More Upside Ahead for Indices? You Bet. Plus, a China Play
01/12/2006
Mike, let's start off with the Dow, which has surpassed 11,000 for the first time in 4 1/2 years. What do you make of the recent action?
The Dow today managed to recover all of its early-session losses, and close unchanged for the session -- exhibiting impressive relative strength and resiliency atop its 3% vertical thrust since its one-week ago pivot low.
Monday and today, the DJIA has traversed a 60-point range, which represents either a roll-over period ahead of a brief correction into the 10,900/880 area, or a sideways high-level congestion zone prior to a thrust to new highs that projects minimally to 11,100.
Right now, the bullish scenario certainly appears to have the upper hand.
What are your thoughts on the Nasdaq?
Looking at the ETF for the Nasdaq 100, the QQQQ, today's trading range of 42.55 to 42.92 almost perfectly mirrors yesterday's range of 42.55 to 42.92, which tells us a couple of things:
- That the bulls continue to show remarkable resiliency atop a 7%, 5-day upmove, and
- That whichever side of the two-day range is violated should trigger follow-through in the direction of the breakout -- either 42.20/00, or to 43.20/30. (Click here to see QQQQ chart.)
Right now, it is difficult to "fade" the powerful bull trend, but my near-term work continues to argue that the Qs are vulnerable to a bout of weakness into the 42.20/00 support zone.
In your Trading Diary today, you wrote that you are particularly bullish on small caps. Why?
The strongest of the indices appears to be the Russell 2000 Small Cap Index, which has rocketed, and which looks like it still has 2-3% left on the upside ahead prior to hitting any meaningful resistance...
Looking at the chart of the ETF of the Russell, the iShares Russell 2000 Index Fund (IWM), you can see that the IWM rally off of last week's low at 66.05 points to a next target at 72.10-.40 which will confront the resistance line of the intermediate-term bullish 18-month channel.
Could the IWN stall and/or pullback into the 69.50/00 near-term support area prior to its next rally? Certainly it could. However, the near and intermediate-term technicals remain very bullish indeed.
Foreign stock funds have performed better than U.S. funds for four straight years. What opportunities do you see overseas?
One on our radar screen is the closed-end China Fund (CHN), which invests in companies that are located on mainland China (80%), or that do business with mainland China (20%). My pattern work argues that the first upleg of the "China bull market" started in 1998 at 4.93, and ended in Jan 2004 at 47.85 (nice appreciation, eh?).
After a 5 1/2 year bull move, the CHN went into a near two-year correction (a 40% time ratio correction), which bottomed on December 18, 2005 at 22.50, representing a 60% "pullback" prior to pivoting to the upside with a vengeance for the past three weeks.
My work indicates that the current upturn has started a new leg in the longer-term bull trend. Notice from the chart that the current upmove rocketed above its declining 40-week (200 DMA). Any near-term pullback weakness should find support in the vicinity of the MA, now at 26.50. If my work proves correct, then the current upleg will exceed the Jan '04 high at 47.85, and projects into the 55-60 target zone within a multi-year timeframe.
As long as 22.50 December corrective low remains intact, the CHN has very powerful upside potential.
Finally, you wrote last month that gold would reach $550, which it briefly exceeded Monday evening in overnight trading, a level not seen since 1981. Where does it go from here?
We can see from the enclosed monthly chart on spot gold that once prices hurdle $510, they accelerated into the $540-$550 area to initiate the upside follow-through off an enormous two-decade-like pattern.
The $550 area represents the 50% recovery zone of the entire bear market from the 1980 high at $850 into the Aug 1999 low near $250.
The ability of gold prices to sustain in the $540-$550 area will be considered very bullish indeed, and will point prices to my next optimal target zone of $600-$620.
At this juncture, only a decline that breaks and sustains below $500 will compromise the very bullish outlook for gold prices.
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