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REALITY
CHECK UPDATE
Published Every Tuesday
and Friday |
| ARCHIVE:
APRIL
2000-MAY
2001 |
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Contributed by
Mitch Harris
President: Market
Trend Realities,
Editor: The Reality Check
Newsletter |
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May 18, 2001 |
| STOCKS |
| REALITY RATIO: +0.226
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Last Signal: 04/20/01, TRADING SELL
Dow: 10,579.85 OTC: 2163.18
The Reality Ratio turned down through both of its moving averages last week, confirming the slow to move trading sell signal of 4/20. It has worked better for the turn in the OTC than Dow, as the rally remained in force but has narrowed considerably (in itself a sign of a turn). It is not clear to us that this downturn is poised to send the averages back to new lows, as their is a greater probability that prices consolidate to relieve the market s overbought condition before again mounting an attack on key resistance near 11,000.
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TUESDAY, May 15, 2001: We reported yesterday that the Dow s surge right through the significant barrier of resistance at 11,035 forced a basic change in our opinion of the market for the short to intermediate term period ahead. We had remained bearish against resistance for months now, and while the breakout was not likely, we changed when it happened. As we said yesterday, the most important thing any trader/investor can do is remain flexible to changing conditions, as opposed to sticking to a scenario that has shown evidence of changing. While the markets are extremely overbought technically and we still think their will be a retracement of the rise that has persisted, perhaps, at least testing the 11,000 breakout point. In itself, this is not much different from what we were expecting before the breakout, but because of the upside acceleration, and from a higher level, we can no longer assume the markets will retrace as deeply as we thought as recently as Tuesday. In any event, while we see virtually no possibility for the NASDAQ to make new highs in the near future, this can no longer be ruled out for the New York averages. Continued gains here would at least bring the NAZ higher with it. In any event, we are turning bullish here, with the expectation of some backing and filling before the market s make too much more immediate upside progress, with a general upward bias as we move into the summer. We think that this will simply provide us with yet another chance to prepare for an even bigger decline later, because if the last decline wasn t the beginning of "the big one", then we expect that it still lies ahead.
Just imagine, if the pain and despair that the last bear phase created was a correction in an ongoing bull market, what the damage will be when the real McCoy takes it down for good! We think this newest buying binge will have simply re-enforced once again the buy and hold forever, no matter what mentality, the BIG HOOK!! The more this remains reinforced while prices keep coming back, the more likely it will be that these "believers" will see their great paper wealth thoroughly destroyed. We must add that today s believers are not just the 20-45 demographic, but the 45-70+ generation who will not have the ability of "time" to help heal the damage that will be done.
Technically, even with the bullish breakout, we see some mixed signals. First, as pointed out by Investors Intelligence, our On-Balance Volume indicator has not yet confirmed the new high in the Dow, nor has the McClellan Oscillator, or its longer term companion indicator, the McClellan Summation Index. Our Cumulative Volume Indicator is above where it was at the high prior to the Fed rally, but still remains below its high of early February. Same is true of our 5 Day Up Volume Indicator-bullish but divergent. On the bullish side, our 10 Day A/D Line Indicator has remained bullish for 24 trading days and will likely remain so for at least a while longer. We also see "slippage" in our CBOE 5 day P/C Ratio, which had already turned up from its April low, showing on average, a low level of put buying over call buying, as bullish confidence has grown high again. Finally, RSI reached the rarely seen 70% overbought level after Wednesdays surge, and Daily Stochastics already were overbought and show a clear and growing bearish divergence. In sum, any or even ALL of these things can be resolved, but that s NOT how we use them as indicators, as the most likely way they get resolved is by leading PRICES lower. Generally, this is the case, especially after a "throw in the towel" type rally that we think was seen this week.
Next Dow resistance is at the 9/6/00, 11,401 high, which was the 2nd of a double top with the 4/00 high (11,425). Further gains above this would greatly increase the odds that the 11,750 high will be tested. Support now begins at the 11,000 breakout point, with 10,800 below that. If the bullish scenario is to remain in place, we do not think the Dow should move below the 5/4, 10673.22 low.
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TREASURIES
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Treasury yields reached a HIGH of 5.90% this week in spite of the Fed lowering rates at the short end of the yield curve. Thursday s delayed market celebration came AFTER the release of the April CPI report which showed a .3% rise for inflation. The market called this "tame" because it had expected a +.4% rise. We do not agree that this is NO inflation, as it annualizes at a gain of 3.6%, and we strongly believe that this MOST MANIPULATED of all government statistics dramatically understates the real rate of inflation, as NO ONE in this country can equate the statistic with the actual growth of the cost to "really" LIVE in the US.
At the 5.90% high, the long end of the market was becoming EXTREMELY oversold and a bullish technical reversal was overdue. We think this has begun with the downside reversal of the last two days. This has brought the yield back down to 5.75% as of this morning s pre-opening in New York, as the retracement rally seems well underway. We see the retracement running into resistance near the 50% retracement, at 5.562%. We do not think the yield should drop back below the 5.40% breakout point. A push above 5.90% would make support at the 5.975-6.025% the next upside target. It appears that the bounce is well defined within minor wave 2 of the larger, primary wave (3) bear market. |
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GOLD
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Gold & the XAU pushed right into our cited resistance at 63 yesterday on gold s continued price firmness after Tuesday s Bank of England auction was met with very strong demand. There is a lot of talk that central banks have become much reluctant to continue their long held policy of lending out their gold reserves to hedgers and speculators, who have painted themselves into a very risky corner in the event they can t come up with the supply they need to keep their scheme alive. When this falls apart as it may have already started to do, it will be the point where there are no more sellers and many, many buyers, who will have to fight for the supply that is made available (at rising prices), akin to scenes of the mad rush to the sales tables at Macy s Department Store as shoppers fight for any piece of garment they can get a firm grip on! We cannot yet say that we are at this point yet, but ultimately, we are SURE that we will get there.
Yesterday s $273.50 close of HSBC cash gold confirmed a the $256 double bottom on our shorter term 1X3 P&F chart. It still needs to close above $274 to confirm this on our longer term, 2X3 chart, which is on a bullish "Low Pole" buy alert formation, which so far, projects a rise to the $304 level. Of course, this is a moving target, but still the first sign of encouragement in a very long time for the bulls!
Back to the XAU, a close above $64 would clear the way for a push toward next resistance, between 68-73, from the 2/7/00 high. Clearing the 64 hurdle will also complete what appears to be a very large magnitude "Head & Shoulders Bottom" chart formation, for yet another bullish sign of encouragement. On the side of caution, the rally is quickly losing its momentum, with Stochastics showing lower highs against the higher [prices, and Daily RSI is well above the 70% overbought level. In sum, mixed signals that cause us to remain tempered in our optimism for down the road! We ve been patient this long, and remain committed to the ultimate upside resolution to this entire metals complex. As we ve said consistently, "we think that great opportunity lies ahead"! This will remain true even in the event of one last leg of decline. Again, next XAU resistance is at 63-4, & then 69-73. Support now begins at the 57 breakout point, and then at 55, which is the current level that would be a bearish high pole warning on the 1X3 P&F Chart, and also just below the 2/14, 45.64 low. Critical long term support is at the 7/14/00, 41.61 low, and then in the 37-40 range. In contrast to the poor risk/reward we see for bonds, we see the exact opposite here, at least if we go out beyond the immediate future!
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PORTFOLIO CHANGES |
| Friday, May 18, 2001: Consistent with our changed opinion, we closed our short of the QQQ s Wednesday at 47 (+3%). Also, we covered the short on Coca Cola Femsa (KOF) on 5/15, at 20 5/8, after learning that it had a tremendous surge in its short interest, to 48 from just 3 days of average daily volume. We are not sure why, or even if this information is correct, but we decided to be done with it; 5/17: Chiron (CHIR) hit the 51 stop (-9.97%); We added Circuit City Stores (CC) for purchase, at 15.50 yesterday as it broke its short term downtrend line after a relatively impressive double bottom. It had also come off a "low pole" buy alert and projects a move to $28. Traders should use a stop at 13, but investors can hold without a stop for the time being. [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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