Last Signal: 3/24/00, SELL Dow: 11,112.72 OTC: 4963.68
The ratio turned back down last week after making a lower high. This turned the moving averages down with the shorter term one dropping below the longer term one, providing more confirmation that the sell signal should lead to lower prices yet. This indicates that rallies will remain narrow, short lived and should be used for selling. With our indicators overall bearish and mostly NOT oversold, we see a lot of room for further price declines.
TUESDAY, April 18, 2000: Last Friday’s CRASH ALERT came right on target as we were attempting to have our readers completely prepared for a worst case scenario. The dramatic volatility and market decline has been directly related to the abrupt reversal of records in Wall Street speculation with trading unprofitable stocks in margin accounts, mutual fund inflows, IPO’s that were recently hastily rushed into the market, and insider selling that came as the "lock in" periods of many recent IPO’s ended. Combined with the end of the seasonally bullish period between 11/1 and 4/15 and a tight monetary policy that has yet to slow the economy and we see many signs of risk. Even after some of the biggest market declines in history that seem to be just the beginning, bubblevision and the financial media in general continues to confidently recommend that investors "stay the course" and to use this (and every) dip as an opportunity to become even more leveraged. After all, this has been the strategy that has worked…up until now, that is. Even so, we don’t see this type of advice as responsible. Financial journalism has generally accepted poorly researched, shallow and superficial reporting as satisfactory explanations for everything. That is, as long as it has been done with a bullish spin on it. The fact of life is that not everything that happens can be simply rationalized away as good or better than it appears to be. An overheating economy, undeniably accelerating inflation, higher interest rates and equity valuations that keep expanding well beyond the levels that proved to be their major tops in all past bull markets do not make for "bullish fundamentals", and perhaps investors are just beginning to realize this as they still cling to the "hope" that prices will recover for yet another new high. They would be much more astute to recognize that we have been making "lower" highs and lows for some time now, a sure sign of a bear market according to OUR definition of it.
Yesterday’s sharp recovery suggests that investors have still not taken the sell off or the risk it implied very seriously. While it was becoming obvious that some type of relief rally was due, we have no desire to try bottom fishing at this point, because of our confidence that the overall trend of the market is BEARISH! Until the majority of investors, both on and off Wall Street recognize this, the odds strongly favor continued "lower" lows. Sentiment remains way too high in most of our longer term measures. The only one that became extreme on the recent selling was the Option Volatility Index (VIX) that reached a high of 41 before reversing. This tells us that the complacency that we had seen among option traders for so long turned to panic during the latest selling. This is not the case in general, with Investors Intelligence reporting almost 57% bulls and less than 27% bears just last Wednesday.
Technically, Many indicators did not reach oversold levels before yesterday’s upturn that closed right at the Dow’s 200 day moving average. With the great amount of technical damage done, we do not see a rally continuing, at least before more backing and filling is done along with a test of the lows on the Dow, S&P and OTC averages. Resistance is at 10,660, 10,800, 11,000, and then at 11,200. Our Elliott view suggests that the Dow has not yet completed intermediate wave 1 of primary wave (3) down. This allows for another minor 5 wave decline below the 10,200 low reached on Friday. If intermediate wave 4 is in progress prices should not make progress much beyond 10,660, the previous 4th wave of 1 lessor degree. Support should be near 10,400 and then at Friday’s 10,201 low, near 10,000 and then near the 9732 March low.
TREASURIES
Treasury Yields surprisingly did little to draw the safe haven buying that usually has accompanied panic and mayhem on Wall Street. Perhaps this was due to the sharply higher CPI inflation report that showed a much stronger than expected .7% gain and a .4% rise in the core rate, a 5 year record. Combined with last Thursday’s 10.5% year over year gain in March retail sales, the markets were assured that the Fed will act for the 6th time to slow the overheating economy, by hiked rates again at their next FOMC meeting on May 16. The fear is that they may step up their effort by hiking the Fed Funds rate .50 basis points instead of their gradual .25 BP’s. We think they should.
Yesterday’s recovery in stocks sent the Treasury yield soaring. The cash bond lost 2 6/32, pushing the yield to 5.94%. This came after having a buying climax (BC) last week for both, the futures and the cash yield. This took place with last week’s bearish reversal after making a lower "yield" in the cash bond and higher "price" in the futures, and is a sign of exhaustion and distribution. It also supports the bearish outlook we adopted on Friday, 4/7. Initial support at 5.85% broke yesterday making 6.00 - 6.05% next, and then 6.20%, 6.32%, and 6.40%. Resistance is at 5.85%, 5.72% and 5.65%. We think the next level to be challenged will be to the upside, as fears are growing that the Fed will act more aggressively.
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 at 54.67 last Thursday, before bouncing to close the week at 57.75. This was enough to produce a major selling climax (SC) by making a 52 week low before closing the week higher. This was also the case for major producers, Barrick Gold, Homestake Mines and Placer Dome Mines. While prices have yet to prove themselves on the upside, I think the next move of significance will be UP, even in the presence of Bank of England (BOE) and now Swiss National Bank (SNB) planned sales, as much of this should already be discounted by the markets and little if any will likely hit the actual market. Support is at last weeks 54.24 low and then at the 48.73 all time low reached on 8/31/98. Resistance remains at 57 - 59, 64, 69 and 72 -3. A break above 60 would offer encouragement for the bulls.
NOTE: Some of our price objectives have been reached in recent days including our stated initial upside objective for the Transportation Average at the 2848 Fibonnacci 38.2% resistance, the OTC Composite has corrected by 29%, more than 1.5 times the 17% top to bottom YTD decline for Dow, as we had expected in our January "Forecast 2000 Report". At the same time, the Dow has satisfied all of our Fibonnacci and price resistance levels on the upside within our Elliott Wave expectations within the intermediate and cycle degree wave (2) bear market retracement. It MAY be waiting for the other markets to catch up before beginning its wave (3) decline that would likely eventually take the index BELOW the 9731 bottom. If this is correct, "you ain’t seen nothin’ yet!!" Crude Oil futures have quickly retreated to our initial downside objective by touching a low of $25.11 per barrel and lower this into this week, and Treasury yields slightly exceeded our downside objective [at the Fibonnacci 50% retracement resistance at 5.72%], reaching 5.65% intraday during Tuesdays pandemonium.
PORTFOLIO CHANGES
Tuesday, April 18, 2000: We recommend covering the following short sales: 4/17: Gateway Computer (GTW) was covered at 50 (+27.54%). It has been building support here and its chart shows bullish RSI and Stochastics divergence’s; Novell (NOVL) 19 (+40.63%). It shows a bullish Stochastics divergence and has reached our short term downside target. While the rest are oversold & will probably move with the market, they still look plenty bearish and show no compelling signs of a bottom. Stocks we like on the LONG side (but are not adding them yet) are Tricon Global Restaurants (YUM) and Eastman Kodak (EK).
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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