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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 22, 2001 |
| STOCKS |
| REALITY RATIO: +0.452
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Last Signal: 04/20/01, TRADING SELL
Dow: 10,579.85 OTC: 2163.18
The Reality Ratio shot back up to make a "higher high" along with the market at the end of last week, as the double option expiration wound down the dramatic events of the week. This keeps our main timing indicator at a VERY overbought, vulnerable reading, where there isn t much we can do but remain cautious for the short term. This remains the case, even as we expect higher prices down the road. Further gains from here will only serve to create an increasingly vulnerable situation.
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TUESDAY, May 22, 2001: The markets have pushed higher without a break, as buyers have been there on every 50 point dip. It is always amazing how decisively opinion changes on a dime, and then how long it stays to perpetuate the move that is in force. Many stocks are now well off their lows, and "we" think that a little patience will produce a better opportunity than chasing prices at the current market.
As stated on Friday, we see way too many negative divergences growing worse as they fail to confirm the higher prices. We are confident that it will require a price decline to reset these at lower levels. The Dow is pushing closer to the next significant resistance, at 11,401-25. We can never rule anything out, but do not see the momentum carrying prices through this past double top. In fact, volume peaked all the way back on April 16, just after the Easter Holiday, for both the Dow and Nasdaq. We also see a very clear 5 wave rally already very close to its completion at yesterday s close, indicating that a downturn should lie immediately ahead. The bullish case that we presented last Thursday still allows for the Dow to correct "all the way back to its break out point, near 11,035, and perhaps to its 4th wave low, near 10,800, for a 3-500 point short term downside potential. We would reassess and build new recommendations near these lower levels, but DO NOT plan to chase the market now. While the Nasdaq does not look quite as immediately vulnerable, we are hoping that it too will follow the NY markets by pulling back a bit. This would offer the opportunity here to, to position for higher prices.
Again, 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 will likely need more time to correct the recent sharply higher levels reached. We have labeled last week s 5.90% high as minor wave 1 within primary degree wave (3) of the long term bear market. Rising long term rates in the face of the Fed s most aggressive easing since the great depression strongly suggests that the market senses their moves to be inflationary, especially with rising energy prices and an economy that is fully expected to rebound.
We think the initial downside reversal last week will take time, and allow for yields to retrace a portion of their recent rise. So far, the yield reached a 5.735% low yesterday. 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 (between the Fibonnacci .618 and .786 retracement levels). 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, and this would ultimately take the yield ABOVE the 6.75%, 1/00 high. |
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GOLD
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Gold & the XAU shot higher into Friday s option expiration. June gold futures were $13.80 higher for the day at Friday s close, also on inflation fears combined with fears that the already heated up Israeli/Palestinian fighting would get worse. The demand overwhelmed dealers who were not prepared for the heavy short covering as speculators scrambled to find physical gold that could be delivered ahead of this week s June Futures settlement. Gold may have also benefited by the release of the March US trade deficit which shot back up to $31 billion, the largest monthly gain in nine years! We see the June expiration as the most likely cause for the sharp gains. If this proves correct, prices will be backing down again into early next week. If the rally continues beyond that, we ll likely be hearing more about the growing inflation risks.
The XAU moved higher too on Friday, pushing through our cited resistance at 63-4 to reach 66.54 before easing back into the close. This also broke above the long term downtrend line drawn from the 2/7/96, 155.60 all time high. We consider this significant as it has greatly enhanced the odds that a long term trend change is taking place. We changed our Elliott Wave count BACK to the way we were counting it until February. We are confident that at least one of the two wave counts is the correct one, but with the trendline break, the odds reverted back to the more bullish interpretation. Next resistance is at 69-73. Prices remain clearly stretched base on some of our very overbought trading indicators. If the scramble among short sellers to cover and/ or roll out their shorts that are coming due this may not stop prices from pushing higher! Support begins at the 63 - 59, which had served as stiff resistance, with an immediate drop back to 56 a very bearish "High Pole at the Bearish Resistance Line" (HPBr) also at support from the 2/14, 45.64 low.. A straight decline to this level would put us back on the more bearish Wave interpretation. Critical long term support is at the 7/14/00, 41.61 low, and then in the 37-40 range.
Thursday s confirmation of the $256 double bottom on our shorter term HSBC cash gold 1X3 P&F chart was, again, greeted with immediate strong demand, taking only one more trading day to confirm the upturn on our longer term chart as well, closing Friday at $287.80. From Friday s close we can currently project a very sharp price rise, to as high as $344 per ounce. Just a reminder, this is a constantly moving target. Next resistance is neat $292, then $302 - 4, and $315. Support begins at $278-5. An immediate pullback to $270 would be a very bearish "High Pole at the Bullish Resistance Line (HPBr) on our longer term chart. This would indicate that the rally had ended, and provide a metal stop loss point for remaining bullish.
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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