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!
FRIDAY, MARCH 30, 2001: This week s exaggerated moves have likely been influenced by quarterly portfolio adjustments (window dressing) into today s last trading day of perhaps the most difficult quarter since the bear market of the mid 1970s. For the first time perhaps in 20 years, investors have become more "aware", that something is wrong, and that the ALMOST bear market that "we aren t in yet" (according to CNBC s mindless definition of a bear market), is much worse than the standard "cyclical" bear markets that we had always quickly recovered from on all the prior corrections since the early 1980s. We had defined the current period as the "recognition phase" long before its arrival, and indeed, recognition that something truly is different with this bear market is certainly what has transpired! Next phase of the bear market DESPAIR!
The volatility certainly has made market analysis difficult, but we maintain our recent opinion that overall, the risk for the near term is in remaining too bearish. Even in the event that the decline has not yet reached the end of its current capitulation phase, we think we will see "modestly" higher prices before we should see much lower prices. Lots of the currently horrible news has already been reflected in the market, at least for the time being. With the beginning of the earnings pre-warning season at hand, we wonder HOW additional lower earnings adjustments can come as a surprise to anyone who cares. The economic slowdown has already set back corporate profits for the first time in two years, by -4.3% and only the second time in the past seven or eight years, since the economy recovered after the Gulf War, that corporate profits were lower than they were three months earlier.
Technically, our short term indicators are a bit mixed, with some recovering slightly from last week s very depressed levels, and others bouncing before carving out even more extreme oversold levels. We are somewhat impressed with the market s cumulative volume indicators, which are appear in position to move HIGHER. On the side of overall caution, our 10 Day A/D Line Indicator has been bearish for the last 14 trading days so far after turning bullish for only a very brief few days. For the short term, this IS a big concern. Our overall Daily A/D Line though is on a low pole (bull alert) formation on our short term P&F chart, offering the ability for it to turn bullish, before reverting back to a bear confirmed signal.
Our Wave Analysis continues to suggest that the Dow is still within its minor 4th wave of upward correction, while still within the larger, Primary wave (3) price decline. If we remain correct on this, the retracement of the last few days can be counted as minor wave "B" within a three wave corrective rally (labeled A up, B down and C up) to complete Primary wave (4), ahead of the fifth wave of decline. We hope this will take more time, as further gains should remain confined BELOW 10,300 on the upside. 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. Unfortunately the OTC was already back down, testing last week s low by yesterday s close. Our best guess is that a new low here is an extension of the current decline, as opposed to the beginning of a new leg down.
The Dow s bounce stretched to a high at 9950 before turning down on Wednesday. So far, the selling has been somewhat measured, and we still see the potential for further upside retracement, against support at the 9540 level. Next resistance is near 10,000, 10,100, and then essentially at 10,300 barrier that should not be penetrated. Support is rising, and now begins near yesterday s 9687 low, then 9540, 9340 and at last Thursday s 9106 low. Longer term lower support is found near 9062, 8850, and 8618.
TREASURIES
Treasury yields have remained under selling pressure after last week s major Buying Climax (BC) and have reversed higher to confirm the initial sell signal we had been cautioning about, by breaking back above support at 5.40%. It closed yesterday at 5.48%, for the highest yield since pushing back below 5.50% on 2/26. The next challenge is quickly approaching, at trendline support which is now near 5.53%, and is drawn from the 1/00, 6.75% yield high. A close above this important line will provide additional confirmation that the overall trend for interest rates has turned HIGHER, even as the Fed continues to lower short term rates.
About six months or so ago, we and many others were warning that the "inverted yield curve" (where short term rates were higher than long term rates) was a sure sign of a coming economic slowdown, and a sign that has almost always preceded recession. We consider that with short term rates under further pressure to fall and higher rates rising, the yield curve is reverting back toward what is considered to be normal, as investors again demand a higher return for taking longer term risk over sacrificing it in exchange for the liquidity of shorter maturities, as has been the case. Perhaps the Fed will soon back off of their almost panic speed of rate cutting, as the economy attempts to find stability, but whatever the message, we remain confident that long term rates are heading higher!
Our wave analysis suggests that the intermediate wave "5" or "C" decline, within the primary degree wave (2) low has likely ended. Long term bonds offer a poor risk/reward at this time in our opinion, and we remain BEARISH. A move above 5.40% turned our short term P&F chart bearish. A move above 5.70% is still needed to confirm a longer term bearish reversal, and that Primary Wave (3) of the long term BEAR market was underway. This may certainly take its time. Higher support is near 5.725%, 5.85%, 5.925%.& 6.00-6.05%. Resistance now begins at 5.37 - 30% (gap resistance), the 5.217% low reached last week, 5.175% and then 5.00%.
GOLD
Gold & the XAU have done so little that we have nothing to add to Tuesday s comments, which we are leaving up. Prices continue churning, doing almost nothing in either direction. The recent 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 is bearish again. While it 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).
XAU resistance begins at 53-4, with more at the recent 57.42 high, 59, 63-4, & 69-73. Next support is at the 2/14, 45.64 low, the 7/14, 41.61 low, and then at 37-40. In contrast to the poor risk/reward we see for bonds, we still see the exact opposite here!
PORTFOLIO CHANGES
Friday, March 30, 2001: -- none today --
[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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