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Ask The Analyst, Sunday, 03/07/2004

Sector bell curve revisited
By Jeff Bailey

It has been quite some time since we looked at the various sector bullish percent charts, and I've had some questions in recent weeks regarding the status of various sectors. As such, I thought this weekend would be a good time to take a look at what's taking place in the various sectors, but also try and tackle a trader's question regarding precious metals stocks, where the sector recently reversed up to "bear correction" from "bear confirmed" after having been "bull confirmed" at a much more overbought level of 92% in December and January of.

Here is a comparison that spans three-weeks of trade.

Sector Bullish % Bell Curve - 02/13/04 & 03/15/04 Comparison

For those that have either visited Dorsey/Wright and Associates' web site, or subscriber to their point and figure service, you've undoubtedly become familiar with their various sector bullish % database. I'm showing just two points in time, roughly 3-weeks apart, where we've seen some sectors begin to shift left, or down the scale, and various stocks within sectors have generated some point and figure sell signals, while at the same time, we are seeing sectors shift right, or up the scale as though money coming out of one sector, rotates to others.

Today's question has the trader noticing that the Precious Metals sector has started to show some signs of recovery in the bullish percent (BPPREC), where after reaching a rather high level of 92% bullish, and falling to a low reading of 56% and "bear confirmed" status, it has started to work its way back to the right and now reads "bear correction" status.

A "gold bug" looking to play this sector from the bullish side would most likely have the mindset at this point that they would be looking for a "bounce" right now, and not necessarily taking on large positions as they look to leg back into the sector, but be ready to exit any new positions should recent lows, or an additional sell signal be found in the stock they are looking to trade, or invest in.

Trading ANY stock from the bullish side in a "bear phase" sector should be done so with caution, and DISCIPLINED stops should be used.

Let's take a look at Newmont Mining (NYSE:NEM) $43.95, which has fallen from a January 5, 2004 high of $50.20 (-12.45% from its high) where traders and investors might be best able to associate the sector's bullish % reading of 92% in January, with the taking of profits, when sector bulls had a rather high level of risk, where now, we have the mindset that some of that bullish risk has been taken out of the sector, where some sign of internal repair is being found.

Newmont Mining (NEM) - $1 box

Newmont Mining (NEM) $43.95 is a stock I consider to be a sector bellwether for precious metals, and this stock tends to be a leader in an advance, and when the sector begins to weaken, is often the "last" stock to show weakness. I've marked a point back in April of last year, when the precious metals sector bullish % was "bear confirmed" and had just started to reverse up to "bear correction." The RED 5 on the chart would be early May. It would have been a very nice trade for a bull in NEM to trade the "bear correction" reversal from the sector bullish %, when NEM was trading around the $26.00 level, where at stop could have been placed at $24.00, or lower at $22.

We can clearly see that NEM later traded $31.00, and triggered a triple-top buy signal in early June RED 6. I then point to August (RED 8) when the sector bullish % then reached "bull confirmed" status.

As such, a "gold bug" looking for renewed bullishness could use past history to set up a trade in NEM, with understanding that a trailing stop at $40.00 should be used, on any bullish positions. A gold bug's tail begins to glow, should NEM show a trade at $46, which would negate the current bearish vertical count of $31.00, and have a new bullish vertical count building, with an initial longer-term bullish target of $55 being established.

Maytag Corp. (NYSE:MYG) - $0.50 & $1 box

I received an upside alert in quite a few stocks and indices today, and upon review found one of them to be Maytag (NYSE:MYG) when the stock traded $30.00 and now looks to be breaking out of a nice 7-month base of consolidation. I wanted the stock to "prove itself" with a trade at $30, to try and avoid a bull trap, which point and figure chartists would be alert that a triple-top buy signal that only went one box above (at $29) might be a trap, when the associated sector bullish % was at a high level of bullish risk. Armed with a bullish vertical count of $44.00, MYG shares look compelling and quite bullish coming out of a 7-month base as if the stock is starting to get a second leg of bullish favor, and demand (X) eats away at supply (O).


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