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REALITY CHECK UPDATE
Published Every Tuesday and Friday

ARCHIVE:    APRIL 2000-MAY 2001  

Contributed by Mitch Harris
President: Market Trend Realities,
Editor: The Reality Check Newsletter

August 21, 2001

STOCKS
REALITY RATIO: +0.129
Last Signal: 08/17/01, TRADING SELL
Dow: 10,240.78 OTC: 1967.03 

With the Dow remaining well within a broad trading range since its May top, the Reality Ratio finally broke down to give a confirmed trading sell signal. HOWEVER, because of how well it and many of its component indicators have held up during the recent prolonged selling, we are interpreting this to be "lagging" and a BULLISH divergence. Perhaps we are not being realistic but we see so many constructive technical signs that we think it is 
likely too late to get bearish for the month ahead. This issue will provide supporting data for our pre-emptive conclusion. I will also point out that because the ratio never quite reached an overbought extreme, an upturn here still allows for this extreme to be reached and this could last for a while once reached! 
TUESDAY, August 21, 2001: There may yet be hope for the  bulls! Yesterday's bounce came just in time, after a fourth successful  test of key support since first reaching 10,120 on July 11. We are  encouraged by many of our indicators that are either acting very well,  or have become very oversold during the recent selling. These are signs  that typically precede a significant upturn. Yesterday, the Investment Company Institute (ICI) reported that $1.5  billion flowed OUT of US equity funds in June, the first outflow since  March when the market bottomed. We think this may be a sign for another  turning point now, as this is a turning point now, as this is a  "rearview mirror" type indicator, one that tells us what "happened" at  about the time when the move is over. ICI also reported that US Bond  funds had a huge +$6.9 billion inflow. Here too, we think that move to  bonds is ending now.20

The markets should be relatively flat ahead of the Fed's post FOMC  meeting announcement, typically around 2:15 pm. It is fully expected  that they will cut rates by another BC%. While we agree with this  expectation, we think that if they want to stimulate the markets,  economy and consumer confidence, that they would be much better off  taking NO action, issuing a statement of confidence that they would  continue to monitor the impact from the six rate cuts already made, as  they should only now begin to show their influence. This would go MUCH  further to boost much needed confidence than another BC% rate cut, as  the markets would read this to mean the Fed sees signs of recovery. Of  course, they are not likely this forward thinking.

Still most impressive to us is that even in the face of declining market  averages since the 5/22, 11,350 price peak, the A/D Line remains at its  highest level of the year. Our 10 Day A/D Line indicator has been  bullish for the past 17 trading days, telling us that more individual  stocks are going up than down, even as the averages have declined. This  is by far our main reason for optimism in the face of much despair, as a  rising A/'D Line is a precursor for prices to follow.20

An initial push above the last Dow high at 10,478 would turn the short  term trend positive and should lead to another test of the resistance at  10,600. Above this key short term level, higher resistance remains near  10,800, 11,000, 11,180, and then at the more significant intermediate  term barrier of 11,350. Support remains near 10,200 and then at the key  7/11, 10,120 low. A close below this would most likely usher in a  cascade of stop loss selling, and force a change of our outlook.

TREASURIES

Treasury yields remained firm ahead of the Fed today. The  yield exceeded Fibonnacci resistance near 5.48% by a small amount,  reaching a low of 5.422% on Friday. This still remains within our more  critical resistance of 5.40% and next Fib. resistance at 5.363% (.786  retracement). With a BC% rate cut fully discounted already by the  markets, we expect there to be selling on the news, hopefully as money  flows back into the equity markets.20

Many of our technical trading indicators are showing glaring bearish  divergences by not confirming the yield low reached last week. These  include Stochastics (which are also overbought), Rate of Change (ROC),  Momentum, and MACD. These generally are resolved by leading to a trend  reversal, and is what we expect. The large mutual fund inflow in June is  also evidence that bullish sentiment has been building dramatically, and  we see this as a contrarian warning, ESPECIALLY as the public has become  heavily invested, as they are generally the last ones in.20

Next lower resistance remains near the 5.40% level. A push above the  8/6, 5.617% high is needed to confirm a short term bearish reversal. A  break above the 7/6, 5.771% high would confirm a more substantial  bearish trend reversal and indicate to us that the larger degree wave  (3) bear market was underway. Higher support is at the 5.975-6.025%  level and would be the next upside target for the bears. 

GOLD

Gold & the XAU pushed higher into Friday's Futures  expiration, with cash closing at $279, its highest close since May. The  futures reached what was considered resistance at $282. Prices gave back  most of Friday's gains yesterday, after the expiration related  manipulations that we see month in and month out passed! We are still  not convinced that the current rally is the beginning of a new bull  market for the metals. The next short term downturn and oversold  condition may be telling.20

The XAU pushed to a high of 58.44 on Friday, clearing short term  resistance near 57. Next resistance is at the 6/14, 60.39 high, and then  at the 5/18, 66.54 high. For (cash) gold itself, resistance at $276 is  being tested now, with more at $280 and $286. Support begins at $270,  which would be a High Pole at the Bearish Resistance (HPBr) on our short  term P&F Chart. Support begins near 52 and with more at the 2/14, 45.64  low, and then at the even more critical 7/14/00, 41.61 low. 
 

PORTFOLIO CHANGES

Tuesday, August 21, 2001: We are adding Cirrus Logic (CRUS)  to our Low Priced Portfolio after today's opening. The stock is "very"  volatile and deeply oversold and we think the chip group has great snap  back potential in the near term. It closed yesterday at 13.24. 

[Part of our offensive is to have a good defense! That means limiting losses and protecting gains]! 
Article contributed by Mitch Harris: President, Market Trend Realities & Editor, The Reality Check Newsletter, and reprinted here with permission. 

Market Trend Realities (MTR) is a Registered Investment Advisory which manages personal, corporate, Trust, and retirement accounts on a fee only basis. Several low cost, flexible management fee arrangements are available. Investment Advisor, Mitch Harris has studied the Point & Figure Charting Method under the direct supervision of Michael Burke, Editor of the prestigious Investors Intelligence research organization. Management is based on a unique combination of technical analysis methods and tools which include, The Point & Figure charting method, Elliott Wave Analysis & techniques, industry group analysis, cycle analysis, Relative Strength Analysis, Stochastics, and investor sentiment studies. MTR offers a very uniquely structured managed mutual fund program using the RYDEX family of mutual funds, which offer outperformance potential whether equity markets are rising OR falling! Inquiries are welcome by calling us at
(513) 421-8737,  Fax: (513) 421-8733 ,  or by email at: mtr@fuse.net

MTR also publishes a monthly investment newsletter called "Reality Check", which offers technical commentary on the stock & bond markets, the Dollar Index, gold & gold stocks (XAU), Treasury yields, utilities, investor sentiment, and Federal Reserve policy. It also offers stock trading recommendations each month with price targets, stop loss points and insider activity. There are 4 trading portfolios, including a short selling account (we are very proud that our short sale recommendations have averaged 12.5% "compounded" during the roaring bull market of the last 5 years). Short term market commentaries are updated on Tuesday and Friday mornings, along with portfolio changes on this web page. They are also emailed for free to anyone who provides us with their email address. The regular subscription rate is $200 (US) per year. Samples are available upon request. MTR will be happy to send information on any of the above mentioned services. Please email us your home or business address along with your daytime phone number and specify your interest(s). 

 
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Last modified: August 22, 2001

Published By Tulips and Bears LLC