Durban Deep will Soon Explode

May 7, 2001

In our study of chart patterns, we have discovered a variation of a classical chart formation that contains tremendous significance from both a time cycle point of view as well as a supply/demand perspective. The pattern, which we have dubbed the "time wedge," combines both price and time, and is a variation of the classical chart pattern known as the wedge, whether in the ascending or descending phase. Time wedges—when they appear—usually take several years to form, often over a decade. When they do form, however, they are highly instructive and permit extraordinary accuracy for predicting major reversals in the stock or commodity they appear in.

For instance, looking at the continuous contract 10-year chart for gold futures, we were able to draw a descending time wedge—the lower boundary starting in 1993 and the upper boundary in 1996. The two boundaries converge to form an apex, or tip, in precisely April 2001! In a time wedge, the place where the apex forms in the wedge is always the exact time when a major cyclical reversal take place. When the time wedge is in the declining phase—as it has been for many years in gold—it means the reversal will be to the upside (and vice-versa when the wedge is in the ascending phase). This strongly confirms our analysis of the past several months that the spring of 2001 would witness a historic bottom in the 21-year bear market for gold. At last, there is solid technical proof that the tide has turned for gold investors!

By subscriber request we took a look at the chart for mining concern Durban Roodeport Deep (DROOY) and were we ever surprised. Durban's two year daily chart displays none other than a clear and distinct "time wedge" (a' la gold futures) that indicates Duran bottomed in April. Coincidental with this cyclical convergence of supply and demand is a three month congestion pattern in which trading volume dried up throughout the formation. Also, a bullish triangle pattern has formed during this time. Put it all together and what you have is an explosive move in shares of Durban Deep that should begin literally any time now. We haven't rated DROOY a buy since 1998, but things have now changed. Buy Durban Deep at the market.

Upward surge will resume this week

As we forecast in the mid-week update, the past couple of days have witnessed a pullback in the broad market in order to consolidate huge gains made in the latter part of April. As well, our forecast for a continued upward move across both major exchanges is still on track, and we should witness the beginning of this move early in the week.

The broad market as measured by the S&P 500 index is on a remarkably strong footing, having overcome several layers of downward trending supply over the last seven months. An excellent measure of this strength is found in the S&P Depository Receipts (SPY), which is preferred by many institutional analysts because, unlike the S&P, it shows daily trading volume. As can be seen from the chart of the SPY in this newsletter, a series of downward-sloping trend channels were overcome in March-April, and a new series of upward-sloping channels have been established. This high-volume reversal paves the way for a strong upward move well into this summer, hence our basis for predicting an explosive summer rally. In the days ahead, the $125-$127 area should provide support but if this area is penetrated, $120 is a very strong support level not likely to be broken.

Confirming this broad bullish trend is the strong technical condition of the Dow Jones Transportation index. A two-year declining trend was arrested this year, as three consecutive layers of supply, or trendlines, were broken. This is one of the most powerful buy signals that can be given by the chart. Also, what could be called a triple bottom is evident in the Transport chart—extremely bulish. A strong transportation outlook translates into a strong industrial outlook. And that translates into an overall bullish 2001.

For the past three or four years, one of the benchmarks of the high-tech economy has been Cisco Systems (CSCO). At one time, Cisco was the most actively traded publicly listed stock in the country, changing hands millions of times a day. While it is down nearly 80% from its high and trading activity is less heavily concentrated than it once was, it is still one of the most actively traded NASDAQ stocks. Moreover, if our analysis is correct, it is being actively accumulated by insiders who plan on starting a bull campaign this summer, a move in which Cisco will retrace a considerable portion of its losses from recent months. Our basis for this assertion is the chart. Note the rounded appearance the priceline has taken in recent weeks, evidence of a bottoming (i.e., accumulation) process. Also, a major line of supply (i.e., trendline) is about to be tested and will probably be broken later this month. Cisco's current underlying support line is inching it towards this last remaining line of supply, and the point of contact looks to be May 25—plus or minus 2-3 trading days—which also happens to be options expiration week. Much has been written about Cisco in the popular press in recent weeks, most of it negative. The same publications that urged traders to buy and hold Cisco for years are suddenly (and belatedly) telling readers to "dump Cisco" and abandon ship. Of course, this is precisely the psychology we would expect to see manifest from the trading public so close to a critical turning point in Cisco's fortunes. Our advice: accumulate Cisco along with the insiders. Prepare for the upward journey that should begin in late May/early June.

One of the big stories last week was the nearly 50% plunge in the value of Dollar General (DG) shares after the discount retailer said it expected to delay the filing of its 2000 annual report with the SEC while it investigates accounting irregularities and possible fraud. Even worse publicity was given to the company in days following, when a major class action suit by Dollar General shareholders, who claimed they were misled by company statements as to its financial soundness, was brought against the company. What is interesting about the Dollar General fiasco is that traders who happened to be long the stock could have easily avoided the plunge simply by giving heed to the warnings that were clearly being flashed in DG's chart. The first warning was given in February when a critical upward-slanting trendline (i.e., line of demand) was broken on high volume, an evident token of insider selling. The second clue was provided in late March and through April, when DG recovered from its initial decline only to soar ahead on diminishing trading volume. Whenever a stock rises too far, too fast on low volume it should give traders and investors pause for thought. The lesson learned is that the investors who got burned by holding on too long to Dollar General should have learned the basics of technical analysis instead of trusting corporate heads who soothingly assured them that everything was alright.

Our volume momentum indicators (which measure the rate of change between advancing and declining volume) are remarkably strong on both major exchanges, particularly the NYSE. The 5-day, 12-day, 21-day and 40-day components of our VOLMOM indicator for the NYSE shows its strongest reading in several months and is projecting a continuation of the advance over the next several days.

The broad Internet sector as measured by the Amex Internet Index continues to look strong and is under massive accumulation, as we have intimated in recent weeks, particularly the former "blue chip" leaders of recent years. We have outlined the technical outlook for many of these stocks in recent issues of the newsletter. The list includes Ameritrade (AMTD), Qualcom (QCOM), E-bay (EBAY), Amazon.com (AMZN), Earthlink (ELNK), and America Online (AOL). Our leading mutual fund recommendation for Internet investors is the WWW Internet Fund (WWIFX), which we profiled in last week's mid-week update. A more in-depth profile of this fund—which we predict will be one of the highest-returning funds of NASDAQ-listed trusts this year—is available from the web site (www.istockforecast.com).

As explained in the foregoing analysis, the week ahead should be quite bullish for stocks. Traders are urged to remain long the Rydex Nova (beta 1.0 the S&P) and Titan Funds (beta 2.0 the S&P) Funds.

Clif Droke is the editor of the three times weekly Momentum Strategies Report newsletter, published since 1997, which covers U.S. equity markets and various stock sectors, natural resources, money supply and bank credit trends, the dollar and the U.S. economy.  The forecasts are made using a unique proprietary blend of analytical methods involving cycles, internal momentum and moving average systems, as well as investor sentiment.  He is also the author of numerous books, including “2014: America’s Date With Destiny.” You can view all of Clif's books here. For more information visit www.clifdroke.com.

18 karat gold is 75% pure gold.

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