Last Signal: 3/24/00, SELL Dow: 11,112.72 OTC: 4963.68
FRIDAY, May 19, 2000: The 567 point Dow rally came to an abrupt halt Wednesday as today’s option expiration approached, and those "brave new investors" had a chance to rethink their optimism over the Fed’s more aggressive 1/2% rate hikes on Tuesday. The entire rally was on very questionable low volume on the lightest trading days of the year. We view this as a rally with the least conviction of the year as each rally has progressively lost support from some of its fans. They are slowly recognizing that losing money is NOT A GAME, and some of the bullish assumptions that had been made are, and have always been unfounded rationalizations. [Rising interest rates due to a tightening Fed have NEVER been good for stocks, regardless of the rationalizations that investors have talked themselves into believing. General over valuation plus rampant speculation, higher commodity prices, tightening labor, a completely neglected, out of control trade deficit, & etc. cannot go ignored forever and the result is just beginning to find recognition now].
Some of our short term indicators have either become overbought or have turned bearish, signaling the end of the rally. We had warned of our concern in Tuesday’s update. The McClellan Oscillator and 5 day Upside Volume indicator have turned down and our 10 day A/D Line indicator turned bullish for ALL of one unconfirmed day before turned bearish again. The 10 day Trin Indicator reached an overbought reading yesterday, and the CRB Index reached a new high. These are not even close to showing a healthy technical underpinning that is building upside capability.
Our Elliott Wave analysis strongly implies this week’s downturn is the beginning of minor wave "3" of larger degree wave (3). A close below 10,200 would offer further evidence of this, against a push above resistance at 11,420, in which case the immediately bearish trend would be negated. Resistance is at 10,900, 11,140, and at the recent 11,410 high. A close above this would force us to reconsider the immediate bearish case. Support is at 10,600, 10,300 - 10,250. A lower close would confirm a new leg of selling, with 9750 the next major support. An intermediate degree wave (3) decline should take prices well below this.
TREASURIES
Treasury yields like the equities, had a chance to re-evaluate its thinking overnight after the Fed’s 6th rate hike in less than one year. Initially, yields retraced back down to 6.12% on the announcement but have since come under renewed selling pressure. Selling even continued yesterday as the Treasury Department announced that they had bought back another $2 billion in older, high yielding debt. While a break out of the 6.12% - 6.25% trading range I mentioned on Tuesday will point the next direction, I must state that I am confident it will be resolved at the "high end", with our next expected support at the 6.32% Fibonnacci support at the 61.8% retracement level of the rally from the 6.75% high to the recent 5.65% low. A sustained breach of this support would suggest the bear market for bonds has resumed. Again, support above 6.25% is at 6.32%, 6.40%, 6.65% and 6.75%. Resistance is near 6.125%, 6.00%, 5.85%, 5.72% and 5.65%.
GOLD
The XAU & Gold took another turn for the worse after the Fed did their dirty deed. The Fed’s resolve and continued warning that rates will be raised further reinforced the already unanimous bullish consensus among US Dollar traders that they should choke themselves on even more dollars. This is perhaps the most bearish factor for gold in the US because it is priced in our local currency. To prove this, gold has actually risen sharply against the euro because of how far it has declined, even with the price of gold falling in our own currency.
As stated on Tuesday, we think that "one" of the keys to a bullish reversal for gold remains with the potential for a bearish reversal for the dollar. The most shunned currency, the euro seems to be noticeably undervalued against it and offers much greater potential for just about any trader who doesn’t simply ride momentum. In other words, while it may continue indefinitely higher as it already has, the US Dollar remains the most vulnerable currency in the world. The ramifications of assets that have thrived on dollar strength will remain vulnerable and those that had been held back in "dollars" would benefit smartly. This should mean bonds and dollars down and gold up.
Heavy bearish open interest among gold bears remains bullish, as does the low number of futures traders who are optimistic. Again, this is particularly true with almost a virtually bullish consensus for greenbacks. This offers great potential for reversals in each. Initial resistance remains at 63 - 64. A break above this would confirm a short term bullish reversal with next resistance above this is at 69, 72 -3 and 81. A move above 64 will also break out above the downtrend line that had defined the bearish trend since last September’s 92.72 high. We are bullish the XAU against support at the April 13, 54.24 low, with initial support near 57.
PORTFOLIO CHANGES
FRIDAY, May 19,2000: 5/18: We’re going back to a general short on the NASDAQ 100 with QQQ at 86, when it reached a bearish HPBr P&F chart formation. We are setting a stop/loss at 93, where the bearish formation would be negated.
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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