Last Signal: 01/12/01, TRADING SELL
Dow: 10,525.38 OTC: 2626.50
The ratio turned down to the neutral line, which was enough for a minimally lower low, confirming our sell signal from 1/12, while the markets have been mixed. We continue to expect another more convincing market decline that will leave little doubt that we are still deeply entrenched by the bear.
TUESDAY, February 13, 2001: Yesterday s strong gains were the result of efforts of the buy the dippers who have not yet learned the virtue of patience. The markets did get very slightly oversold during the prior four trading sessions, and the rebound was due. We see reason to believe that with the volatility of this week s options expiration and comments from Fed Chairman Greenspan, the volatility is likely to continue. We continue to remind readers that talk of further rate cuts is already quite well built into the market, so the only surprises from the Fed can be that the economy is sinking at a more alarming rate than thought, or that they may refrain on further actions for the time being.
Yesterday s rally was another half hearted effort by the bulls when viewing the volume on the Dow and NASDAQ. It has remained a problem on the otherwise apparently strong days, and is likely the reason for the Dow s continued failure to push through the key level of resistance at 11,028 that we remain bearish against. We think this is in direct relation to the $3 TRILLION in lost buying power that vanished with last year s over-inflated prices. While the media only tells us how great the inflows have been on a week to week basis, they have done little to disclose the tremendous losses suffered. The markets are still in the "hope" phase, where it is still commonly believed that they ll get their money back with "just a little more patience." This is not different from the early 90 s, when the average Japanese investor also clung to the belief that recovery was "just around the corner", yet they are still waiting, with the Nikkei just making a new 18 month low below 13,000 (the 1/90 peak was at 38,900!). Their bull market too was thought to have negated the business cycle and classic valuation models.
This ALWAYS leads to reduced fiscal responsibility as savings decline and debt increases as prudence is set aside in favor of depending on continued good times that in reality do not last. This promotes "making better use of cash flow" by spending the emergency fund and borrowing more heavily against the future, in order to have more money invested. By the virtue of its own weight, the economy finally topples, leaving many casualties as the misconstrued belief led to speculating with the funds that were supposed to remain whole and liquid, as the virtues of "betting the farm" are finally disproven. With no liquidity, already tapped out credit sources and now diminishing job security, they are unfortunately not prepared to sustain the normal process of the economy resetting itself for the next upturn. They immediately must cut out all "non-essential" spending, exacerbating the economy s weakness further, prolonging a normal recovery. This has been the case for Japan, and it will likely also be the case here.
Another forceful decline in the market may prove the fatal blow for this HOPE, as even with the market far below its highs, investor sentiment has reached its highest reading since January of 1987, just ahead of when the average stock peaked ahead of the 87 crash. Elliott observed that sentiment during the rebound rally often and expectedly reaches a higher level than when the actual high was reached as this HOPE is kept alive as people find it "more convenient" and easier than to adjust their behavior to the changing reality. It is this emotional condition that we can see in the markets NOW. As stated on Tuesday, investor sentiment becomes even more optimistic at the secondary peak as investors fail to adjust their attitudes from the bull market mentality that had prevailed. It is not the fault of sellers that small investors lose their shirts during a bear market. It s their perpetually conditioned bullish psychosis. It would be just as easy for the average investor to recognize when the game was changing, but hope springs eternal!
Yesterday s rally came on lighter volume again, as it has each successive attempt to push through resistance. It has remained our biggest clue so far that suggests there is neither the conviction or buying power to move prices beyond it. The 11,028, Fibonnacci resistance level [11,402 high - 9654 low = 1748 X .786 = 1374 + 9654 low = 11,028] that we continue to focus on remains a significant barrier and we remain equally convicted to our bearish forecast, against it. The Dow held just above lower support near 10,700 before bouncing back from a 10,755 intraday low on Friday. A close below this would now confirm a top, with lower support at 600 and 10,470-500. A break of this level would confirm that the elusive wave 3 of (3) decline has started. Next lower support remains near 10340-280, and then its down to the 9654, October low! In the event that the Dow pushes appreciably through the 11,019 - 35 barrier, higher resistance remains near 11,120, 11,250 and 11,400-25. A close above 11,450 would indicate a more complex bear market rally had developed.
TREASURIES
Treasury yields also remain near a more critical juncture, with the yield rallying strongly on Friday to a low of 5.369% on more fear of the equity market and concern over the economy. Unless the rally continues to push below the 5.35% January low, we are considering the rally as within its wave "2" lower low (lower high for the price). A yield rise above the short term support at the 1/31, 5.69% high would confirm that the higher highs that we expect were forthcoming. A lot of new bond supplies are flooding the market as issuers rush their borrowing with new bond debt to the market to lock in the favorable terms. This is often the case when yields are near their low!
Between the recent low and high, we can set our parameters. A move above 5.70% would confirm that the next longer term leg of selling is underway, with support at last week s 5.689%, and then at 5.725%, 5.85%, 5.925%.& 6.00-6.05%. A move below 5.35% would prolong the rally but continue to offer a poor overall risk/reward. This is why we remain BEARISH, even against lower yields!
GOLD
Gold & the XAU have managed to hold the flat line in the past few days, trying to digest the prior days to its lowest level since 8/98, when gold dropped to a low near $252 per ounce, and the XAU reached an all time low of 48.67. Conditions remain outstanding for a very powerful rally to begin at any time. Further selling pressure will likely make this potential even greater, as there is already a very high level of speculator short interest outstanding that will need to be bought back at some point, usually sooner rather than later, especially in the futures market. Corresponding to this is sentiment among futures traders, which is clearly at levels from which strong rallies have emerged. We have also heard some recurring rumors of several very large institutional buyers, who are said to be trying to reduce their very heavy short interest into the guise of weakness. If our information is correct, they are among some of the biggest institutional firms that have made it their practice in recent years to sell gold futures in their own "carry trade", where they borrow the gold and sell futures contracts against it. As they continue this practice, they are actually manipulating prices lower to benefit on the contracts sold previously. IF, as we suspect will occur the perception changes, there is likely to be a very quick switch from this practice of forward selling to physical buying, because this is how they must process the closing of the trade in order to pay back the borrowed gold. This is what we mean when we are discussing "short covering", and a change in perception can, and likely will be the precursor to a very sharp rally.
XAU resistance remains at the elusive 53-4 level and 55-6 level of resistance above that. Higher resistance is at 59, 64, and 69. Support is at 44, the 41.64 low and then 37-40. We still believe that any lower prices will be relatively short lived.
PORTFOLIO CHANGES
Friday, February 9, 2001: We still suggest buying Pennzoil (PZL) for our Income Portfolio, for its total return potential, on a dip BELOW 11.75. We also recommend shorting America Online/Time Warner (AOL) on a further bounce, but are adjusting our price effort to 50 or higher from the original "above 51" recommendation. It is on a "High Pole at the Bearish Resistance Line (HpBr), after a 5 wave rally into resistance above 55, and may fall immediately our give us our chance. If executed, we would give this plenty of room, with the initial stop/loss point at 59.25. 2/12: We added Federated Dept. Stores (FD) to our Short Sales list at yesterday s 43.50 closing price. It recently had a Major BUYING CLIMAX (BC) and a High Pole Top (HPT). We are using a 47 stop to keep the risk/reward favorable. [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
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Fax: (513) 421-8733 , or by email at: mtr@fuse.net .
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