This column was originally published on RealMoney on Dec. 2 at 10:10 a.m. EST. It's being republished as a bonus for TheStreet.com readers.
What markets look attractive now?
This is the question should always be on a trader's mind. The most effective method I've found for answering it -- that is, for determining which markets are hot and which are not -- is looking at monthly charts of various markets and sectors. It's an easy way to spot fading moves and pick up on what could move next, and my recent checks show that a few changes are coming down the pike in energy, Japan, metals and the bond markets.
First, a bit about my method. Market themes play out over years, not days or weeks. This method is easy: Consider it "chart reading for the simple-minded," because all it requires beyond a look at the chart is the ability to draw a few trend lines. Once you have determined if the market or sector is bull or bear, then you can drill down using smaller time frames.
As an example, let's look at a monthly chart of
. You will see that you could have been aware as early as the first quarter of 2004 that this stock and, by proxy, the energy sector were in a bull market.
Exxon Mobil made a bull run from 1995 until 2001 -- trend line AB on the chart. This led to a two-and-half-year consolidation period resulting in a flag-like pattern. Prices broke out of this pattern in February 2004 at $42 (blue up arrow), and in a continuation move of the prior trend, XOM ran about 50% over the next 12 months. Clearly, for a shorter-term trader there were plenty of opportunities to play this energy bull.
Where is the stock now? The price move from $42 to $65 was a measured move as it traveled about 20 points, which is similar to the price move along trend line AB. Prices are now consolidating in a triangle-like pattern, suggesting that Exxon Mobil and, by proxy, the energy sector are rangebound for the foreseeable future. A definitive break above means another bull market for this stock. A break beneath means watch out below!
What Markets Look Attractive Now?
I like anything Japan-related here. The monthly chart of the
shows that Japanese shares, as represented by this ETF, found a bottom in the first quarter of 2003. Prices have consolidated over the past year in a triangle-like pattern, and EWJ broke out of this pattern in August 2005. Because the price move prior to the consolidation was about 4.5 points, we can add this to the recent breakout point to get a price projection of $15.50 for the EWJ. This would coincide with resistance levels near the all-time highs for the ETF, and it indicates that there is about 20% left in this bullish run.
Another sector that I have written about extensively and that still holds promise is the precious metals and mining sector. Look at the monthly chart of the Philadelphia Gold and Silver Mining Index (XAU). Prices found a bottom in the fourth quarter of 2000 and spent much of 2004 and 2005 consolidating into a flag-like pattern, only recently breaking out. The price move off the bottom was worth about 50 points on the index, and adding this to the breakout point should yield a price projection just above the all-time highs at $160.
Still Digging Miners
There is one caveat to the gold and silver mining sector story, and that is gold bullion itself. The precious metal has been flirting with the psychologically important $500 level for about a week now. Gold bullion is in need of consolidation period. That's OK and to be expected, but that should not change the story inferred from the monthly charts: Precious metals shares, like the metal itself, are in a bull market.
One market that I don't like is the bond market.
The monthly chart of the continuous contract for the 10-year Treasury bond shows that prices are currently at trend-line support, and this is a trend line that goes all the way back to the first quarter of 2000. Prices have already broken down out of an ascending wedge pattern, and this is a very bearish topping pattern. The break hasn't occurred yet, but it does bear watching. Lower bonds prices (higher yields) will not bode well for the housing market or for consumers who are levered so closely to the value of their homes. If a break lower in the 10-year Treasury bond does occur, the retail and housing sectors may be underperformers for a while.
Beware the Bonds
So in the end, keep it simple. Use the monthly charts to identify themes and to keep you in sync with the prevailing trends.
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At the time of publication, Lerner was long i-shares Japan, although holdings can change at any time.
Guy M. Lerner, M.D., is an anesthesiologist and a freelance writer who trades for his own account. He blends technical and fundamental analysis to find factors that lead to sustainable moves in the markets. Lerner's approach is research-driven and focuses on supply-demand issues, investor sentiment, intermarket relationships and monetary liquidity. He is a member of the Market Technicians Association and is the founder of
, a Web site that offers content, commentary and strategies for investors and traders. Under no circumstances does the information in this commentary represent a recommendation to buy or sell stocks. He appreciates your feedback and invites you to send your comments by