-- Posted Sunday, 3 May 2009 | | Source: GoldSeek.com
By: Dr. Christian Normann, Chief Strategist, Normann Financial
No, we have not entirely lost our minds. Long-term U.S. treasury bonds have presently declined back to near the very significant level they broke through in late 2008. Don't get us wrong: we believe U.S. t-bonds will enter a long-term, very severe bear market eventually; we're simply not convinced that time has arrived just yet.
Whether a new bear market begins soon or at some later date will likely be determined by whether the 30-year bond can hold the 121-119 support range on a weekly closing basis. In other words, for the uptrend to remain in force, a bottom needs to form at or near present levels. If it does, a significant rally to potentially test the recent high will likely get underway. If this takes place, money is likely to flow out of general equities (which have already experienced a tremendous rally - likely of the bear market variety) and into both Treasury bonds and gold.
This thought process is technically supported by the still intact floor of support formed by the long base formation built by the 30-year bond from 2003 to 2008, combined with a nearby rising 65 week moving average and a severely oversold slow stochastic reading. (At some later date, money may flow out of both Treasury bonds and general equities into gold and likely also silver.)
We are therefore going long the TLT long-term treasury bond ETF near $97 with a stop loss order at $93.83. Our objective is a retracement approximately halfway back to the recent high around $123. We will likely exit a bit early around $109. The chart below shows the actual treasury bond price, not the TLT exchange traded fund.
The Time To Buy Gold And Short General Equities Is Likely Near
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.
Gold Is Still 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.
Bear Market Rally In Stocks Nears Major Resistance
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 general equity 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 through put options, and are considering shorting REITs by going long SRS.
When the current rally ends, 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 960, 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.
Crude Oil Remains Trapped In Wide $37-$56 Range
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.
Japanese Yen Reverses Up After Reaching Our Anticipated Buy Point
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. The Stochastic oscillator has now also triggered to the upside (the black K-line crossing the red D-line) for the second time since reaching oversold levels.
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 attempting to turn up after reaching our buy point. 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.
Netflix has broken out to all-time record highs after forming a very large base from 2004 to 2009. NFLX may now be correcting back to our projected buy point offering a second opportunity to go long near $40 with a stop loss order at $37.23.
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 the following piece of information from the Great Depression of the 1930s: movie theaters experienced a boom in the number of tickets sold, perhaps as 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. Beyond that smaller formation, the entire period from 2004 to present could plausibly represent a huge base from which a major advance can take place on a genuine upside breakout above the $40.90 high, and it appears we have seen just such a true breakout over the past couple of months.
Until next weekend, have a very good week. Always remember that proper risk management is essential - and even more so during volatile markets.
All the best,
Christian Normann
dr.normann@post.harvard.edu
www.normannfinancial.com
For the complete version of our weekly analysis including many additional and significantly larger charts (as well as potential setups in commodities, currencies, stocks and ETFs) please click here
Dr. Normann is a graduate of both Harvard University and Florida Atlantic University, with one of his degrees in Finance (summa cum laude and 4.0 GPA).
Previously, he was a financial advisor with Morgan Stanley Dean Witter, but left ten years ago because he wanted the freedom to do completely independent research and focus on perfecting his own trading style and investment skills.
He first entered the financial markets in 1995, trading currencies for his own and his family's accounts. Later, he expanded into equity, commodity, futures, and bond investment and trading, and has extensively studied the history of financial markets going back to their origin centuries ago (covering multiple extraordinary mania periods and subsequent busts).
Please visit the About Normann Financial page for important information about risk management and position sizing. We provide analysis in good faith and to the best of our ability, but all information on the Normann Financial website is provided solely for educational purposes and does not constitute investment advice. Learning to operate successfully in the financial markets is not easy - it takes a substantial amount of time, effort, and discipline. Your trading and investment decisions are exclusively your own responsibility. Proper risk management is crucial.
-- Posted Sunday, 3 May 2009 | Digg This Article
| Source: GoldSeek.com
