When Stuck In A Depression, Head To The Movies With Netflix

Netflix has gone from only offering a DVD-by-mail rental service to now also offering streaming video of both movies and TV programs in near-DVD quality. That makes their service far more convenient (than always having to wait for DVDs to arrive in the mail and having to mail them back after viewing). This may be one of the reasons why NFLX stock has climbed up to again test the high near $40 from 2004.

A second reason may perhaps be found in a bit of information from the Great Depression of the 1930s: movie theaters experienced a boom in the number of tickets sold, perhaps people wanted something to take their mind off the economic situation?

Of course, there was no DVD rental business (and certainly no online video streaming!) during the 1930s, but NFLX may now stand to benefit from capturing a share of the potentially increasing interest in watching movies over the next couple of years. For larger families and anyone watching several movies per month, NFLX is also far more affordable than paying high ticket prices at the box office.

NFLX broke out of a reverse head-and-shoulder formation (marked by the two green lines) the week of January 30th this year. The whole period from 2004 to present could plausibly represent a huge base from which a major advance could take place on a genuine upside breakout above the $40.90 high.

Below is a ratio chart of the gold price versus the S&P 500 Index - broadly representing the overall U.S. stock market. Most equity markets worldwide also fall or rise roughly in line with the S&P 500 index. The higher the ratio, the more gold is worth compared to the equity market. The ratio appears to be in a very strong, long-term bull market.

The anticipated correction in the ratio back to 1.00 has taken place. This indicates that we have either already arrived at or are close to a likely good opportunity to exit and/or short the general equity market and once again go long gold (or add to existing positions). As can be seen from the chart, even a more severe correction back to 0.80-0.75 would leave the bull market fully intact. At what level the S&P or gold would be if the ratio corrects that far is uncertain - it will likely be a combination of the stock market rising further, perhaps to S&P 930-945, and a deeper correction in gold toward 730-680. We do not believe this to be the most likely scenario, and continue to expect a bottom in gold between $855 and $823.

It would not be outside the norms of history if gold eventually reaches a 5:1 or a 10:1 ratio against the S&P 500 (years from now). Plenty of chart analysis and twisting turns will take place on the way there, however. At this point it is to a large extent little more than a plausible speculation based on the expected madness of governments and central banks in printing enormous amounts of paper currency to fund massive and misguided bailouts, as well as attempts at artificially stimulating demand in the economy.

Based on our calculations: When gold hit its peak in January 1980, the Gold/S&P ratio hit 7.9. When the stock market hit bottom in July 1932 (and gold was still fixed at $21 per ounce - the Gold Standard), the Gold/S&P ratio hit 5.3.

Gold Reverses Near The Expected Support Range

After nearing the record high from March 2008, gold entered a correction. As previously stated, we expected that gold would meet significant resistance at this level, and a correction back to support in the range from around $855 down to the weekly record close from 1980 at $823 appeared likely before a final breakout above $1000 / $1033.90 potentially takes place. Corrections usually have two legs down that are similar in size, and the second leg down took gold to just above our anticipated target range. That may have been the bottom, though gold could very well enter the range over the next few weeks.

This would represent a normal correction of about 50% of gold's move up from its October 2008 low. If gold has a weekly close one percent or more below $823, a retest of the $681 low may take place.

U.S.

and World equity markets are in multi-year downtrends. At present, the current rally has pushed through our anticipated resistance from 850 to 860 for the S&P 500. Many individual stocks and indices are now near significant resistance, so although the market may run up to test the 930-945 range, we have closed many of our long positions rather than risk holding on too long. For anyone long the S&P 500, we recommend tightening stop loss orders to just below 830. Should the market run up to test the 930-945 range, this will likely represent a very good shorting opportunity. We have already initiated a couple short positions in AAPL and ORLY.

When the current bounce fizzles, the most plausible target range for the next intermediate bottom for the S&P 500 remains around 620-580 and 5900-5500 for the Dow Jones Industrial Average.

For the S&P 500 (chart below), note the significance of the 200 day (43 week) moving average. It tends to offer stiff resistance during major downtrends (a good example of which can be seen during the 2000-2003 bear market), and is currently located at 964, rapidly declining deeper into the 930-980 resistance range. The plausibility of breaking 980 any time in the next several months has significantly diminished now that the 200 day (43 week) moving average has fallen so far.

Once the market hits a final bottom, all the moving averages are eventually certain to be broken through to the upside, but that may be another year or more away from happening. For example, during the 2000 to 2002 bear market, the S&P took 31 months from the peak to the ultimate low (down 51% from the peak). During the 1929 to 1932 market collapse, the Dow Industrial Average took 34 months to hit bottom (down 89% from the peak). So far, the S&P is only 18 months into its current bear market.

When the S&P and most other major world indices eventually successfully clear both the 200 day (43 week) and 300 day (65 week) moving averages, we are likely to see - at the very least - a cyclical bull market lasting a couple of years, and - depending on how things turn out - possibly a new major bull market lasting several years.

Crude oil may have bottomed. However, if the very important long-term $40-$37 support area later gives way in convincing fashion, the next important area of support is all the way down at $26-$25. Also, the $40-$37 area would likely turn into a significant upside resistance should such a breakdown take place. Conversely, if oil breaks back up through the $53-$56 area, the bottom is likely in. The next important resistance areas would then be $68-$70 followed by $78-$80.

We previously stated that crude oil had pulled back from anticipated resistance in the $53-$56 area, and that we would consider going long oil either through the futures market or the corresponding level for the USO oil ETF on a correction in oil to around $47. Oil has pulled back to that point three times, but remains trapped in the larger $37 to $56 range until a weekly close at $57 or higher takes place. If oil has yet another short-term correction, it may again find support between $47.50 and $45.

We previously stated that the Japanese Yen was expected to find significant support around the 99-98 level (meaning 99-98 U.S. Cents per 100 Japanese Yen, the inverse of the usual USDJPY Forex market quote which is given as the number of Yen per U.S. Dollar).

Additionally, the long-term 300 day (65 week) moving average that often acts as significant support in uptrends has been rising through the area between 98 and 99, and the Slow Stochastic oscillator at the bottom of the chart moved into oversold territory, suggesting that - at the very least - a significant bounce was likely to begin in the next few weeks.

We recommended going long the Yen around the 99-98 level with a stop loss order at 95.5, and it appears the Yen may now be turning up after reaching our buy point (already up about 4 percent). The target is a test of the recent high near 115, and we would recommend closing the position at 113 for a potential 14-15 percent profit. We have now moved our stop loss order up to 97.5, a bit over a percent below the recent low.

For those trading through the U.S. equity market, there is a Japanese Yen ETF with ticker symbol FXY. For anyone placing trades through the FOREX currency market, the support level of 99-98 corresponds to a resistance level of about 101-102 since the chart is inverted, and one would need to sell USDJPY in order to go long the Japanese Yen vs. the U.S. Dollar.

Until next weekend, have a very good week. Always remember that proper risk management is essential - and even more so during volatile markets.


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