When there are more white marbles than black ones, I run with the bulls.

If black marbles represent falling stock prices and white marbles represent rising prices, it becomes clear what to do: Whenever black marbles are a majority I implement a bearish strategy; whenever white marbles dominate I run with the bulls.

For example, when the yield curve is inverted, and the year-over-year percent change in the Index of Leading Economic Indicators (LEI) is negative three months in a row, chances are extremely high that a recession will follow soon.

In this case let’s say, that 90 percent of the marbles in the bucket are black. Whenever this rare condition is given I’ll get out of stocks and buy inverse ETFs and long-term Treasury bonds. The last time this condition prevailed was in 2007.

Technical analysis is just one part of my approach. Longer term, fundamentals and macroeconomics are the financial markets’ driving forces. But markets can stay irrational much longer than you might think. That’s why it pays to take technical analysis seriously … at least when compelling signals are generated.

And that’s precisely the case right now. Take a look at the chart below …

Source: Tradestation

Last Thursday, the S&P 500 index rose above its June high. In doing so, it’s showing an important bottoming formation: A huge head and shoulders bottom. Rising volume and strong market breadth confirmed the buy signal. Additional proof came from foreign markets showing more or less the same bullish pattern. And from the 200-day moving averages, which are in the process of turning around as well.

I take these signals seriously. They’re telling me to expect a continuation of the bear market rally off of the March lows.

I deem it probable now that this rally will have legs. And I expect the markets to keep rising and not come under serious pressure again until the second quarter of 2010.

I use the LEI to back up this view. It moved up from minus 4.0 percent year-over-year in May to minus 1.2 percent in June. This clear improvement points to some kind of an economic rebound.

No, the crisis is not yet over. Longer-term fundamentals are strongly against a more optimistic outcome. But a few quarters of a shallow economic recovery, caused by the huge stimulus programs all over the world, is the most probable outcome now.

In other words, all my indicators are telling me the jar now has more white marbles in it than it did just a month ago.

Best wishes,

Claus Vogt
Money and Markets

This investment news is brought to you by Money and Markets. Money and Markets is a free daily investment newsletter from Martin D. Weiss and Weiss Research analysts offering the latest investing news and financial insights for the stock market, including tips and advice on investing in gold, energy and oil. Dr. Weiss is a leader in the fields of investing, interest rates, financial safety and economic forecasting. To view archives or subscribe, visit http://www.moneyandmarkets.com.

As part of one of the fastest growing financial guidance and education firms out there, one of the biggest lessons we wish to express, is to use the Larger Time Frame Method.  This method is exactly how my partners and I at InTheMoneyStocks.com were able to pinpoint within a week or two the top on the market recently.  The SPY (a good gauge of the S&P 500) was trading for 2-3 weeks between $94-$96.  During this time, President Obama, Treasury Secretary Geithner and the Federal Reserve Chairman Ben Bernanke all stated multiple times that green shoots were sprouting.  The media was singing their praises, mutual funds and hedge funds were dumping hundreds of billions back into the market and a V-shaped bottom seemed to be in place.  At heart we are contrarian thinkers and use psychology as part of our analysis techniques.  Seeing this pumping in the media put us on high alert.  We started looking at the daily SPY chart.  Sure, it looked over bought but let’s face it, a chart of anything can remain that way for days, weeks, months or even years.  After analyzing the daily and seeing mixed signals and signs, we decided to do something most investors or traders lack the common sense to do.  I went to the next bigger time frame.  This is where we made an amazing discovery.

This is one of the secrets which may seem like common sense but for some reason so few people are willing to do it.  Whenever you find it hard to read a chart but feel something is overbought or oversold on a certain chart or when people seem far too bullish or bearish, always go to the next bigger time frame.  If you are right on the move coming, it should be showing and confirm on that time frame.  The chart below shows a great example of the confusion that was in the markets.  The daily chart shows the markets off the March lows by 40%.  However, at the same time a great bullish consolidation pattern is forming which many beginner/amateur traders were thinking meant the markets were going to go higher.

What did we do?  We first got worried based off the psychological indicators.  With the President, Federal Reserve and Treasury all pumping the markets, the media blasted it to everyone.  That was what worried us.  Too many bullish people.  With that we looked at the daily chart below.

RealTick graphics used with permission of Townsend Analytics, Ltd. ©1986-2009 townsend Analytics, Ltd. All Rights Reserved. RealTick is a registered trademark of Townsend Analytics, Ltd

RealTick graphics used with permission of Townsend Analytics, Ltd. ©1986-2009 townsend Analytics, Ltd. All Rights Reserved. RealTick is a registered trademark of Townsend Analytics, Ltd

In my DailyWealth column April 13, I said if the long bond fell below 124.07, it would signal a bond bear market. Well, the long bond closed at 123.26 last Tuesday and is now making new five-month lows…

The "long bond" is the nickname for the 30-year Treasury bond. It’s the longest-dated debt instrument the U.S. Treasury issues. And on March 18, the Federal Reserve announced it would buy $300 billion "longer-dated" Treasury bonds.

This was the news the bond bulls had been waiting for. The world’s most powerful central bank was going to pump $300 billion into their market over the next six months.

Long-bond investors must have thought they were about to get rich… but the market didn’t oblige. There were too many sellers.

To make successful short plays, old-time traders will tell you, "Throw your rocks into the wettest paper bags." The long-bond market is a wet paper bag. The long bond is so weak, not even the Fed’s printing press can hold it up.

If you own any long-dated Treasury bonds, sell them now. This market is in danger of imminent collapse. The next major stop for this market is 112.5, the lows of 2008. Take a look…

To watch the action in the long bond price, use the iShares Barclays 20+ Year Treasury Bond fund. The symbol of this fund is TLT. This fund is a giant basket of long-dated Treasury bonds. It’s one of the largest and most liquid ETFs in the world. The movements in this fund represent the movements in the long-bond price.

Right now, TLT trades at about $97. As long as TLT is trading below $100, assume the long bond is in a bear market and the path of resistance leads to lower bond prices.

Good investing,

By Tom Dyson
Daily Wealth

As you know, I turned short-term bearish last week. The intermediate-term rally needed a break and this week seemed as good as any for the market to pull back and wean a few of the weaker bulls from the herd.

So far so good. Stocks are down on the week and it looks like we’re in the middle of a short-term correction.

There’s more downside to come. But my original plan was to use a move down to about 780 or so on the S&P 500 as an opportunity to load up on stocks in anticipation of another big wave higher. After all, my upside target for this intermediate-term rally is between 1,000 and 1,100 on the S&P. That may, however, be too optimistic…

We are dangerously close to getting an intermediate-term sell signal from one of my favorite technical indicators… the Nasdaq Summation Index (NASI).

A summation index is simply a long-range analysis of market breadth indicators. It’s a measure of overbought and oversold indicators – which, by themselves, don’t generate buy or sell signals. But when the momentum behind the index begins to slow down, and we get a "crossover" in the moving average convergence divergence (MACD), a summation index can signal an important intermediate-term change in the market.

Here, take a look…

The blue arrows point to the last few buy and sell signals from this indicator. NASI generated "sell" signals in early September 2008 and mid-January. It produced "buy" signals in late October 2008 and early March.

You can see for yourself how well those signals turned out…

The buy signal last October was a bit premature, but still profitable. The three other signals occurred just before huge moves in the market. So it pays to keep an eye on the NASI.

Now, here’s the problem…

Last week, the NASI was extended but the MACD indicator was pointing straight up and there was no fear of a crossover. Today, however, after a couple days of weakness in the market, the MACD is starting to roll over. There’s no crossover yet. But if the market sells off from here, we’ll almost certainly get an intermediate-term sell signal from the NASI.

If that happens, forget about the idea of a second wave to the intermediate-term rally. The bear will be back.

Best regards and good trading,

Jeff Clark
Growth Stock Wire

Back then, I warned short sellers they were about to get wiped out. Since that essay, the S&P 500 has rallied 20%. The Dow is up over 1,000 points. And investors are breathing a sigh of relief that the worst is over. Indeed, the strength of the recent rally seems to have just about everyone thinking we’ve entered a new bull market.

While I’d love to join the ever-expanding chorus of cheerleaders yelling out, "Give me a B… Give me a U… Give me an L – L," we’d have to add four more letters to express my true thoughts. The rally has been nice, but it’s not the start of a brand new bull market. Stocks will be lower later this year. In fact, they’ll probably be lower by next week.

Stocks are in an intermediate-term rally within the confines of a larger bear market. These types of rallies typically unfold in two strong waves higher, separated by one quick and severe decline.

So far, we’ve seen the first wave up. The rally off the early March lows has been impressive. But stocks are now stretched too far to the upside, and investors are a bit too giddy about their future profits. So the stage is set for a pretty good smackdown.

Short-term traders can take on a short position or two right here. One of the sectors that looks most vulnerable for a pullback is emerging markets.

The MSCI Emerging Markets Index is up 33% from its early March low. It’s hugely extended. And if our stock market corrects here, then emerging markets are likely to get hit even harder.

One way to trade this move is through the ProShares UltraShort Emerging Markets exchange traded fund (EEV). EEV is designed to return the inverse performance of the MSCI Emerging Markets Index. So EEV rallies as emerging markets decline, and it declines as emerging markets rally. Here’s a recent chart…

This is the epitome of a bullish falling-wedge pattern. This pattern forms when a stock makes a series of lower highs and lower lows, and the range between the two gets smaller and smaller.

Most often, these patterns break out to the upside in a dramatic burst of energy – which is consistent with my expectation for a quick and severe decline in the broad stock market. If this pattern plays out, then EEV could rapidly run to $40 per share or higher. That’s a gain of 25% or more from current levels – and it could happen within the next week.

Be sure to take profits quickly, though. The intermediate-term rally still has one more wave higher to go. When that’s done, we’ll be looking to set up some longer-term short sales.

Best regards and good trading,

By Jeff Clark
Growth Stock Wire

Most investors like to pick stocks they think will rise. Short sellers pick stocks they think will fall. Enron is Chanos’ most famous short sale. Chanos knew Enron was a broken company before the stock market. His "short sale" of Enron made a fortune when the stock collapsed… and made him famous on Wall Street.

Jim Chanos is a smart guy and he’s made a lot of money for his investors. Here at DailyWealth, we always pay attention to his investment ideas… as they are almost always profitable.

Right now, Jim Chanos is selling short the for-profit education business.

The for-profit education industry includes companies like DeVry, ITT Tech, and Career Education. These companies charge tuition fees for graduate and post-graduate training in technology and business.

"Kids are graduating from these schools," Chanos says, "with associate and bachelor degrees… and running up $30,000… $40,000… $50,000… $60,000 in debt. In many cases, the cost of these diplomas is the cost of Ivy League diplomas. Some of these kids don’t find themselves any more employable with one of these degrees than beforehand."

The federal government offers subsidized loans to help students attend these institutions… But the problem is, the fees these schools charge are so high, students need to augment their government loans with private financing. Many of these private loans defaulted in the credit crunch… and it’s created a large financial mess.

Chanos thinks these firms are going to have difficulty recruiting students now that the students can’t get financing to pay the high tuition fees… and he’s shorted the stocks of several of the companies in the sector.

There’s no ETF for the secondary education sector… But check out Apollo (APOL). As my colleague Brian Hunt pointed out yesterday, Apollo is the "bell cow" of the for-profit education industry. With a market capitalization of $11 billion, Apollo is an excellent proxy for what’s going on in the sector as a whole.

On April 1, Apollo reported solid quarterly earnings. Revenues were up 26% year over year, and Apollo beat analysts’ estimates of both sales and profits. The stock plummeted 16% on high trading volume.

As I explained on Monday, it’s an incredibly bearish sign when a stock reports decent earnings and gets clobbered for its trouble. It shows the line of least resistance is down.

Last week, the stock market showed strength. The S&P 500 rose 5% on Wednesday and Thursday. While the bulls were charging stocks higher, Apollo’s stock was declining 3%. It may not sound like much, but this divergence shows immense weakness in Apollo’s stock.

Since its big earnings drop, Apollo is down 9% in the seven trading sessions. Most importantly… the 22% total decline has led to a new five-month low in Apollo’s stock price.

This is a textbook example of a stock "acting poorly." The charts of other for-profit educators like DeVry, ITT, Career Education, and Corinthian Colleges are showing same patterns of poor action and multimonth breakdowns.

The world’s best short seller is bearish on for-profit education. And the stock prices are breaking to new lows as the S&P rises… It’s likely this sector will see a big move lower.

Good investing,

Tom Dyson
Daily Wealth

Back in January, we made the unpopular assertion that platinum would outperform gold this year. At the time, it seemed ludicrous – at least, that’s what I heard from the many gold bugs who read our musings here in Growth Stock Wire.

After all, platinum is more of an industrial metal while gold is a a hedge against inflation. So with the economy in a recession and with the government running the currency printing presses around the clock, logic dictated gold should be the metal of choice.

Of course, I’ve never been a big fan of logic – especially as it applies to the financial markets – and we put our money on the shiny white metal instead. Since then, gold has basically marked time. It’s trading about $20 higher than where it was on January 6. That’s a gain of about 2.3%.

Platinum, on the other hand, is up $220 per ounce, about 22%.

While there are more gains ahead, and all of the metals will likely end the year higher than they are today, platinum is approaching an important resistance level. Traders should consider taking some profits off the table here.

Take a look at this chart…

Platinum closed yesterday at $1,195 per ounce, just a fraction beneath obvious resistance at $1,220. It has been a great run over the past three months, but the metal is unlikely to bust through resistance on its first attempt. So in the short term, platinum is due for a bit of a correction.

Traders can sell it here, with the idea of buying it back somewhere around $1,050.

Shares of E-Tracs UBS Long Platinum ETN (PTM) are up about 25% over the past three months. If you jumped into this trade when we first wrote about it, then perhaps now is a good time to enjoy the profits.

Best regards and good trading,

Jeff Clark
Growth Stock Wire

Upon brief examination of the performance of the Dow Industrials on Friday, one factor fairly leaps off the charts: whereas banking issues did well, by and large the shares of companies which make tangible products which people use every day barely moved – for example, Johnson & Johnson, Kraft, Procter & Gamble, Exxon Mobil, and Coca-Cola. Johnson & Johnson and Merck were actually down a notch. Perhaps most tellingly, Wal-Mart gapped way down on opening, the gap held all day, and Wal-Mart shares closed 3.8% lower.

What might Yogi make of it? Is this “déjà vu all over again?” Are investors once again chasing stocks of financial companies which create no products of tangible value, while stocks of companies which make brand-name household staples which we use every day get hardly any play at all – and while the shares of the largest retailer in the country gap down, stay down, and close lower? If bank shares are becoming stylish again, one wonders whether this is getting close to the heady old days of financial magic, and whether this narrow little boom may not have staying power in terms of general performance of the market in the days to come.

I made note of this in my newsletter yesterday. This morning, a financial writer in another publication makes pretty much the same observation, part of his story headline being “U.S. Banks Will Make or Break the Stock Market Rally.”

Let’s take a look at the Candlestick pattern of Wells Fargo shares’ price action last Friday. Prices gapped up $4.95 on opening, and the gap held all day. This is the beginning of an “Island Top.” Most importantly, the price bar of the entire day’s action is a classic Candlestick “Hanging Man” formation, which has bearish implications but requires a lower closing today for confirmation. It’s a warning signal.

There’s no way to tell, this early in the morning before the market has even opened, whether Wells shares will close lower today. But if they do, we had better be aware that the bear is lurking.

William Kurtz
http://www.candlesticksonsteroids.com

The Japanese Candlesticks routinely perform better than that. As a particular point of departure, we do not claim that they are rocket science. Likewise, the study and application of the Candlesticks to matters of finance is not voodoo; or some kind of magic; or figments of the imagination – seeing things that aren’t there. Nor is it hokum. It involves pictures rather than numbers or graphs. It’s pattern recognition. My 8-year-old grandson picked up on it very quickly. Candlestick analysis is used by more and more folks every day, most of whom have their feet firmly implanted on the ground, at least most of the time. I cannot imagine going back to the open-high-low-close bar charts. They miss so much that the Candles tell you in – literally – a flash. “How’re ya goin’ to keep ‘em down on the farm after they’ve seen Paree?” Or, as Cole Porter might have remarked, after having learned the Candlesticks and then being asked to interpret an OHLC bar chart – “Is this Granada I see, or only Asbury Park?”

The Candlesticks excel at calling major reversals of trend. That’s where they shine. They do it by pulling back the curtain and revealing what traders, as a group, are thinking. This is especially so when the observer can watch the market action in streaming data. In some cases, a single day’s candle bar throws off valuable clues about a possible reversal in the making. Oftentimes, a combination pattern composed of two days’ or three days’ bars is especially accurate in forecasting a reversal. Looking back now on the Monthly charts of Bear Stearns and Merrill Lynch, as presented in Candlestick format, it is very clear that at the very height of their market valuations the clues were there for those companies’ eventual demise.

Only days ago, the (more or less) “standard” signals for Wheat were quite dismal. It appeared that prices were headed down. We thought we knew better; and sure enough, we were right; prices rose. In Cocoa, we – and many others, no doubt – knew that a High and a reversal were somewhere close by; but we called it correctly the day before Monday’s massive decline. We’re calling a probable turn in Soybeans in our news which will be circulated later today.

It’s true that we do help the Candles along quite a bit. We add our own 100-octane pictorial material which focuses on the relationships between the waves of the Indicators, which to the best of our knowledge no one else is doing; and we tinker with the Indicators a little, too. It’s all visual. The result is a powerhouse of reversal predictability, all in one package.

Everyone should learn the Candlesticks. It’s easy, fast, and fun. Without having an understanding of the Candles, you’re one lap behind, even before the race starts.

William Kurtz
Candlesticksonsteroids.com

And the price strength of the move has all the marks of a massive new trend.

It’s true the market has fallen 50% in the past 18 months and valuations are now in "cheap" territory for the first time in years. It’s also true sentiment reached an extreme level of panic in March. The AAII investor sentiment survey, for example, reached all-time bearish levels in the first week of March, just before the rally started. We love to be bullish when the crowd is bearish.

Now even some of the market experts I respect are calling for higher stock prices. "You have to be careful not to miss the opportunity," says Mark Mobius. Mark, one of the most famous money managers in the world, sees value in stocks and says we’re at the start of a new bull market.

Recently, another institutional heavyweight, Barton Biggs, told Bloomberg he thinks the S&P 500 Index may rally between 30% and 50%.

Even Whitney Tilson – one of the most bearish fund managers of the last few years – has turned bullish. He’s loading his fund with financial stocks like American Express and Wells Fargo.

It’s hard not to be on the same side as these guys… But the chart is sending us a different message.

In the early 1980s, Jim Fixx was the world’s top running trainer. He literally wrote the book on running… called The Complete Book of Running. It sold over 1 million copies and made him rich and famous. His muscular legs were featured on the cover. The picture of health.

A few years later, Fixx dropped dead of a heart attack. He was 52 years old. Turns out, on the inside, Fixx was not so healthy.

Look at this chart of the S&P 500. The price is rising, and it has the appearance of health… But when we look below the skin, there’s no multi-month breakout developing. The volume looks sickly, and the momentum is erratic and jerky.

Let’s start with the breakout. This index needs to rise through 950 to make a new 65-day high. I studied the initial rallies that followed the great bear-market bottoms of 1929, 1938, 1974, and 1982. If this market was to maintain its ascent to 950, it’d be the strongest, sharpest rise in the history of the stock market… even sharper than the bear-market rally that started in late 1929 after the initial crash.

I think that’s unlikely. If this is a new bull market, it’s far more probable we’ll see the market form a base over the next few months that sets the stage for a breakout later this year.

The market’s volume pattern is sickly… Its recent declines have come on huge trading volume… but its recent rallies have come on low volume. This guy is having a heart attack.

The momentum – as shown by the relative strength index (RSI) – is strong right now, but it looks jerky and sudden. I like to see a trend of higher highs and higher lows driving higher slowly but surely.

In sum, it’s just too early to call the beginning of a bull market. We don’t have enough evidence to be bullish on stocks in general.

On the other hand, oil and copper are breaking out to new highs. And as Jeff pointed out, commodities in general look ready to explode higher. So forget stocks for now… Commodities are a much healthier prospect.

Good trading,
By Tom Dyson
Growth Stock Wire

In the commodity sector, you don’t get a more bullish sign than when the 20-day moving average crosses over the 50-day moving average. (And there isn’t a more bearish sign than when the cross goes the other way.)

Take a look at this chart of the Commodities Index (CRB)…

The 20-day moving average crossed over the 50-day moving average back in September 2007. That kicked off a strong bull market in commodity prices, and the index rallied from about 325 all the way up to 475 – a gain of 46% – in just 10 months.

In July 2008, the 20-day moving average crossed under the 50-day moving average. The bear market that followed cut the index by more than half and inflicted severe pain on anyone invested in the sector.

But now the bull has returned. We got a bullish crossover on the chart last week, and that should lead to higher prices for commodities over the next several months.

There’s no guarantee, of course. The CRB index could just waffle back and forth right here and hammer out a more complex bottom. But given the severity of the recent decline and the overwhelmingly pessimistic investor sentiment, it seems more likely we’ll kick off this up-leg with a sudden, strong rally.

Crude oil, heating oil, and natural gas combine to make up about 18% of the CRB Index. Gold, silver, and platinum make up another 18%. Anyone looking to get on board the commodity rally should look to buy stocks with exposure to these sectors.

Best regards and good trading,

Jeff Clark
Growth Stock Wire

There’s still risk. My downside target for the S&P 500 is 725. But stocks are now in an intermediate-term uptrend, which should last several more weeks at least. A few small stock purchases now ought to pay off well over the next month or two – even if there’s a bit more short-term weakness. And you’ll want to make several big bets if the Volatility Index (aka the "VIX") breaks down below 39.

Let me explain…

The VIX is best used as a fear barometer. A rising VIX shows increasing fear among investors and is commonly associated with declining stock prices. A falling VIX, on the other hand, indicates investors are less fearful and more willing to take risks. It often leads to rising stock prices.

By the look of this chart, the VIX is ready to break down…

This is a descending-triangle pattern. It is created when a stock bounces multiple times off the same support line and each bounce is lower than the previous one. This is a bearish pattern. Most of the time, the constant pounding on the support line causes the chart to break down, creating a sudden and severe decline.

A sharp move lower in the VIX will likely be accompanied by a sharp move higher in the stock market.

The Volatility Index has support right now at just over 39. Once that level breaks, it’ll kick off the next big up-leg for this intermediate-term rally. My guess is it’ll happen sometime within the next week.

You’ll want to have a few small long positions before the VIX breaks down. And you’ll want to increase exposure as soon as it happens.

The next leg could carry the Dow up another 1,000 points from here.

Best regards and good trading,

Jeff Clark
Growth Stock Wire

And then it all came apart yesterday. What happened?

A gap happened, that’s what happened.

Gaps are magnets. They are Sirens, drawing unaware investors toward a rocky reef, They are also resistance levels.

Many Investors failed to notice the gap between the low of February 13 and the high of February 17. It was lying in wait.

On Monday, March 23, prices were drawn right into that gap, left a High there, and closed there. The stage was set. What would happen on the next day? Would Monday’s momentum carry through and propel prices right up and out of that gap resistance, or would the gap win by throwing prices out of the ring to the downside?

The gap won. It trapped the Bulls. It’s still sitting there, as resistance. So now the effort to penetrate it has to start all over again.

Investors ignore gaps at their peril.

William Kurtz
Candlesticks on Steroids

In our work, we use the Japanese Candlesticks method of price display, together with a group of the standard well-known “Western” Indicators. We especially have our eye out for reversals of trend, because we prefer to enter a trade earlier rather than later if all of the evidence, together, permits a conclusion that the timing is right and that the potential exists. In the light of what we saw in the Candlestick formations and in the Indicator readings, our conclusion was that the generally accepted wisdom was wrong, and that Silver prices were fast heading into a top and a reversal downward.

Silver made several false starts toward a reversal from November 2008 onward; and in January and February its rise in prices became nearly vertical as shown on the charts. The pressure pushing down on Silver prices from above increased to an extreme between February 17 and February 23. It became apparent that at some point, very soon, pressure had to be released in the form of a decline in prices. We continued to search for Candlestick price patterns and other evidence which could lead to the conclusion that the top was near.

Finally, on February 20, we noted the emergence of a “Last Bullish Engulfing” pattern in Daily Silver prices, in which the “real body” of price action that day very nearly enveloped, or engulfed, the real body of the previous day’s price action. We were on the lookout for a lower close the next day, and we got it as prices closed lower in a bearish “Hanging Man” configuration. (The Hanging Man appears near the top of an extended advance in prices. It is attended by a small real body near the top of the price bar). The Hanging Man is subject to confirmation by a lower close on the next trading day. That confirmation requirement was triply fulfilled as prices closed successively lower three days in a row. The cheese was made even more binding as the price bars of February 20, 23, and 24, together, are a variation on a (bearish) Candlestick “Evening Star” pattern. Final confirmation of a turn was provided by the falloff represented by the tall black cand le on February 26.

The Indicators were not asleep while the Candles were putting together all of this evidence for us. Over a period of several weeks, some of them have taken to traveling right along the range extremes of their allowable travel. One of them, the RSI, showed a divergence from the price trend line of Silver, in that the RSI declined while the price of Silver continued to advance. Through experience, we have found that a divergence such as this often is a predictor of lower prices.

It is likely now that Silver will continue to decline. We are targeting the 1075 level before it is likely to find any substantial support. Those investors who are still Long in Silver might begin to think seriously about exiting, or at least in elevating your safety sell stops to a level which is close underneath current prices.

The moral of the story is that Japanese Candlestick price charting plus good Indicators which are accurately interpreted gave us reason enough to conclude that Silver prices were pointing lower; and the proof of the pudding arrived yesterday as Silver finished a four-day period of net decline, to the tune of 155 cents.

William Kurtz
Commodities Junction

This predictability derives from the use of Japanese Candlestick price display plus the use of some of the many standard Indicators which have been prevalent in recent decades. In combination, they very often correctly forecast the course of prices in future days.
Today, that uncanny ability to predict price action was displayed once again, in the patterns of Gold.

We had been saying for many weeks in our Newsletter that Gold was headed for a High and a price reversal. Of course, this flew in the face of general wisdom, which almost universally held that the poor state of the economy and the persistent decline in stock prices could have no result other than a continuing increase in the price of Gold. We thought we knew better than that, and awaited the evidence to prove us correct.

The first hard clue that a reversal was imminent occurred on February 20, when the “real body” (that part of the daily price action which is encompassed between the opening price and the closing price) completely wrapped around the “real body” of price action of the previous day. At the top end of a long trend, when this pattern appears it is called a “Last Bullish Engulfing” pattern, and it is considered to be bearish. On the next trading day (February 23), prices closed lower, and the Candlestick pattern of price action on that day was both a “High-Wave Doji” (a Doji occurs when the opening price and the closing price are the same, or nearly so) and a “Hanging Man.” Both of them have bearish connotations. The Hanging Man requires confirmation by a lower closing price on the next trading day. With these two signals in mind, we were alert for a lower close on February 24.

Prices on February 24 gapped lower on opening and did in fact close significantly lower on that day, thereby providing the necessary confirmation of bearishness. Today, February 25, prices closed still lower (by about $20), which has all but certainly confirmed that Gold has topped and rolled over, and that prices are very likely to decline from this point.

The Indicators, too, had a hand in the prediction. For several weeks, some of them have been riding along the numerical extremes of their respective ranges; and in one case there has been a quite evident divergence between its trend line and the trend line of Gold’s prices, in that the Indicator’s trend line has been pointing Down while Gold’s price trend line has been pointing Up. We have learned that a divergence such as that is a warning that a continuation of higher prices is very suspect.

The bottom line is that the combination of Japanese Candlestick price charting and a close reading and understanding of the Indicators gave us good reason to believe that Gold prices are heading lower; and the proof began to be apparent today.

William Kurtz
Commodities Junction

It shouldn’t be that surprising.  Almost every Tom, Dick, and Harry with an Ameritrade or Schwab trading  account doesn’t have a clue what’s going on in the stock market or any other financial market for that matter.  So I guess the advisers and analysts that they get their advice from only have to be slightly more intelligent.

I’m not complaining.  In fact, it’s just the opposite.  Financial markets are a zero sum game.  For every 20% gain you have, the counter party in the trade loses 20%.  So we should be thankful for bad analysts and worse investors.  Just remember, wealth is never destroyed, only transferred.

Bottoms, Risk, and Asset Prices

I’ve discussed very little about market bottoms.  I did discuss in a prior issue of B&B about a gold potentially forming a consolidated base that it could rally from, but that is the extent of it.  I happen to have some very interesting insight on the coming market bottom, but to understand my hypothesis, we must first identify how we got here.

The road to DOW 7500 has been covered and analyzed rather extensively.  Although it’s been beaten to death, I would simply like to restate the driving force behind the decline of asset prices.

The cause was a deflationary process resulting from the de-leveraging of a financial system that was leveraged to extreme Keynesian standards.  Leading the way in this massive margin call were the banks, hedge funds, and other investment fund.  As these piles of money liquidated assets, risk was repriced into the markets.  Hence we entered, and are currently in, a "preserve" instead of a "risk-taking" climate.

When risk reenters the market, we will set asset prices begin their next rally.  I think we are nearing that point.  I’m not calling a bottom yet, but I have two practical ways to identify when the risk is returning, which implies a bottom in asset prices.

Charting Bottoms

This first charts is the price of the 10-year Treasury Note:

Obviously you can see the fantastic run up in price.  It’s been well documented.  But I’m not here today to talk about the Treasury market bubble and the growing liabilities of our nation.  Before that bubble really pops we can use the 10-year Treasury price as an indicator of risk and tool to identify market reentry points.

You can see the pull back which has turned and rallied in sync with the decline in stock prices over the past week.  What I’m looking for is a correction below the 50 day MA and a period of consolidation between the 50 and 200 day MA.  I believe asset prices will begin to rise as that occurs.

Once we break support at the 50 day, looking at the chart you can see that there really isn’t any support until 120. Beyond that, it’s hard to say.  When the bond bubble pops, the Treasury market may no longer be a good judge of risk. I have another chart that should help

The next chart looks at a market that is one of the purest ways to identify risk.

We are looking at the daily Light Crude chart here.  Oil will probably be one of the easiest ways to identify when risk reenters the market.  I’m here to use it as just that.

Oil just doesn’t seem to be quite ready to move higher.  You can see how it just about kissed the 50 day MA before turning around.  Oil has yet to stop making lower lows and has formed a formidable double top at the 50 level.  The 50 level also happens to coincide with the 50 day MA, making any tests at breaking resistance here even more difficult.

Long term outlook is a different story.  In the past 6 months, oil’s range is from 145-35. So as far as risk-reward scenarios go, you have to like the long side here. Add that to the reflation story and it seems like a place worth committing some capital.

For the sake of this article, it doesn’t matter.  When oil rallies through resistance at 50, and starts to form a base above its 50 day MA, that will signify risk returning to the market.

Conclusion

So I’m not exactly calling a bottom, but I’m telling you when I can.  Look for the 10-year Treasury Note to break below and hold below its 50 day MA and look for oil to break above and hold above its 50 day MA.  Although we aren’t there yet, I believe this point to be in the not so distant future

Please note that this article focuses on risk and asset prices as a whole.  Besides a brief reference to oil, I didn’t focus on the specifics of any markets.  That’s because I believe this to have a "rising tide lifts all boats" type of rally.

Look for a bear market rally of around 40% in domestic equities.  I look for gold to lag other commodities early, but have a strong surge late.  The last thing I wanted to say is that when these markets move, it will most likely be fast and violent.  The pundits will be quick to jump on board, especially with the rally in stocks.  Be aware of this, as it will present opportunity.

Nicholas Jones
Analyst, Oxbury Research

and went home (see chart, above).  And as for shipping, the dye has also been cast.  A look at the venerable Baltic Dry Index tells a tale of suction the likes of which would shock even Count Dracula.  The shippers have simply been tied down and bled at full pump (see below).

It appears there’s nothing to be moved.  Nothing.

So how’s a good, old fashioned transport company supposed to avail itself of this windfall in fuel savings?

“Ahh,” say the intelligent men whom they call economists.  “This is the point.  The fuel savings will create…” 

Yes?  Please tell.  What will the fuel savings create?

“The fuel savings will create – fuel savings!”  And the audience gasps, and the band strikes up, and the dancing girls arrive, and we all move over to the bar for a drink.

At which point I embarrassedly ask my close friend and knower of all things economic, Andras, what it all means.  He explains thus: the fuel savings will slash the costs of nearly everything, from gasoline to home heating to business energy expenses – everything will fall, he says.  And margins – both household and business margins – will expand.  There will be profits and spending and a return to the glory days and…

I look at the dancing girls and take a slug of bourbon.  “But, come on, Andras… how much of a difference could it really make?”  Andras refers me to the handout provided by the clever economist.  “Look here,” he says.  “It says that in just the past four months we’ve had $300 billion of indirect economic stimulus from lower gas prices.”  “That’s 2% of GDP,” I say.  Andras nods.  He’s looking at the dancing girls.

Yep, that’s the way it goes in the world of economics, folks.  Every 10-cent drop in gasoline prices, the economists tell us, can be equated to a $12 billion tax cut.  And the greatest beneficiaries are businesses and the lower- and middle-classes, because they spend a greater percentage of their incomes on energy.

But when will the benefits be seen – and where?

Generally speaking, the transport stocks are the first harbingers of an uptick in business activity – which is why we’re watching both the Dow Industrials and Transports very closely for signs of a trend reversal under classic Dow Theory.  If the stimulus is sufficient, we may very shortly see a reversal in market direction.  (And if not, there’s always the dancing girls.)

As it happens, according to Dow Theory we’re at an investment crossroads literally today, as you read this report.  The Industrials and Transports will either reconfirm the bearish signal given in the beginning of October, when the Transports declined to new lows.  Or, only one of the averages will break to a new low, while the other begins to trend higher.  Under classic Dow Theory this signals a non-confirmation reversal

and would only become an outright bullish signal when both averages hit new reaction highs.  The third possibility is that both averages reverse and trend higher without setting new lows.  Again, if and when new reaction highs are hit by both, a bull market would be signaled.

Yet even without taking any of this into account, there are transport companies out there that are making money.  They come from a sector that we never particularly liked (it’s perennially plagued with losses), but today it seems there’s something rather worthy in the group.  They don’t move commodities – rather, human cargo.  We’re referring to the airlines.

As a group, the air carriers have not impressed.  But there are a number that have proven themselves standouts in nearly every respect.  Here’s one.

Ice Cold Profits.  Alaska Air Group Inc.

No, Alaska Air does not refer to the cranial contents of a particular, unsuccessful election candidate.  On the contrary, this outfit has positively skated over the competition in nearly every aspect of its business, including all important stock price.  Take a look below at a one year comparison of The Dow Jones Transport Average, the Dow Jones Airlines Average and Alaska Air Group (ALK:NYSE); the outperformance is staggering.

At a time when the market was literally crashing – nose diving, even – when the wings were falling off the financial world – when high fliers of every variety were spiraling toward earth – Alaska Air was gaining altitude.  One hundred and fifty percent in the last four months, friends!  The technicals, too, are bullish:

1. AKL has traced out a clear head and shoulders reversal pattern whose initial count should bring the stock to roughly $38.

2. The shares have tested and bettered resistance at $20 and $24.  Next resistance is shaping up at $28.

3. The 50 and 200 day moving averages have made a bullish crossover and all trade in the stock is taking place above the MA’s.

Needless to say, it’s all very bullish.

Just who is Alaska Air?  In brief, they’re the country’s tenth largest airline; they’ve got the youngest fleet of aircraft, and they’re the largest wholesaler of Disneyland vacation packages in the U.S.  The company has over a billion dollars in cash and actually turned a profit last quarter (an exception in the airline industry); EPS was $1.10.  

Alaska Air Group is primarily a West Coast operator.  They have a loyal customer base and one of the top fuel hedge portfolios in the entire airline industry.  Since July ’02, the company’s hedge program has garnered half a billion dollars in benefits!

It’s good to know someone got oil prices right.

Matt McAbby
Analyst, Oxbury Research

A triangle is composed of not fewer than five waves (a-b-c-d-e) which ricochet like a pinball between the upper and lower trend lines of the triangle. When the “e” wave is complete at or near a trendline, prices will bounce away from it in the direction of the next major move. As prices exit the triangle at the opposite trendline, we can measure the probable extent of the next move: it is likely to be the size of the “a” wave move.

In the S&P 500 right now, the construction of the triangle seems to be well along. The “a”, “b,” and “c” waves are complete, and the “d” wave appears to have completed yesterday at the 875.81 low. The intraday Candlestick readings yesterday displayed numerous “Hammer” and “Doji” patterns, which are bullish. Consequently, we expected that prices would very likely rise this morning as the onset of the “e” wave, and they have done precisely that.

The top of the “e” wave would probably be in the neighborhood of 960 if the wave completes today, or at about 950 if it completes tomorrow and at about 940 if it completes on Monday. Anything beyond that would mean that the triangle is getting very long in the tooth. If prices should continue in a lateral fashion beyond what we perceive as the apex, that would mean that there never was a triangle at all.

As of now, prices are taking aim at the top trend line. It is not necessary that they reach that point for the “e” wave to be complete.

If all of this observation is on the mark, after prices do reverse and head downward after the completion of the “e” wave, we would expect that the next downmove would be the size of wave “a” as measured from the point of breakdown from the bottom trendline, which gives us a target of 686.

William Kurtz
Candlewave

All looked well for the Euro back in July. it appeared that the ascendancy of the Euro was becoming a permanent fixture, and that the further obliteration of the Dollar was inevitable. How things have changed!

Was this cascading decline inevitable? Perhaps not. Was it foreseeable? Absolutely.

The “double top” price formation is generally considered to be a bearish omen. On the Euro’s Monthly chart, we see a nearly-identical top in prices for the month of April and for the month of July. These readings were refined further in the Weekly chart, showing nearly identical tops for the weeks of April 24 and July 18; and they were still further refined in the Daily chart, showing nearly identical tops on April 22 and July 15. Investors and traders who had been aware of the April formations would have been well-served by keeping an eye on price progress during July to see whether a similar pattern emerged; and if it did so, they could have taken appropriate action at that time in anticipation of a substantial downdraft in the price of the Euro.

Had they been schooled at all in Candlestick interpretation, investors would have noted at the end of April that the price bars on the Weekly charts of the Euro exhibited long upper “shadows,” or “tails” or “wicks” if you prefer, which were clues that traders had tried to drive prices higher, but that in each case they were rebuffed. This circumstance is also a bearish indication, which the knowledgeable trader could have added into the mix of evidence following the second Double Top in July – and he could have made his move to the Short side.

Failing a response to all of that evidence, three weeks in a row of declining Euro prices in July ought to have been enough to satisfy all but the most diehard trader that there was a strong likelihood that prices were on their way down for an extended stay.

William Kurtz
Candlewave

And as the new week’s trading approaches, we also peer down from that yawning precipice to a barely visible bottom and ask: could it be the end?

Nietzsche’s intention in the above quote was to warn us against the allure of gazing trance-like into the seemingly bottomless, vertigo-inducing wastes of doom, lest they become mirrors into our own meaningless lives.  For it is the abyss within ourselves that so terrifies.

Without the anchor of faith, Nietzsche wrote – without belief that life has a purpose and a time and place for everything – we are doomed ultimately to cast ourselves headlong into the meaningless void below.  A leap from the precipice that both swallows and gets swallowed all at once – a destitute deed that points up the universe’s absolute meaninglessness.

But is it so?  Certainly for one whose life is markets and profits and returns and wealth-creation, the abyss of a market sell off holds a mirror to the soul – and exposes the material life for what it is: emptiness and waste; vanity and selfishness.

Take a good, long gaze in the mirror.

But for those who are anchored in the spirit and purpose of existence – whose lives are not focused on mere “getting and spending” – reality is different.

The market appears poised to disintegrate.  Panic is the ethos of the season.  Capitalism is in doubt – its destruction being cheered by billions of America’s enemies worldwide.  We have been through manias and bubbles – are we now destined for depressions and banking collapses?

On one popular financial blogger’s site we read about “Armageddon trades” – stocks that will thrive during a meltdown not only in stock markets, but in the prevailing social order.  His picks include Campbell’s Soup and Taser, in keeping with the average Joe’s need for hoardable food and effective self-defense.  The chart is here:

Over the last three months, Campbell’s is up 16% and Taser a giant 34%, making for performances of 30% and 48% above the S&P 500 over the same time frame.

So is it time to load up on spam and head for the hills?

Perhaps.

But perhaps not.

Let’s take a look at a few more charts first.

Here is a chart of Wells Fargo (NYSE:WFC) – one of the biggest banking regionals still alive today.

Consider the following:

1. Wells Fargo is now bidding for control of distressed Wachovia, an East Coast regional that would significantly push Wells Fargo further up the U.S. banking food chain.

• Is this something that a banker with Wells Fargo’s record does directly before Financial Armageddon?

• Remember, Wells Fargo largely sidestepped the subprime loan fiasco by sticking to centuries old lending practices and eschewing flavor of the week banking gimmickry.

2. Note, too, that Wells has risen impressively on very high volume after bottoming in mid-July at just over $20 a share.

• Is that the technical action of a stock about to step into the abyss?

3. The stock is trading above its rising trendline and has maintained trade over the 200 DMA for over a month

• Do you recognize a bearish technical omen in these chart fundamentals?

In short, Wells Fargo may be a picture of health as far as banking stocks are concerned.  But believe me, folks, no one gets off scot-free in a market meltdown.  And it would take a significant external and unknown shock – likely on the order of a 9/11 attack – to move Wells Fargo toward any sort of purgatorial abyss.

And here we get to the crux.  My friends, there will be no abyss.  Sentiment is so disastrous and the majority of investing Americans is so seized with “deer-in-the-headlights” inertia that the chances of a general public sell off are minimal – possible, but minimal.  Again, we would have to see a major external event come into the play in order to flip to the bearish view.

Consider this: the dividend yield on the Dow Jones Industrial Average (3.14%) is higher than the return offered on 5 year U.S. Treasuries (2.68%)!

Absurd!

It’s a situation that is simply unsustainable.  Panic buying (of treasuries) and selling (of stocks) is exactly that – panic.  And he who is ready to capitalize here, now, at the very precipice, amidst the panic will make off like a titan in the end.

There is no place for fear in the trader’s toolkit.  Only cold analysis yields fortunes.

Look here:

The U.S. Dollar Index is up 15% from its springtime lows – and this at a time when the entire world is fixated on the bailout plan and how much damage it’s meant to do to the U.S. economy!  Am I the only madman in the Gulag?!  Why is the world a net buyer of U.S. dollars?  Why aren’t short sellers driving this worthless currency to the bottom of a godless ocean!?  You can still short the U.S. Dollar, gang!  WHY IS NO ONE DOING IT?!

The answer is simple.  Inflows.  Money is starting to wash up on American shores because however bad those shores may be littered they’re still the place where money gets treated best.

Pick yourself three or four quality, dividend paying stocks with fundamentals and good chart patterns and start buying them.  And leave the blank stares and mouth-breathing to the CNBC addicts.

And for some great investment ideas, try Oxbury’s Residual Income Report.

Here is a recent feature from that premium service:

Odyssey Re Holdings, whose stock popped within a week of our recommendation and is poised to ramp significantly higher in the weeks ahead – despite the doomsayers.  And (gasp!) a financial stock, no less!

“To every thing there is a season,
 and a time to every purpose under heaven.”

The time is now for courage and proper resource deployment.  Get on it.

Matt McAbby
Analyst, Oxbury Research

Not two days have elapsed and they’re at it again already. Wall Street and their bailout-crazed government lackeys, that is.

Just because Congress said ‘no’ to the first version of the $700 billion bailout plan doesn’t seem to have fazed its backers. "If at first you don’t succeed, try and try again" seems to be their motto. ‘No’ is evidently the wrong answer. Obviously the voting public (and Congress) are too stupid to realize the magnificent benefits of the master strategy and so the Senate has decided to vote upon essentially the exact same legislation.

The new bill still incorporates $700 billion to buy troubled assets from banks, but just like one of those over-hyped junk mail sales letters you throw in the trash, the proposal includes several new provisions (Special Bonuses Available! You must act now!!!) which are intended to attract more Republicans votes in the House.

Special Bonus #1: Temporarily raises the FDIC insurance cap to $250,000 from $100,000. The FDIC may not charge member banks more to cover the increase, and allows the FDIC to borrow from the Treasury to cover any losses that might occur from the higher insurance limit. (OK, this makes some kind of plausible sense.)

Special Bonus #2: Extends renewable energy tax breaks for individuals and businesses, including a deduction for solar panel purchases. (We had no idea that solar panels were a key part of the credit and mortgage disaster. Perhaps those sneaky charlatans at Goldman Sachs are planning to corner the market?)

Special Bonus #3: Continues numerous other expiring tax breaks such as a research and development credit for businesses and also state and local sales tax deductions for individuals. (Don’t worry, these tax breaks don’t make any sense to us either, considering that this is supposedly critical legislation to resuscitate the financial sector.)

Special Bonus #4: Offers relief from the Alternative Minimum Tax for millions of Americans. (A good idea but again, what does this have to do with failed mortgages and banks presently standing in front of the firing squad and awaiting execution?)

Special Bonus #5: Introduces a "Mental Health Parity" provision which requires health insurance companies to cover mental illness at parity with physical illness. (At last, this is making sense! You must be mentally ill not to love this bailout package. Either that or you shortly will be mentally ill once the full effects of hyperinflation take hold in the economy.)

The Senate bill requires the president to send a legislative proposal to Congress that obligates the financial industry to reimburse taxpayers for any net losses associated with the program after five years. Collective punishment is a wonderful thing, as this means that all the financial companies — even the ones astute enough to avoid the need for a bailout — get to pay for the incompetence of the others. But don’t feel too sorry for them, as we’re sure that they’ll be more than happy to pass on any extra costs to you.

And of course there’s another way that you (the lucky American taxpayer) really gets to enjoy the benefits of collective punishment. Never mind that you lived within your means, only bought what you could truly afford, and never defaulted on a single payment on anything in your life. You get to bail out everyone else who was less responsible to the tune of $2,300 per person. And that’s a conservative estimate as we’re sure it will be much more than that overall.

What’s more, your beloved US dollar gets destroyed in the process.

Why We Think The Bailout Package Is Doomed

You may or may not be aware that the Federal Reserve pumped $630 billion into the global financial system by increasing its existing currency swaps with foreign central banks by $330 billion to $620 billion.

And the Term Auction Facility, the Fed’s emergency loan program, expanded by $300 billion to $450 billion. This is the largest liquidity infusion since last year’s credit seizure and it came hours before the U.S. House of Representatives first rejected that $700 billion bailout on Monday.

Do you realize what that means? The Fed poured $630 billion into the market before the vote, and yet the S&P 500 was already down dramatically and tanked even further after the vote. A mere $630 billion from Bernanke (only slightly less than the $700 billion that Paulson wants) failed to arrest the slide in the market.

If we’re truly facing an economic catastrophe, that’s irrefutable proof that Paulson’s $700 billion will do nothing of note except blow out the U.S. government’s debt obligations and the U.S. dollar with it.

If the dollar gets cut in half due to these shenanigans (all too likely if trillions in obligations come due), then your cost of living doubles. Won’t that be fun, especially when you know that $700+ billion of your dollars went to rescue bankers who made highly risky bets that the real estate market would go up forever?

Fortunately, there’s a way to protect yourself, and it doesn’t mean hiding all your cash in a mattress.

A Golden Future Amidst The Financial Hurricane

Short term fluctuations aside, long term security involves gold. Physical gold (in the form of coins or ingots or high-carat jewelry), gold futures, and gold ETFs and stocks are about the only way to protect your savings from the depredations of Wall Street, the Fed and the government.

Here’s how the underlying asset itself is doing, as represented by the nearest COMEX futures contract:

Gold is struggling to close over $900/oz right now, but don’t let that worry you. The yellow metal is one of the most volatile assets around and the long term trend is up.

If you’re very conservative and don’t feel happy buying at a reduced price (in our opinion anything under $900/oz is a bargain), then wait for a strong close over $1000/oz. But by then we think it will run away and you’re likely to be chasing a train as it leaves the station.

The AMEX HUI (Gold Bugs Index) is also showing some strong support right now. It’s underperformed the metal, strangely enough, but is poised for what should be a new upturn. We’ll be happier seeing the HUI close over each of those moving averages, but for now gold stocks are available at bargain prices.

Two of the better-performing HUI components include Kinross Gold Corporation and Golden Star Resources.

Kinross is a Canadian-based gold mining company with eight mines in the United States, Brazil, Russia and Chile. It’s the third-largest gold mining company in North America by reserves and seventh in the world in production and has been the top-performing senior gold equity on the Toronto Stock Exchange and the NYSE in 2006 and 2007. From the chart, it’s worth a buy at $14 if you’re lucky enough for it to fall that low again:

Golden Star is a much smaller mid-tier gold mining company with two operating mines situated along the prolific Ashanti Gold Belt in Ghana, West Africa. It’s obviously suffered in the recent commodity downturn, but this is a stock that traded at $3 only a few months ago and has suffered no adverse corporate developments since that time:

Whatever you choose to do, we hope you take the threat of an eroding U.S. dollar very seriously and act accordingly. Since the government appears intent on selling you out via this insane bailout plan, you need to protect yourself now.

Good investing,

Nick Thomas
Analyst, Oxbury Research

For years now, many enlightened financial observers have been warning that the national debt was a ticking time bomb. Guess what? The time bomb has exploded.

But the so-called geniuses on Wall Street didn’t see it coming, did they? Apparently they were far too impressed by their own financial theories, “innovations” and models, not to mention extremely lucrative salaries and bonuses.

And the response of the global markets (and the DJIA itself) to the Great Bailout Fiasco of 2008 has been anything but enthusiastic. Even before the failed vote in Congress just now, the FTSE had already plummeted …

… the Hang Seng Index in Hong Kong had slumped …

… and virtually every other major stock market that counts including Europe (France and Germany), Japan, and Canada (our biggest trading partner) went nowhere but downwards.

Even traders on the NYSE know a financial turkey when they spot one, especially once Congress failed to assemble enough votes to pass it.

Some of America’s closest Western allies and trading partners have been particularly scathing.

Canadian Prime Minister Stephen Harper, who is currently running for re-election on October 14, has come forward and said, “A lot of things have gone wrong here and, by the way, there were a lot of warning signs. This should not be a huge surprise. I certainly had expressed my concerns about some of these things to my American counterparts in the time leading up to this.”

The rest of the Group of Seven (G7) industrialized nations have also been less than complimentary over the way the U.S. financial system has been managed.

French President Nicolas Sarkozy recently raised the idea of a November summit of the world’s major economies to rein in America’s “mad system” and establish “principles and new rules” to regulate financial markets and punish those who “jeopardize people’s savings.”

German Finance Minister Peer Steinbrueck last week also claimed that the “Anglo-Saxon” model of banking has “an exaggerated fixation on returns.”

On the whole, U.S. allies have refused to back Treasury Secretary Henry Paulson’s $700 billion rescue plan. This is despite their own problems which have snowballed over the weekend. Major Belgian-Dutch financial services firm Fortis has been partly nationalized by Belgium, the Netherlands and Luxembourg via a EUR11.2 billion ($16.3 billion) bailout following fears that the European giant was on the brink of insolvency following large credit-related write-downs.

The British government was also forced to nationalize mortgage lender Bradford & Bingley due to that firm’s risky $91 billion mortgage and loan portfolio.

But what stank so badly about the now-failed plan that Congress couldn’t bear to pass?

A 228-205 Failure As Congress Rejects The Bailout Package

Despite enormous pressure from the Treasury, the Fed and the White House, the House of Representatives voted to reject the $700 billion rescue package even though supportive House leaders kept the voting period open 40 minutes past the allotted time in a failed attempt to convert “no” votes to “yes” votes by pointing to damage being done to the markets.

It would seem that despite all the screaming and fear-mongering, congress is not entirely convinced that the credit freeze will actually drag down not just Wall Street investment houses but also the savings and portfolios of millions of working Americans.

Or at least, they want a far better deal than the one that was forced onto their laps with such haste. Even though the latest deal was supposedly strengthened by new taxpayer safeguards, there were still key problems about accountability and cost.

One of the things that stuck us as most peculiar was this section:

Section 135. Preservation of Authority.

Clarifies that nothing in this Act shall limit the authority of the Secretary or the Federal Reserve under any other provision of law.

This sounds awfully dictatorial to us despite so-called safeguards in the form of the Financial Stability Oversight Board (charged with ensuring that policies protected taxpayers and were in the economic interests of America) and a congressional oversight panel (charged with reviewing the state of financial markets, the regulatory system and the Treasury’s use of its authority under the rescue plan).

Further problems:

The SEC retained the ability to suspend mark-to-market accounting rules on a case-by-base basis, leading to all kinds of potential abuse due to lobbying and favoritism. Essentially, some banks would have been forced to report excessive losses (and then driven into bankruptcy) and others would have been allowed to “fake” solvency long enough to survive. There have already been a lot of fingers pointed as to why Lehman Brothers was allowed to fail completely and other institutions (such as Merrill) were allowed to merge with a suitor. This package would have magnified that conflict of interest immensely!

Also, Paulson could have chosen to buy assets from any financial institution that does business in the United States (including pension funds and even foreign central banks!) with wide discretion over what he could buy and how much he could pay.

And don’t forget that if this had passed, another $2,300 would have been added to your share of the national debt, with all bailouts potentially amounting to a staggering $1.8 trillion (or $15,000 per US household).

Where To From Here?

It won’t take long before Paulson comes up with another version of his plan. What could he do to make it more appealing to U.S. politicians and taxpayers? He might want to take a look at what Sweden did in 1992.

After years of ineffective regulation, short-sighted economic policy and a property boom that was going bust, Sweden was faced with a major financial crisis of their own, one very much like the one facing America right now.

But the Swedes didn’t just bail out its banks and investment houses by having the government take over bad debts, they forced all banks to write down losses and issue warrants to the government. In turn, the government announced that the state would guarantee all bank deposits and creditors of the nation’s banks, formed a new agency to supervise institutions that needed recapitalization, and created another agency to sell off mainly real estate assets originally held as collateral.

The government became an owner and when distressed assets were sold, the profits flowed to taxpayers including final payouts as the banks were taken public once the crisis was over. No banks were spared unless they wanted to find their own way out of the mess, and several subsequently decided to preserve their shareholder equity by arranging their own recapitalizations. Even so, the government seized a large proportion of the country’s banks and drained share capital before injecting cash.

The plan cost 4% of the country’s GDP (as compared to 5% of U.S. GDP for the now-failed Paulson Plan) and the final cost was less than 2% — perhaps even zero depending on rate of return calculations! — once all positions were wound up. The country was back on its feet in record time with minimal damage to its reputation and economic viability.

Now how’s that for a vastly improved plan?

However, it remains to be seen if our own government will have the will and the integrity to implement a similarly tough program. We can only hope!

Good investing,

Nick Thomas
Analyst, Oxbury Research