Last Signal: 01/12/01, TRADING SELL
Dow: 10,525.38 OTC: 2626.50
Last week s sharp downswing brought the ratio down with it, reaching toward the oversold side of neutral. While the bulls are fighting it every step of the way, the market, and our indictors appear to have rolled over to end the seasonally bullish rally. Time will tell, but the Reality Ratio was not able to push beyond the neutral +.20 level on the upside, and it may soon be ready to challenge moving out of the neutral range, on the downside.
TUESDAY February 27, 2001: The markets were "touched by an Angell" closing sharply higher on growing speculation that the Fed will cut rates again at any time, instead of waiting until their next FOMC meeting on March 20. Ex-Fed Governor, now chief economist at Bear Stearns, Wayne Angell has been talking up the markets with his expectation that the Fed will not wait to hack off rates again, as soon as later this week. While others don t see this as likely, investors were eager to find any reason to ignore the continued nasty profit warnings, downgrades and so on, in favor of any comments that allowed for hope. My big problem is with Angell s credibility. While at the Fed, he was by far the biggest interest rate HAWK, but once he took his position in the private sector, he quickly turned his attitude by becoming among Wall Street s most outspoken DOVES. While we do not necessarily take issue with the idea the Fed will cut rates again, we haven t seen such horrendously bad news since their last rate cut that would suggest such an immediate or sensational action is warranted. In fact, as with their last dramatic actions, it would risk the appearance that the Fed is continuing to panic, and being dictated to by the markets. This would risk the loss of their very most valuable asset - CREDIBILITY!
As we discussed on Friday, many short term indicators were oversold, and yesterday s bounce was what we consider pretty typically within the character of the other bear market bounces that we seen as the markets have moved lower. While a one day recovery doesn t do too much to relieve their oversold levels, we think rallies will remain short lived and should be used for more selling. Friday s intraday low tested key support from the 11/30, 10,292 low, when Wayne Angell s Fed call was first made. We don t think the timing of his proclamation was a coincidence by any means, but a carefully timed "talking up". The better than 2 to 1 advancing issues over decline s left our 10 day A/D Line Indicator bearish for the fifth day now. Our bottom line, as long as investor s remain eager to buy the dips with the idea that "perhaps the worst is over", we doubt very much that it will be. Overall, sentiment remains far too excessively bullish after all the selling for us to believe we can be near any magnitude of a substantial bottom. This will not change until this attitude toward risk is ADJUSTED.
Technically, the markets are entitled to more of a bounce, with the broken support at 10,722 now becoming resistance, with more near 10,800, 10,900-40 and 11,000-35. The market should NOT be able to move beyond this under the intermediate term bearish scenario. In fact, we think there is a chance that the 350 point bounce of the last 1 � days may still be within minor wave 4 of the decline that would still allow for one more push lower, before a better technical would develop. For this to remain a plausible, the Dow must remain below the 10,760, wave 1 bottom, because Elliott s rules do not allow for wave 4 to "overlap" wave 1. So, any push above this level would force a change in this short term possibility to something to be determined then. On the downside, a drop below yesterday s 10430 swing low would increase the odds that this possible minor 5th wave was underway, making a new flow for the move more likely. A drop below 10,292 could force heavy stop/loss selling/capitulation that could lead to a better trading opportunity.
TREASURIES
Treasury yields rallied enough to reverse down on our short term "inverted" yield chart. We think Treasuries are within a critical period technically, as they are either tracing out a 4th wave "contracting triangle", leaving one last push ahead to a new (yield) low, or they should soon begin to move higher. The first, more bullish alternative would simply buy the markets a bit more time before yields head higher, where the second should become more clear in short order. A rise above last Thursday s 5.538% high to 5.55% would sharply increase the odds that rates were heading higher. The more bullish first scenario would take the yield below 5.35% at a minimum. While this too would clear up the current wave uncertainty, we would be back on the same alert for a bearish upside reversal. This is why we think long term bonds offer a poor risk/reward at this time, and why we have remained BEARISH even against lower yields.
We see a few other, less immediate signs of caution for bonds, within the clear distribution pattern among the Dow Utilities, as sellers now emerge into their strength to lower highs, and a new development, our long term bond timing indicator, the Dow Jones, 20 Bond Average moved to a long term "High Pole at the Bearish Resistance Line" (HPBr) yesterday. This occurred on our long term Point & Figure (P&F) chart, after it had first reached where the long term broken bullish resistance line (uptrend line drawn from the 10/87 panic low) intersected with the long term bearish resistance line (drawn from its 11/98 top), and then turned down. It is very common for a retracement rally to come back to test the underbelly of a broken uptrend line before turning lower again, especially when it intersects with the bearish downtrend line. The 20 Bond Average also retraced almost an exact Fibonnacci .618 level at its recent 2/16, 101.43 high [101.88 = 61.8% retracement]. While this indicator had remained bullish since 5/00, catching a good portion of the bond rally of the past year or so, it is now telling us to become cautious, which we have!
While a short term push above 5.55% would now turn our short term P&F chart bearish, a move above 5.70% is needed to confirm a bearish reversal for our longer term P&F chart, with higher support is at 5.65%, 5.725%, 5.85%, 5.925%.& 6.00-6.05%. A move below 5.35% would make lower resistance at 5.25%, 5.175% and then 5.00% the next barriers. Again, we believe that contrary to popular opinion, bonds offer a poor overall risk/reward.
GOLD
Gold & the XAU moved sharply higher in the past four sessions, with March Gold closing $7.40 and the XAU closing over 7 points higher since last Wednesday. For the XAU, that s a 15.39% gain in four days. To us, its not that important to know exactly WHY the market has been rallying, just that our indicators had been strongly suggesting that it would and it did! Our early warning indicator, the XAU/Gold Ratio did turn up for a Low Pole (LP) buy alert signal at last Thursday s close. It has since given a confirmed buy signal and has also broken its downtrend line drawn from the 9/99 high, a very good sign. Our indicators strongly suggest that conditions remain perfect for what may initially appear to be short covering only to become a much more sustained move higher. This is also regardless of whether or not it is within a new bull, or old bear market!
Stated on Friday, "we do think that if a trading rally is about to take place, it needs to begin almost right away," seems to be on course. Major support is at the 8/99, $252 per ounce low, and for the XAU, at the 10/00, 41.64 low. Also stated on Friday, "conditions that call for a strong bullish reversal continue to grow to levels that have always lead to very powerful bullish reversals in the past. Sentiment remains very low and short selling activity is pushing back towards old extremes of "wrong way" speculation, both should lead to powerful short covering to begin the rally." We think it is underway!
To keep us from becoming giddy, 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 the 2/15, 45.64 low, the 7/14, 41.61 low and then 37-40. In contrast to the poor risk/reward we see for bonds, we see the exact opposite here!
PORTFOLIO CHANGES
Tuesday, February 27, 2001: We still suggest Pennzoil (PZL) for our Income Portfolio, but are raising our buy price from 11.75 to 12 1/2. We advise accumulating this if it dips. [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: April 01, 2001
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