the StockCharts​.com Newsletter

October 2, 2005
  Chip Anderson | John Murphy | Arthur Hill | Carl Swenlin | Richard Rhodes  
by Chip Anderson | ChartWatchers

This week, John reviews the market's recent performance in light of all the economic changes we've been seeing, Richard breaks out a new triangle pattern, Carl takes an in-depth look at gold, and Arthur Hill looks at the Russell 2000. Here we go...

by John Murphy | The Market Message

MARKET AVERAGES CLOSE BACK OVER 50-DAY LINES... The market had a lot thrown at it this month. A spike in energy prices, plunging consumer confidence, and rising long-term interest rates. It also had the month of September to deal with which has traditionally been the worst month of the year. While the market bent a bit during the month, it refused to break. And then ended the month on the upside. The first three charts show essentially the same pictures. The three major market indexes held support at their late-August lows and closed the week back over their 50-day averages. [The S&P and the Nasdaq also stayed over their 200-day averages]. That action prevented a chart breakdown and has kept the market in a trading range. This week's bounce also kept weekly and monthly indicators in positive territory. Part of Friday's market gains were probably the result of falling energy prices. Some other positive signs were new signs of strength in small caps, the Nasdaq, semiconductors, and the transports. Chart 3 plots a ratio of the Nasdaq 100 divided by the S&P 500 . The ratio peaked in early August when loss of Nasdaq leadership started to weigh on the entire market. The good news is that the ratio started to bounce again this week (see arrow). The market usually does better when the Nasdaq shows upside leadership. A lot of the Nasdaq leadership came from the semiconductors.

- John Murphy

by Arthur Hill | Art's Charts

The Russell 2000 ETF (IWM) has two potentially bearish patterns working that would be confirmed with a support break at 64 (645 for the Russell 2000). Confirmation is the key with both patterns. In fact, confirmation is the key to most patterns. Until confirmation, these are only potentially bearish patterns and a trend reversal has yet to take place.

The descending triangle usually marks a continuation of a downtrend, but can also mark a top. The lower high (red arrow) shows that buyers do not have as much power as before and upside momentum is waning. However, the equal lows represent support and show that the sellers have yet to take full control (green arrows). A support break would signal a new thrust of selling pressure and confirm the bearish pattern. The downside projection would be to around 60 and broken resistance from the April-May highs confirms this level.

The second potentially bearish pattern involves three fan lines. These extend up from the April low and the stock already broke the first two. IWM has consolidated since breaking the second fan line and a move below the third would confirm this bearish setup. Notice that the third fan line and descending triangle lows confirm support around 64 and it is clear that a break below this level would be most bearish.

- Arthur Hill

by Carl Swenlin |

This chart of gold has some interesting technical features. First, there is the parabolic rise to $850 in 1980, which culminated in the inevitable blowoff and collapse.

After a parabolic collapse, prices most often return to the original base, which in the case of gold is somewhere below $100 and not visible on the chart; however, another outcome is that prices can enter a high-level consolidation, which is a trading range at a level far above the previous base, and this is what has happened with gold. In this case, the trading range is between roughly $300 ($250 at the extreme) and $500, and it serves the purpose of digesting the excesses of the parabolic, and preparing for the next long-term move, which I assume will be up.

The reason I assume that the next long-term trend will be up is because the double bottom in 1999 and 2001 marks the end of a 22-year bear market in gold, and a new bull market is in force. The problem is that the bull market is now nearly five years old, and we can clearly see overhead resistance in the area of $500, created by the intersection of the top of the rising trend channel and the top of the long-term trading range.

The normal technical outcome from a high-level consolidation is an upside breakout. We don't know if the current rising trend will be able to effect such a breakout, but sufficient time has passed that it would not be overly optimistic to have this expectation; however, remember, we are looking at a monthly chart (each bar is one month), and it could be another year or more before a breakout is made and confirmed.

For example, there were corrections within the rising trend channel in 2004 and 2005 that took several months to complete, so it is reasonable to expect that another lengthy correction will take place once the resistance around $500 is encountered.

Finally, let's look at the Price Momentum Oscillator (PMO). The PMO peak in 1980 is abnormally high and cannot be used as a benchmark for anything except another parabolic rise. The PMO's current level is typical for the trading range, but it is pretty high. This level could be exceeded if the rising trend continues and accelerates, but, if gold's current rate of climb is maintained, the PMO can remain flat, and, therefore, not much help in warning of a trend change.

Bottom Line: My long-term view for gold is positive, but I expect that, when it encounters the resistance at the $500 level, there will be a correction of sufficient length and depth ($450?) to consolidate the gains of the last five years and to move the PMO back toward the zero line.

- Carl Swenlin

by Richard Rhodes | The Rhodes Report

Taking a long-term gander at the Nasdaq Composite, I think is very clear that the time is running out for prices to rise much further than they have at present. The reason is that prices are winding their way through the "triangle consolidation"; which means two scenarios exist – a bearish and bullish one to be exact. The bearish probability is highest in my mind with prices breaking down through trendline support and then the 25-month moving average currently at 2009 – thereby ‘confirming' a bear market has begun; or the lower probability breakout above major resistance at 2185-2200 – this would signal a new and larger leg higher is underway.

Given our stance is clear, it is so only because our longer-term models show the current rally's 'strength' has moderated significantly to where selling pressure is rising a sharp rate than in previous months. However, our shorter-term models are turning higher - which against the backdrop of our longer-term high probability scenario suggests a rally in the next several weeks that will be a 'final and material test' of the highs will occur and then fail with lower prices back towards 1200-1500 anticipated.

But the real cruxes of the situation will which themes to be involved in.

ETF Portfolio: +7.0%
"Paid-to-Play" Portfolio: +14.3%

- Richard Rhodes