05/17/05 - TraderMike: Back in Action
I just back from the Las Vegas Money Show Monday at around midnight. It was a funtrip and I really enjoyed meeting some of you. I saw some old faces and new facesthat I can now attach to old names. Due to the time difference I ended up going tobed at 2 in the morning. I've been spending the entire day catching up with theactivity in the market.
Before I left I was working under the assumption that the long-term trend of the broadmarket was one in which a stage three top was being completed and by the end of the summerthe DOW and Nasdaq would enter stage four declines. However, for the short-term Iwas quite bullish, believing that an important intermediate term low have been put in andwe should see the trend remain up for the next several weeks.
With gold I was expecting gold and the gold stocks to bottom within the next threeweeks with the dollar congruently breaking resistance at 85 for one final pop.
Let's see if things have changed while I have been gone. Last week the the DOWfinished down 205 points while the Nasdaq gained 9. Oil prices and oil stocksdeclined. There is no sign that the market rally that started at the end of theApril has ended. Supports are holding.
In fact today the Nasdaq closed above its 50-day moving average and right on itsdowntrend line that began in January. One more up day will be confirmation that arally is indeed in place, as if any more confirmation is really needed.
Interestingly the DOW is under performing the Nasdaq on this bounce and so are thesectors, such as drugs and health care, that are now looking more bullish for the rest ofthe year. In fact the most important thing that has happened in my absence is theout performance last week of the very sectors that were leading the market down fromJanuary to the beginning of May. These sectors include Internets and technologystocks.
In other words the sectors that led the market correction are now leading thebounce. This IS NOT characteristic of a new bull rally, but is the exact type ofthing you see during a bear market rally or a rally fueled by short-covering andspeculation.
I do think that the DOW, health care, and defensive sectors will rise during thisrally, however, the Internets and tech stocks will likely continue to lead the market overthe next few weeks. Tomorrow I am going to look for trading candidates in thesesectors for people who want to trade the rally. Investors should use this rally as achance to get out of these stocks, raise cash, and use that cash to rotate into defensivesectors if they line up for a major stage two advance later this summer.
In the final analysis nothing has changed to alter my views of the overall markettrends.
Now let's turn to gold, because that is where things are getting interesting.
The dollar broke 85 while I was gone and closed above 86 today. Gold has fallento 418. Gold commercial traders have finally started to close out theirpositions. According to the last commitment of traders report as of the week endingMay 10, 2005 commercial traders went long 11,543 contracts while covering 17,612 contractsand are net short 108,549 contracts. This is exactly what we want to see, becauseimportant bottoms in the gold market have been made when commercials have been net short40,000-50,000 shares. Since gold has fallen some since May 10 they have have likelycovered more contracts since then. We won't know the exact figure until the nextcommitment of traders report is released.
I have been expecting gold to make its major bottom in the 400-410 area and it lookslike we are on track to do just that. Gold usually bottoms with a final gap downdrop of 5-10 points one morning. If we get that over the next few days I plan onusing such a move as an opportunity to buy gold stocks for a tradeable bottom.
My plan is to buy a large position, place a tight stop, and then sell half of theposition once the XAU gets overbought on a daily chart. After gold and the goldstocks bottom I expect each to go sideways and base like they did last summer. Atsome point the gold stocks will begin to out perform the metal and the downtrend line onthe XAU/Gold ratio chart will be broken. At that point I will buy heavily into thegold stocks with the intention of holding as I expect a huge rally to commence after theXAU/gold ratio is broken. This is exactly what happened last year and things arelooking to repeat again. I want to have large position on such an entry point. This is the safest and most profitable time to get into the gold stock market.
If I buy gold stocks this week I will post a bulletin immediately afterwards. Tomorrow I am going to go through the individual gold stocks to identify the ones I wantto buy to hold and to trade and will go through tech issues for short-term tradingcandidates.
About Mike Swanson
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