March 2006

Crude oil prices reportedly 'worried' investors yesterday, perhaps because there was nothing more menacing in the news. But look at the chart below. It doesn't take a technician to see that the current uptrend in prices is yet another gratuitous stab into the mid $60s, as likely to be followed by a $4 or $5 decline as high tide is by low. Face it, if Katrina couldn't push spot quotes up to $100 a barrel, what would?** But prices at the pump are another matter. I've never put $50 of gas into a car's tank, but I came pretty close yesterday and would have achieved that dubious milestone if there hadn't been a couple of gallons left in the tank. I hadn't filled it in quite a while and was therefore unaware that premium had crept back up to $2.65 a gallon hereabouts. Ordinarily, the local newspapers keep this story in our faces, but I guess we've all been conditioned by now to simply shrug off anything less than $3 a gallon. But do the editors know that seasonal factors are actually restraining gasoline prices at the moment and that a 30% increase between now and the beginning of summer would not be the least bit unusual? If so, they've kept pretty quiet about it. ** Yes, I know: a sidewinder missile taking out a supertanker in the Strait of Hormuz or the Suez Canal. But so far, most fortunately, the world's luck has held out.

With gold's bull-market correction now in its thirty-fifth day, investors in mining shares and precious metals are eager to know whether prices are likely to turn decisively higher any time soon. To save on guesswork I've reproduced a chart below of the Gold Bugs Index (HUI). It shows the precise location of four hidden-pivot supports, each capable of producing a dramatic turnaround -- or at the very least, a tradable bounce. (Click on chart to enlarge) As you can see, all of the prospective supports are relatively nearby. The topmost hidden pivot implies a further fall of 2.4 percent; the lowermost, of 11.8 percent. The most promising of them, 284.40, implies a decline of 4.4 percent. Because these are hidden pivots rather than conventional technical supports, we should be able to tell how much further the HUI has to fall by watching how it interacts with each successive pivot. A rule of thumb in this instance is that, if a hidden pivot is exceeded by more than 0.05 points within 15 minutes of when it is first touched, the next pivot is likely to be reached. In any event, each should show discernible support ' enough, presumably, to permit bottom-fishing on the way down using very tight stop losses. As noted above, 284.40 is the most promising of the lot. A caveat: Call options in the HUI are much too illiquid to trade, so you'll have to substitute another vehicle if you plan to play. A component of the index itself should suffice for this purpose, and it could therefore be any of the following: Bema Gold (BGO), Newmont Mining (NEM), Kinross (KGC), or Hecla (HL). Some other stocks included in the HUI, which comprises a basket of unhedged gold stocks, include Agnico Eagle (AEM), Eldorado (EGO), Gold Fields Ltd

I am fortunate to have as a pen-pal a guy who has tracked the global bird-flu menace closely enough to understand it in ways that the news media evidently do not. He got my serious attention a while back with some interesting (and so far, profitable) thoughts concerning which stocks to short ahead of an all-but-inevitable bird-flu panic. Is it possible for one guy to know more than all of the newspapers and magazines that have been covering the story? I'd say yes, since I was in much the same position myself a few years back, covering the mounting Y2K juggernaut for clients of a high-powered research firm. Inveterate doomsdayist that I am, after three years of exhaustive fact-gathering I was nonetheless able to predict as early as mid-1999 that a sunny outcome lay in store for planet Earth. Having interviewed many hundreds of information-system honchos in health care, manufacturing, banking, electrical power, transportation and other sectors, and having learned in intricate detail about the remedial steps they were taking, I became absolutely confident that the dreaded midnight hour would come and go with nary a significant incident. And so it did. With regard to the bird-flu threat, my pen-pal, Erich Simon, appears to be similarly on top of the facts. He has not only been gathering and organizing huge amounts of data, but parsing the details in such a way as to buttress intuitive conclusions. I've reprinted his most recent letter below, but let me caution you that this is scary stuff. Indeed, the more one knows about bird flu and the steps being taken to prevent a pandemic, the more acutely one comes to understand how easily this diabolical virus could defeat our best defenses. Research 'Ritual' Here's Erich: 'Three months before H5N1 came across my radar screen,

Will the Dow Industrials surpass 11350, a threshold that I've characterized as crucial to the bullish case for the intermediate term? If Monday's turgid action is any indication, the Indoos will get there eventually, but probably later rather than sooner, one mincing step at a time. Usually the opening minutes of a new week provide Da Boyz with an excellent opportunity to mount a short squeeze. Yesterday, though, their tried-and-true ruse failed just 15 minutes into the session, presumably frustrating all of those who thrill to pay top dollar for whatever someone else might be selling. Stocks went flat for the remainder of the day, the DJIA having gone no higher than 11308.39. (Click on chart to enlarge) Check out the chart above if you want to see how flat. It shows a second-guessing game at its trance-inducing worst, played out against a backdrop of falling oil prices, bird flu on-the-wing, and the revelation from Helicopter Ben that a glut of world savings might be responsible for the unusually low, long-term interest rates. Maybe he's got a point, since there are so few good reasons to take the supposed glut and invest it in, say, new manufacturing capacity. But who's complaining? The thrill of living in a post-industrial economy is that -- to borrow from Warhol -- someday we'll all be billionaires. But not if we have to do it by creating real goods from actual raw materials. That's so Adam Smith. 

Just when you though it was safe to factor a housing bust into your investment outlook, lo, the shares of the homebuilders explode like gas from a bloated corpse. Here's what it looked like on Friday, a veritable gusher of exuberance recorded by the PHLX Housing Sector Index: (Click om chart to enlarge) The builders' shares had been moving up strongly for the last week or so, but we were still surprised at how easily they punctured not one, but two important prior tops on the daily chart. This occurred in the first hour on a gap opening, and it means that the entire rally from early March's bottom can be considered as a single, powerfully bullish impulse leg. It all but ensures that any weakness from these levels or above is likely to be temporary, a prelude to yet another bullish surge. Given the importance of the homebuilding industry to the U.S. economy ' face it, the housing sector is the economy ' it seems highly unlikely that we're about to experience a downturn. Not if homebuilder shares are just beginning a bullish cycle that could take as long as 8-10 weeks to play out.

The spyders rallied to within 0.30 points of our hidden-pivot target at 131.77 yesterday ' close enough to imply that a correction could be in the works, though not quite close enough for us to get short at the high. We attempted to do so by purchasing some April 131 puts for up to 1.35; however, they traded no lower than 1.50 intraday. Our 1321.75 projection for the Mini-S&P got even closer to the actual high, since it occurred at 1321.50, just a single tick from where advertised. We were not attempting to short the S&Ps, though, only to monitor their interaction with some well-defined hidden pivots. Had the futures bettered the 1321.75 target by more than a point or so, we'd have inferred that higher prices ' perhaps significantly higher ' lie ahead. As things stand, the target will remain useful as a trigger threshold for yet another running of the bulls. (Click on chart to enlarge) There are also a couple of targets in the DJIA that bear watching: 11410 and, more importantly, 11351. That last number is not a hidden pivot, but rather a point of reference that sits one tick above a pivotally important high made almost five years ago. Any rally exceeding it would create a fresh, bullish impulse leg on the monthly chart, implying that bulls would remain in charge for the foreseeable future. I should also note that, if the downturn begun from yesterday's highs gains momentum over the next few days, it could queer the bullish case in a New York minute. That's because the rally which has unfolded over the last 30 months has been accompanied by declining stochastic peaks and is in fact occurring right now on declining volume. Bottom line: Until such time as the DJIA exceeds 11350, stocks

The Dow Industrials recorded their highest close in nearly five years, but you'll have to pardon us if we don't sound too excited about it, at least not yet. In fact, the blue chip average has gained less than five percent in the last two years in relation to the important peak recorded in February 2004. That turned out to be the top of a very powerful, 12-month bull run -- one whose trajectory has flattened considerably since, giving us two years of tedium that persists to this day and notwithstanding yesterday's multiyear high. (Click on chart to enlarge) From a hidden-pivot perspective, however, the bulls have good reason to be optimistic about what might come next. The chart above shows why. Note how the bullish impulse leg A-B announced itself with unmistakable force and clarity, surpassing two prior peaks of monthly-chart magnitude in the space of two years. Moreover, since that time, no decline has exceeded a prior low of any importance, much less the minimum two required to create a bearish impulse leg. The big picture suggests a major consolidation borne of tireless patience and relentless staying power. And were it not for the series of declining stochastic peaks that has accompanied the last 30 months of the rally ' a potentially ominous sign that we cannot afford to overlook ' we would view the overall picture as one of incandescent promise. More immediately, if the current, minor-cycle rally were to exceed the peak at 11350 made in May of 2001, it would create a fresh, bullish impulse leg worthy of our earnest attention. Please take note that that top lies just 124 points above Wednesday's intraday high.

It took the S&Ps all of two days to chew through a thick wad of supply that we had talked about here on Monday. Now the June futures are practically guaranteed to reach a minimum 1321.75, equivalent to an approximately 100-point rally in the Dow Industrial Average. Since we treat all such crazed leaps as the potential last gasp of the now three-year-old Mother of All Bear Rallies, we'll be looking to get short in the right place, presumably with a stop-loss we can easily manage. From a hidden-pivot perspective, there are only two places this rally could flame out, so it will be well worth our while to lay out some tightly stopped shorts at each. (Click on chart to enlarge) Our first clue that we should not attempt to impede the bulls too aggressively will come at 11209.13, basis the DJIA, and then at 11232.10. A close above that last number, a hidden pivot, would all but clinch a run-up to 11400+. FYI, gold should be moving more or less in-synch, since the last gasp of yesterday's robust rally created a promising impulse leg on the hourly chart. If you study the chart above, you'll see that the April contract did not call it a day until it had surpassed a tiny peak recorded on March 8 at 552.50. A subtle accomplishment for sure, but it should be viewed as a reliable sign nonetheless that the rally in gold is likely to continue.

Last weekend's hidden-pivot seminar drew some goldbugs, and so we naturally lingered for a while on the chart below, which shows the Comex April contract. It is more bullish than I had originally realized, notwithstanding the fact that gold bulls have been getting hammered for the last five weeks. What led me to this conclusion? Well, in the first place, the bearish impulse legs have been relatively feeble. Let me explain. All major trends begin with an 'impulse leg,' and the more powerful the impulse, the more long-lasting the new trend is likely to be. Typically, a major trend-change announces itself by blowing past two or three prior highs/lows without a pause. According to my hidden-pivot method, to qualify as an impulse leg a rally/decline must surpass at least two prior peaks/bottoms. On the chart below, the first bearish impulse leg (in red, labeled #1) met the minimum requirement by surpassing a series of four minor lows. But notice how it stopped short of passing the more formidable low marked at point X. It took a second feint south (line #2) to achieve that, but by that time the bear had already hinted that his growl was more fearsome than his bite. (Click to enlarge) If there was any doubt about this, most of the decline was recouped by the bullish impulse leg that followed (shown in blue), which slightly exceeded the peak labeled #2, as required. That gave way to another bearish impulse leg, but like the first it was a pisher. If might have been worth worrying about if it had breached the low at point Y. It didn't, however, and that's why goldbugs should be as confident as ever as this correction peters out in the days ahead and the bull takes charge once again. *** It's