Dow Jones 10686.04 +45.94 1:20 pm PST, November 12, 2005  NASDAQ 2202.47 +5.79 For info, visit access.smallcapnetwork.com S & P 500 1234.72 +3.76 Change your subscription status here Russell 2000 666.66 +1.73 VOLUME 05: ISSUE 85  Feature: Rally Time - A Look at Tech, Oil and Housing. If you get all of your investment information from the press and CNBC, you have a right to be confused. When oil was at $70 post Katrina, the conventional wisdom espoused that the price for oil and natural gas was going higher--much higher. We strongly disagreed in our September 2nd and October 28th pieces as well as in other articles in recent months. When housing prices looked like they could only continue rising, these same outlets consistently confirmed that outlook. Again, in those SmallCap Digest articles noted, our take was that housing prices were easing. And as far as markets were concerned, it was the usual bull/bear arguments. Once again throughout the fall we gave our definitive market opinions and most recently in late October and on November 1st, we stood up and made a significant tech rally call. Now that energy prices have declined--oil to below $60 and natural gas at $11--the intelligentsia is at it again with calls for even lower prices. Our take?  We disagree, once again, with the conventional wisdom. What a surprise. First, the NASDAQ. The circle on our first chart shows the COMP approaching the August high of 2218. While we would suggest staying long at current levels, we would caution against buying at new highs, as there will eventually be a reversal of the current money flow into tech from energy. The recent rally is likely a function of energy money continuing to come into tech as investors weary of the energy sector's failure to hit the pundits' aggressively advertised higher commodity prices. The second NASDAQ chart shown here is monthly and it appears to us that this rally could get to 2312, which is a .382 retracement. Should it break that level with conviction, there is a significant potential for a new up-leg. Should that level not be breached, we'll have another look, as our premise below is that oil and housing prices will rally and likely serve to mitigate the tech rise at some point. One day soon, we'll do a complete tech piece on the value of retracement levels when stocks rise and fall. Essentially, the basic premise is that stocks need to breathe and gather themselves and, contrary to conventional wisdom, they don't rise or fall in a consistent fashion. The smart money uses the .382 and .618 levels to position itself and rarely chase stocks on a run in either direction. Whether you're an investor or trader, waiting for pullbacks to these levels usually prove decent levels to take positions. Whether you use five minute or monthly charts, the risk/reward parameters tend to be the same. If you go back and look at our articles where we've used this method for making either market or stock calls, the approach tends to get good results in the vast majority of cases. In the final analysis, emotion alone tends to be an unreliable indicator and using this mathematical determination is a valuable addition to your investment decision-making -- whether to buy, sell or short situations. When is a House a Home? More like a cash cow until recently. As we have noted in previous articles, the housing rally is over for now. We believe that a new rally could take hold once the Housing Sector Index (AMEX: ^HGX) pulls back to 435 from its current 491. That would be the point at which the homebuilder stocks look attractive again. We believe that a further pullback to that 435-point is very likely, so dust off your tool belt and be ready for the index to arrive at or near that level. Everyone should understand by now that as interest rates rise housing becomes less attractive. We've clearly made our case for falling housing prices, which have now spread to other pockets of the country from just California and the North East. Much like oil and energy, as you will see, once the trend seems to have reversed, Chicken Littles' show up on the airwaves and in print and follow the horse out of the barn, not to mix metaphors.  As we have often said, once a trend is apparent, it's too late. Further down, we have a chart of house builder Toll Brothers (NYSE: TOL). The arrow shows the high volume coinciding with the summer share price peak. All one has to do is look at the insider trading at that time to see large sales of stock in the mid-$50's.  These folks are not only smart business types, but obviously subscribe to the correct theory that when everyone wants something, you sell it to them. Now that everyone is calling for further housing price weakness and the home builders have fallen from favor, it's likely time to have a look. Interesting to note, that a look at recent insider activity shows these folks beginning to acquire shares at these depressed levels. What does that tell us? Even Toll was talking down the sector last week, even though they're slated to build more houses next year than this. The concern came from a weakness in the rate of growth rather than less units built. Once the market gets its head around that, the shares and the sector will likely rally. Black Gold Probably the second most important liquid to our survival, oil has been the stuff of much spilled ink lately. It's going up, it's going down, we need more, we need less, yadda yadda. Oil is a commodity and the price is determined by pure supply and demand, as the Chairman of Exxon explained to some incredibly naive congressman this past week. The only constant is that the price will fluctuate. We concluded weeks ago that the price of all energy components would fall significantly. They have and will likely continue to do so for a while longer.  As we noted, when the price was at $70 a barrel, pundits saw $100. Now that it's sub $60, more weakness for prices is finally coming into the opinions. You'll not be surprised to learn that we disagree, again.  We believe that the energy sector is setting up for a nice trade on the long side. Should the oil price hit $56.50, we see a resultant rally following. Many things come to pass at that level. Likely all the stops will be triggered and the market cleaned out. Further, that level represents a solid .618 retracement of the recent run. Energy stocks are beginning to look attractive again and even though the weather has been warm so far, we are likely one cold snap away from a significant rally. Once all those factors collide, it should be a great trade to the long side. A bit of energy-stock nibbling next week would likely be smart.  Could oil go to $100 a barrel? Sure. But not yet. Buying or selling oil stocks when everyone else was doing the opposite has been a profitable strategy. Technically, it appears recent action will end no differently as everyone tries to talk oil and natural gas prices down some more. And they'll probably be successful for another couple of bucks. Then, just when that conventional wisdom gets comfortable with weaker oil/energy prices, the rally will appear.  At least that's our opinion. So far so good.     We Value Your Feedback Got comments, questions or suggestions? Send 'em on over: Editor@smallcapnetwork.com If you wish to send a written request or inquiry, please send it to our physical address: TGR Group, LLC 4653 Carmel Mtn Rd Suite 308 #402  San Diego, CA 92130 Subscribe Information is power and timely information is profitable. 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