Last Signal: 01/12/01, TRADING SELL
Dow: 10,525.38 OTC: 2626.50
Dow, the markets and the ratio managed to close higher for the week. As for the ratio, while the basic line was higher, it fell short of pushing through the 2 moving averages which were still falling, and because the upturn was not from below the -.40 or lower oversold level, it was not quite enough to change anything, based on our interpretation. Our analysis still allowed for another drop toward oversold before we are willing to call for some sort of meaningful bounce. One thing we d like to see, is a rally that is "not believed" by the parade of wishful thinkers that have to date, called every bounce "the" bottom.
NOTE: Due to a death in the family, we will TRY to update on Friday, and stay on schedule to publish our March Reality Check issue this weekend, but it may be a few days late, in which case we would beg your indulgence!
TUESDAY, March 13, 2001: WOW! The BULLS are stampeding on Wall Street! They re running away from it! They called it a buyers strike on CNBC, not enough to signal the end to the retreat. Many of their guest analysts were telling viewers that we are not yet close to capitulation of the decline. We think that yesterday s 436 point plunge in the Dow Industrials on 1.231 billion shares was evidence of exactly that. Down Volume outpaced up volume by a factor of 11 to 1, and declining issues outpaced the advancing ones by a margin of 3.486 to 12. As this has accelerated fairly sharply from the norm, it CAN be considered capitulation! We can t say that it won t continue, but we can say that this did qualify as at least some capitulation of the short term rally. Investors were overcome with rumors that GE would lower their earnings projection for the quarter and full year, and that Japan was in great trouble. Their is also some confusion over what the Fed may do next, and whether they can really fix things.
The Dow s two day loss of 650 points was paced by the OTC Composite s loss of another 244 points. This brought the NAZ to its lowest level in almost 2 � years, and its worst bear market in its history. Since topping at 5048 last March, the OTC Composite alone has lost over $3.6 TRILLION dollars of market value. If there is any question of why the economy has gone from boom to bust, one only need s to realize that the "wealth effect" has turned into a wealth "defect", as businesses over-invested to create capacity that in retrospect was certainly foolish. Now that consumer s have stopped spending as their unrealized gains have vanished, the economy is in a vacuum. We do not foresee a turnaround for quite some time to come, but they will tell us that "the recovery is just around the corner" all the way down, just as they have in Japan. Only now, 12 years after their own bubble burst are they beginning to grasp reality. Perhaps, for them, the admission that things are on the verge of destruction is the first step toward finding real solutions to their immense fiscal and bad debt problems. It was reported just yesterday that Japan s "Sovereign" debt is at almost 175% of their annual GDP. Remembering back to the late 1980 s when they were still the economic machine that lead to their bust, they were a "creditor" nation, as the US "says" they are at this time. This IS evidence that such balance sheet analysis may best be taken with a grain of salt.
Only yesterday, they were asking on CNBC, "is the S&P now in a bear market?" as it apparently just fell below their imaginary -20% used to define a bear market. We wonder, if they must ask based on this arbitrary percentage, than perhaps they don t really grasp the true meaning of what a true bear market is. One guest even called the recent lower highs "classic distribution!" This is supposedly a representative of a major brokerage firm, who doesn t understand that the distribution phase of a bull market occurs while the market is still rallying. We firmly see the Dow in a "liquidation phase", a step ahead of distribution, which is likely far behind the market by now.
With this week being the first "triple expiration" of the year, the volatility may indeed be enough to produce a trading bottom that can last for a while. The problem is, how much more downside might there be first? We are attempting to remain objective and open minded about this. While the market is a "little" bit oversold, it is not yet deep enough to be confident that a bottom is at hand. This allows for still lower prices, but we feel we must remain alert to the possibility that buyers may begin to re-emerge into further weakness. This may be especially true of the OTC averages, as they are much further advanced in their bear market than are the NY averages. Even with yesterday s selling, we did notice that many chip stocks held their ground well, and some were even higher for the day. This may be a bullish price divergence in the making, as this group typically gets so beat up, it emerges from its lows ahead of a typical market bottom.
Stated on Friday, "a downturn here will have strong potential to test the key support that has lasted on at least five occasions since last November 30, at the 10,292. A break of this level will very likely usher in a cascade of new selling, as many, many institutions has their stop losses set just beneath that level." And so it was. Next Dow support is near 10,000-10,050, and then down to the 10/18/00, 9654 low. Resistance begins near 10,400, then 10,500, 600, 700, 800-840, and 11,028. For the NAZ, resistance begins between 2070 and 2150, then 2140, 2300, 23400-50 and 2600. Next support as we see it is near 1750 and then down to the 10/7/98, 1449 low. From last Friday, our Elliott Wave analysis of the Nasdaq 100 (NDX) remains basically unchanged, as we think intermediate wave 5, within the larger primary wave (3) decline is ending. If this is correct, this allows for the best rally effort since the initial decline from the 5000 high, and should bring the average back up at least to 2500 with the potential to retrace the entire decline from early in February, to 28-900. This was our reason for taking a stab at the QQQ s in the mid 40 s. Any rebound should still remain within primary degree wave (4) of the OTC bear market, leaving one last 5 wave decline ahead to complete the entire primary wave "(5)" decline. In contrast, the New York averages still have a way to go before catching up to the NASDAQ on the downside. We reiterate our recent comments that because the NAZ is further ahead of the other averages, we think it will begin to outperform, at least in relative terms against the Dow, NYSE, and S&P.
TREASURIES
Treasury yields continue to be a big beneficiary of the fickle trading money that can t decide on whether to stay in or out of equities. The yield surprising to many did relatively little during yesterday s blood bath for equities. We can only attribute this as evidence that both, lower Fed rates and lower stock prices are becoming fully reflected in the Treasury market, consistent with our cautious analysis for bonds. Even a push below last Thursday s low of 5.268%. We think lower long bond rates would simply be an extension of the 5th wave within the larger, intermediate wave "C", of the primary degree wave (2) low." The long term bond offers a poor risk/reward at this time in our opinion, and we remain BEARISH even against lower yields.." A move above 5.40% would turn our short term P&F chart bearish, with a move above 5.70% needed to confirm a longer term bearish reversal, with higher support at 5.725%, 5.85%, 5.925%.& 6.00-6.05%. Next lower resistance remains at 5.25%, 5.175% and then 5.00%.
GOLD
Gold & the XAU remained firm yesterday, with gold approaching the highest level of the year, near $275. The trading rumors we ve been hearing about that several large central bank gold loans have come due and are not being renewed, continue to support the market in the short term. The liquidity squeeze and ensuing scramble to find the gold that forward sellers need before they can pay back the central bank lenders remains in tact. This has forced lease rates (paid by the short sellers who borrow gold from the central bankers so they can in turn sell it into the market) dramatically higher, with some of these loan rates moving from as low as .75% to as high as 7 �% in recent days, dramatically increasing the cost of holding these positions, especially as prices move higher on top of the 800% surge in the loan terms. This is a clear crack in the entire forward selling game that we have suggested on many occasions as a clear market manipulation. The truth is that there is so much gold held short, it is unlikely they can all find the gold necessary to close these positions without driving prices impressively higher.
The XAU has so far, held its gains to the 57 level. The recent high was what we consider to be a significant short to intermediate term breakout above the top of the range of resistance we ve been siting, seemingly forever. This was also a break out above the neckline of a very impressive "Head & Shoulders Bottom", which measures a move to just under 70. Our gold P&F charts also turned bullish and we can project a move to $292 on our HSBC cash gold charts. As stated on Tuesday, "Simply put, even if their overall bear market remains in force, the shorter term rally is poised for further gains." Regardless of whether or not this is the beginning of the new, long term "secular" bull market that we have discussed on many occasions, what is important is that for now, the trend has turned bullish! We will look for levels that would indicate the end of this short term strength in the near future.
Higher resistance is at 59, 63-4, & 69-73. Initial support was raised to 50 on Friday, where it would be a bearish High Pole (HP) on our shorter term, (1X3) P&F Chart, with lower support still 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, March 13, 2001: 3/9: Nasdaq 100 Tracking stock (QQQ) hit and closed right on our 45 stop loss, protecting us from yesterday s devastation, for a very manageable 1 � point loss from our 46 � entry point (-3.74%). We will look to re-establish this position upon evidence that the anticipated primary wave (4) rally is beginning. [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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