The ratio bounced slightly last week but remains on the sell signal that was confirmed the week earlier. It made a lower high and as suspected, has given the ratios moving averages a bit more time to be drawn closer to the overbought ratio line. We are confident that the next move of consequence will be back DOWN, as more and more, it becomes recognized that something is WRONG within the new paradigm!!
FRIDAY April 14, 2000: CRASH ALERT!!!! That’s correct, we are advising extreme caution for the near term. Forced margin liquidation from over-indebted, highly risky speculating is perpetuating the overall destabilization that this herd thought would never catch “them”. They were so confident that prices could only go up because of a new paradigm, that they completely ignored the multitude of signs that the RISK part of any risk/reward equation cannot, by its very nature ever be repealed.
Because of this, we are putting out a crash alert as the hypothecation that drove prices indefinitely higher has finally found out where indefinitely ends and reality begins. This process is forcing more selling/liquidation on each rally attempt. The selling will either get temporarily washed out as forced margin selling runs its course, or the further destabilization will snowball into a full blown panic, as the selling draws in others who just a few short months ago were certain they were “in it for the long term”. The risk is that we could see this process continue for a few more weeks, into late April/early May, but the damage could grow exponentially, just as it did when prices were moving higher so fast that most couldn’t see the potholes in the road they were traveling on.
I am leaving the following portions from Tuesday’s update as they remain relevant: The volume divergence that was noted last Friday was a clear divergence that warned against betting on a sustainable recovery after last Tuesday’s serious drama. We discussed our cynicism about the dramatic recovery after the NASDAQ had crashed by 28% in less than 1 � trading days before it was rumored that the Fed stepped in to stabilize the markets, buying S&P and NASDAQ futures. If they really did this, It is doubtful that even they will be able to keep the markets from running their natural course, just as they had failed to effectively talk the markets DOWN when they thought it became irrational. The truth is, government intervention (now known as social engineering) can’t possibly be effective in the long run without an unnatural commitment to perpetual manipulation. This of course would not be acceptable once it became more visible. [There is nothing to stop them from trying this again, but they should quickly see it as an act of desperation that has little chance of succeeding].
The noticeably diminishing volume on the rally remains a sure sign that this market has run out of time and money. This clearly contradicts the idea that last week’s low was another opportunity to buy the dip, especially as we are now at the tail end of the seasonally bullish period that generally lasts from November 1st through mid to late April, as the last of the retirement contributions are made. With this most bullish period of the year ending with a crash and burn, what might be in store for the typically much more subdued and realistic environment going forward? We don’t think it will be pretty, nor to the expectations of the general population which has rested its entire future on faith alone, and not on the sanity of market fundamentals. In fact, we still hear almost every single day that the markets will continue to rise because of the “strong” fundamentals. We don’t know what is being referred to because the fundamentals that we can see are anything BUT strong. Interest rates, are rising with a hostile Fed policy. The stock market has stopped going up while P/E multiples continue to expand, implying that earnings have indeed NOT kept pace with the rise in stock prices. On average, the prices we pay for about everything we need day to day have gone up, costing us ALL more of our rising wages, effectively TAXING us more. On top of all of this, Americans level of debt and therefor debt service is becoming a greater and greater portion of our monthly expenses, also acting as a higher cost of “living” tax. So, if market and economic fundamentals remains strong, I must have failed miserably to understand what this means and should never be capable of making an accurate investment, market or economic forecast.
Moving beyond this absurdity, with our upside objectives reached for the Dow, Transports and Treasury yields, all right as the most bullish time of the year is concluding, we conclude that the risks remain not only high, but immediate. Our Elliott wave analysis strongly suggests that these rallies represent the end of larger primary degree wave (2). This would lead to new lows in equity prices and an ultimate new high in yields within primary wave (3), which we call “the recognition phase”. This is the decline that develops as the majority finally begin to realize that all is not well in Fundamentia and they want out. [This may have begun this week as investors are beginning to wake up and smell the risk].
For the Dow, last Tuesday’s intraday high at 11,418 was tested and FAILED, completing an important double and secondary top that traced out a very well defined B wave, within what still appears to be the developing third wave decline. Initial support at 11,000 broke and it closed just 23.55 points above next support at 10,900. A close below 10,700 will confirm that primary wave (3) is indeed underway, with support at 10,500, 10,000 - 100, and at the 9731 low. Price resistance is at 11,140, 11,320, 11,420 and the high at 11,750.
The NASDAQ continued to break support levels, closing below 3700 yesterday. Here, I see two potential wave counts. The first is that we are at the end of wave 5 of larger degree wave (1) of its new bear market. This would call for closing strength after more follow through selling today, and allows for a rally to push slightly above the previous 4th wave of 1 lesser degree, above 4470. The second possibility is that it is completing the first wave decline within larger, primary degree wave (3). This would call for a smaller recovery above the lesser degree 4th wave resistance at 3910 before continuing lower. Resistance above this is at 4180, 4470, 4600, and so on. Below 3675, next support is near 3500. We stated on Tuesday, “if our Elliott interpretation remains accurate, we think a very sudden and sharp decline could be directly ahead!!”. This was obviously correct, but the more important question now is how long and how far?
TREASURIES
Treasury yields broke sharply lower in Tuesday and Wednesday’s trading on rumored hedge and mutual fund swapping out of long Treasuries for agency bonds (Ginnies and Freddies), and on comments from Fed Governor, Larry Meyer’s hawkish comments that the Fed may accelerate their tight policy in an effort to actually bring GDP down from its robust pace. This was interpreted to mean they may be ready to hike rates more aggressively.
We changed our bullish stance on bonds earlier this week to bearish as our intermediate 6.72% yield objective was reached. We think yields will back up to at least test support at the 6.20% level, and perhaps higher, to support at 6.32% or 6.40%. That is if the yield recovery hasn’t ended altogether, in which case they could ultimately be heading even higher than their 6.75% high. With sentiment reaching an overconfident 66% who are bullish and our projected target reached preceding an immediate reversal on our shorter term yield chart, we don’t want to tempt fate at this time. Initial support is at 5.85%, then 6.00 - 6.05%, and the levels mentioned above. Resistance in the near term is at 5.77%, 5.72%, 5.6j8% and at 5.65%.
GOLD
The XAU & Gold continue to do little but hold their own at current levels, with the XAU slipping below support at 55.72 to close yesterday at 54.67, perhaps on its way to test the 8/31/98, 48.73 all time low. Wednesday, the Swiss Government announced they may begin selling their pre-approved 1300 metric tonnes of gold reserves in May, in a manner that “would not disrupt the market”. There was surprisingly little reaction to this news because of how well anticipated it is. Today is option expiration on the Comex, which could also be acting to hold prices down. Our XAU/cash gold Ratio continues to drop further, indicating that gold shares are getting cheaper relative to the price of gold itself. The Latest Commitment of Traders Report (COT) shows the speculators heavily short and the Commercial insiders heavily long gold futures again, offering great potential for a rally to begin at any time from current levels. Finally, sentiment among these futures traders remains very pessimistic with only 24% who are bullish. We think the next move of consequence will be UP. Resistance is at 57 - 59, 64, 69 and 72-3. A move back above 60 would offer encouragement.
Article contributed by Mitch Harris: President, Market Trend Realities & Editor,
The Reality Check Newsletter, and reprinted here with permission.
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