Last Signal: 03/23/01, TRADING BUY
Dow: 9,504.78 OTC: 2626.50
Our Reality Ratio plunged to a deeply oversold area to signal a "trading buy" after it remained bearish since 1/12/01. That sell signal insulated us from a 1020 point, 9.69% Dow decline and a 697.52 point, 26.56% Nasdaq plunge in just 10 weeks! We suggested last Tuesday that it could very well be a transitional week and we see lots of evidence that it was, at least for the next few weeks. As we ve learned from our friends at Investors Intelligence, when our indicators change, we change with them!
TUESDAY, MARCH 27, 2001: Last week s dramatic volatility was enough to produce what appears to us to be a capitulation lead panic low that cannot be ignored even if we remain within an ongoing bear market. Prices became so oversold that a rally was becoming well overdue, regardless of the semantics. We think this rally is tradable and began adjusting for it last week. Perhaps the very most difficult thing to do as a trader is to remain objective enough to shift our emotions and trading accordingly, especially as we think it remains more than likely that lower prices will ultimately resume after a while.
Last Thursday s sharp upside reversal from a 380 point deficit was likely the climactic reversal we had quickly prepared for, creating a rush of key upside reversals, including major selling climaxes on the Nasdaq Averages, by closing higher for the week after making a new low. Trading indicators that were just mentioned in Friday s update, such as the McClellan "Oscillator" and 10 day Trin have quickly turned higher and have already relieved a great deal of their oversold levels just reached. The Option Volatility Index (VIX) also found dramatic relief, backing down from Thursday s 41.99 spike to 33.19 yesterday. These, along with many other signs do combine to indicate that there indeed was panic in the market on Thursday. Typically, this has lead to sustained bottoms in the past, and while in a bear market, that may mean something of less sustainability, it should still manage to provide some upside for a while!
Our Elliott analysis continues to determine that the rally is within Primary wave (4). This may last for a while, but ultimately if this assessment is correct, more selling should still take prices to new lows after this rally runs its course. Within wave (4), the Dow should NOT overlap the bottom of the minor wave 1 low, which was at 10,294. For the Dow, we are using this as a key level of initial resistance, at least to keep our preferred analysis from needing revision. For the OTC Composite, this level is near 3042, leaving loads of upside potential for a bounce in this most battered index. As stated on Tuesday, we think the OTC Composite has the potential to retrace at least back up to the 2500 level, with further potential toward 2800, still within primary wave (4) up. This assessment allows for the best rally effort since the initial decline from the 5000.
The Dow s decline below its October 18, 9654 low RE-CONFIRMED that it remains in a bear market. In spite of the mindless dribble put out by the media that "the Dow is flirting with a bear market" simply because it is down 20%! This assessment is nothing but a simplistic, misleading and incorrect definition of what a bear market is. Imagine how many have already been devastated, while these "amateurs" keep spinning that we are still in "bull market territory"! A bull market is a "process", in which the excess liquidity of a healthy, growing economy finds its way into the rising market until the process loses steam and finally ends. A bear market is the opposite, a cleansing, or reversal of the excesses created by the past expansion of liquidity. The key to the definition is that both are part of the "process". Combine this process with a trend of higher highs and higher lows during a bull market, and lower lows and lower highs during a bear market, and you have an excellent understanding of how to identify the market s "primary trend", along with knowing how misleading and ridiculous the media is. To me at least, it is insulting how the media so vastly misleads their viewers.
Initial resistance is now near the broken support near 9654, with a range of between 9550 and 9710. Above this is minor resistance at 9,800, 10,000, 10,100 and 10,300. We think the markets should find sellers near the key levels (9700, 10,000 and in particular, 10,300). Support is rising, and now begins near 9540, 9340 and at last Thursday s 9106 low. Longer term lower support is found near 9062, 8850, and 8618.
If you haven t received a sample of our work, our March issue is now available. This is a good time to request a sample, by emailing us at mtr@fuse.net. This month s commentary is titled, "The Downside Spiral of Despair&Cancel That Order!"
TREASURIES
After Treasury yields carved out a nominal new low at 5.217% last Thursday, they quickly reversed to close the week higher. Opposite the OTC market s, this marked a major "buying Climax" (BC) and is a clear signal of major distribution, or selling into what we think was buying capitulation into the climactic equity turmoil. Here too, we have been confident that a reversal was coming that should ultimately lead to dramatically higher rates as the rally from the 1/00, 6.75% high should have ended, according to our work. It has already broken down out of the apex of the "ending diagonal triangle" we noted on Friday stating, "this strongly suggests that a bearish reversal is due at any time now." We also thing the Fed will remain a non-event for the long end of the bond spectrum, and old news by time they take further action.
Again, we see the intermediate wave "5" or "C" decline, within the primary degree wave (2) low as likely ending. Long term bonds 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
Gold & the XAU continue churning, doing almost nothing in either direction. The panic selling didn t help to stimulate demand for the gold market, and it is not likely to do so during the panic s absence. At some point, money will rediscover this under-owned market sector as it is isolated as the one and only completely unexploited, under-owned, and under-valued investment category that is uniquely and available in ALL investment markets throughout the world.
Technically, the XAU remains on a bearish HP formation, and gold itself has turned bearish again. 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. This remains our conjecture for now, and so far we do not see this. 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 27, 2001: 3/23: We closed out the S&P Tracking Stock (SPY) we ve held as a core short sale since 12/28/99, at 113, for a +22.74% gain. We hope to reposition when we think the time is right. We are also adjusting some stops: ALK 30 vs 31; AOL 48 vs 52; KOF 21 vs 26; FNM 80 vs 85; & PG 72 vs 80. [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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