Last Signal: 01/12/01, TRADING SELL
Dow: 10,525.38 OTC: 2626.50
Last week s blood bath on Wall Street finally broke our Reality Ratio line out of its neutral range of the past few months, dropping VERY close to a minimum oversold reading of -.40. This remained well in line with our expectations when we stated last week, "Our analysis still allowed for another drop toward oversold before we are willing to call for some sort of meaningful bounce." From the -.387 reached, we cannot rule this out. An overall upturn this week may confirm a new buy signal, so "heads up!"
MARCH 20, 2001: Happy Spring Equinox!! Today is the first day of Spring, representing a rebirth of the season as the weather warms, buds form on the barren trees from the cold winter months, and perhaps the seeds planted by our Federal Reserve in recent months are sprouting into at least a temporary market bottom. The dramatic selling into last week s triple expiration of options and futures MAY have been enough to generate a short term capitulation and subsequently, an upside reversal this week, not so much because of what the Fed does at this afternoon s FOMC conclusion, but because the markets have exhausted themselves of at least some selling into Friday s dramatic expiration!
Friday s selling was exacerbated after the University of Michigan Consumer Sentiment Survey was released, showing a slight bounce over February, from 90.6 to 91.8, and its "expectations index" rose to 84 from 80.8. This display of consumers moral fortitude toward the religion of consumerism derailed the day s hope of a strong finish, as investors were disappointed by how the Fed MAY take it, on top of the heavy option and futures related selling. Last week was the worst PRICE decline EVER for the Dow and the first time since 11/18/98 that the OTC Composite closed below 1900. Last week was attributed to forced margin selling, fresh short selling and mutual fund redemption s. NYSE volume reached 1,552,089, strong enough when added to the better than 1.2 billion shares or more traded each day last week to qualify in our book as a downside capitulation. On top of this, ALL of the 5 day put/call ratios we follow rose dramatically, indicating a dramatic surge in PUT buying activity (a sign of fear among the fast to react option traders), and some of our other short term indicators also stretched within various oversold levels. Yesterday s modest upturn was at least enough for many of these indicators to reverse higher again, and some, like the shorter term McClellan Oscillator gave a trading BUY signal by moving from Friday s -187 to -120. This leaves PLENTY of room for a rally to grow legs, but we must warn against building too much into it, as we ve been pointing out that "oversold" in a bear market is NOT the same as during a bull market. Another warning against excessive pessimism were the significant Time and News Week issues that each had a Bear on its cover. In terms of sentiment, this is a historically significant sign that the bottom is within about a month of its low!!! Also statistically interesting, according to Jim Bianco of Bianco Research, it took 948 days for the Nikkei to decline by 62%. In contrast, the OTC Composite declined 62% in just 367 days, almost 2.6 times as fast. We have correlated the two markets and our two economies many times, and this is very strong evidence in support of our own theory, that because we are much more highly indebted than they were, before, during and after the peak, that our own developing problems may easily become WORSE than theirs have been!
We see strong initial resistance near the broken 10,292 level of recently critical support, with more at 10,480, 10,600, 10,840 and 11,028. We do not think the market has any chance of recovery beyond the 10,770 - 840 level, which is not only a solid level of price resistance, but is also at the .786 Fibonnacci retracement resistance from the 11,035 high to the 9794 low. This is now considered key resistance. Next support is at the 10/18, 9654 low, which we still think will be taken out before the current reign of terror ends. Beneath this level, support is found at 8695, and then down to 7400. I d also like to point out that this level was last reached at the 10/8/98 low, which was not at all long ago and seems PLENTY reachable to us, providing we haven t just seen the bottom.
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, it 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. To clarify, while we do allow for a strong technical rally, our best guess remains that for the New York averages, primary wave (3) remains in progress, and should take the Dow BELOW the 10/19, 9654 low before long. 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. This appears to have already started.
TREASURIES
Treasury yields continue to churn near its 5.24% low, but have not made further progress, ahead of today s FOMC meeting. We see whatever the Fed does as a "sell on the news" event", at least for bonds, as it is already fully reflected and will come as a surprise to NO ONE! Perhaps this sets the stage for disappointment, and the upside reversal for bond yields that we expect, and the downside continuation for equities, to complete its third primary wave of decline that we still think is ahead. With many Fed Governors sounding in recently that the economy is not declining as many feel it is, we only expect a half point cut. This may prove to be a disappointment as the markets have talked themselves into more. We see anything greater than .50 would indicate two things, that the Fed is more worried about the economy than their comments would suggest, and/or that they were yielding to the demands of the markets instead of acting independently to defend the "economy".
We think the next move of consequence will be an upside reversal, taking the bullish consensus by complete surprise as they have talked themselves into another round of indefinitely lower yields. We think the 5th wave of the larger, intermediate wave "C" decline, within the primary degree wave (2) low has likely ended. If correct, long term bonds would offer 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, and that Primary Wave (3) of the long term BEAR market was underway, with higher support at 5.725%, 5.85%, 5.925%.& 6.00-6.05%. Next lower resistance remains at 5.24%, 5.175% and then 5.00%.
GOLD
The Gold & the XAU rally still seems to have ended right into the Bank of England s (BOE) 2nd auction for the year went poorly last week. The new supply relieved the short sellers panic to find some of the tight supply of gold needed to renew their short sales and carry trades after the prior Friday s expiration of the options on gold futures that lead to a (temporary) short squeeze. One more minor 5 wave decline to a new low would conclude the entire decline, AT LEAST from the 10/99, 92.72 high, and potentially much more compellingly, the entire bear market of the past 21 years. In either case, we can clearly see a silver lining in any further selling that emerges within the current downturn, as it will offer the best buying opportunity in no less than the past two years or so, and potentially the best trading opportunity for any market any where in the world for the next few years or more!
The XAU remains on a bearish HP formation. While gold itself falls back, we would consider it a very bullish sign IF the XAU managed to hold above its previous low(s), as typically the XAU begins to firm up ahead of the metal and would be taken as a very bullish sign. Of course, this is only conjecture for now, and overall, we do think the XAU looks better than the metal itself, at least in relative terms. In any event, great opportunity lies ahead, regardless of whether or not it makes a new low (below 41.61) or not.
XAU resistance now begins at the recent 57.42 high, with more at 59, 63-4, & 69-73. Initial support was raised to 50 on Friday, but should have actually been at 51 where it would be a bearish High Pole (HP) on our shorter term, (1X3) P&F Chart. Lower support remains 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 still see the exact opposite here!
PORTFOLIO CHANGES
Tuesday, March
20, 2001: 3/19: Merrill Lynch (MER) rose quickly to hit our 58 stop (+22.67%), as the brokerage community conspired to circle the wagons in defense of each others stock prices, by upgrading each others stocks (i.e. Lehman Bros. Upgraded MER to strong buy from buy, Merrill Lynch upgraded Lehman Brothers from Buy to Strong Buy, and Morgan Stanley Dean Witter & Co upgraded Lehman Brothers from Market Performer to Buy. We see this as a clear conspiracy between the three brokerage titans! [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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