Last Signal: 3/24/00, SELL Dow: 11,112.72 OTC: 4963.68
The ratio continued lower toward its oversold zone, but it is not there yet. A move above Ratio level of 5/5 would produce a "short term" trading buy confirmation, but even that would be presumed a short lived bounce, because it would come from only a neutral level. This might have happened last week, but it didn’t. As stated last Tuesday "with the FOMC meeting and Friday’s option expiration, we won’t try to front run them or the markets reaction!!" This remains the case now that those events "failed" to turn things around.
TUESDAY, MAY 23, 2000: Last week’s Option Expiration and FOMC meeting did little to help the ongoing nervousness. After a brief relief rally last Tuesday, prices have remained under general pressure lead by the OTC, which has now joined the Dow moving below its 200 day moving average. Light volume is a major concern as it shows us that investors no longer have the buying power that had driven prices higher, or the buying conviction required ahead of even an attempt at a recovery. It also represents the end of the shell game that had been kept so perpetually alive by speculators who had traded largely on borrowed margin money. Unfortunately for them, they didn’t realize that trading on the short side was also done within a margin account, and the reward potential is even greater than the game of greed they had pushed beyond the limit on the long side. This was especially true as the market showed (and continues to show) its fatigue.
Of all things, the sharp selloff on Friday was not just due to rising US rates, but due to a worse than expected March Merchandise Trade Deficit. After YEARS of this, the market decided that this particular report was alarming!! We have warned about the trade deficit for months, as an aside issue or our personal concern, knowing that it was a bubbling issue that had to percolate eventually. Perhaps the time has come. If so, it would correspond perfectly to our expectation that the US Dollar was vulnerable to the most significant bearish reversal in several years. As this continues to develop it may be appropriate to diversify some assets into European bonds. Their economies are relatively sluggish and their extremely depressed and literally abandoned currencies are just beginning to recover, their bonds should appreciate well as a non-leveraged hedge against the dollar. The reversal of the US Dollar will also have a seriously negative impact on foreign assets held in the US and we think this is a very strong reason why the Fed has had a policy of promoting the dollar’s strength as we have grown addicted to the need for foreign investment. It was rumored on Friday that the Japanese are beginning to fear this and have started to sell US assets and repatriate the money back home, another risk that our markets are not through suffering the lack of conviction that is easily seen in the light volume mentioned above.
Another point, posted in our 5/11/00, P&F Chart of the Week Analysis , we had been calling for the oil futures to retrace to near $30.30 per barrel (.618 Fib. retracement of the decline from $34.20 to $24 per barrel) before turning lower again (toward our lower targets of either $22 or $19.50). The price of June Crude closed exactly at $30.30 last Thursday before reversing sharply lower since. This is a good initial sign that our analysis is proving timely and correct. In regard to the dollar, a sharp decline in the price of crude oil is considered a serious negative for the US Dollar because crude is priced in dollars. This makes oil a proxy for the dollar’s value and helps to explain why it remained so strong as oil was tripling in price over the last year or so.
While we see the potential for a market low and the beginning of a summer rally, we see absolutely no evidence to suggest this is at hand in the immediate future. Our shorter term cycle work suggests the selling could generally last through early June before a decent recovery will begin. If correct, we still see prices going lower before they recover much. If our Elliott Wave analysis is correct, that last week’s downturn is the beginning of minor wave "3" of larger degree wave (3), the decline has plenty of work still ahead. 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 implications would be negated. Resistance is at 10,960, 11,140, and at the recent 11,410 high. A close above 10,960 would be an initial warning for the bears. Support at 10,600 was broken yesterday, making 10,300 - 10,250 the next level of significance. 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 have bounced back a little after last week’s Fed induced dramatics, but remain well within the narrow range we’ve keyed on in the last week or so. The market’s remain nervous that the Fed is not through hiking rates and will continue to do so until the signs of a slowing economy become evident. They do not show this yet at all. New York Fed President, William McDonough said on Friday that "it is still to early to determine the effects on the economy of previous Fed tightening…The likelihood is that as monetary policy is firmed more, that it will bring about greater equilibrium of supply and demand." In other words, he still looks for more rate hikes ahead!
As stated last Tuesday, a break of the range we’ve keyed on between 6.12% and 6.25% will point the next direction, but we still assume it will be to the upside. Higher and lower bands of this range are to 6.00% on the downside and to our sighted higher Fibonnacci support at 6.32% [.618 retracement of the rally from the 6.75% high to the recent 5.65% low]. A sustained breach of support would suggest the bear market for bonds has resumed. A push below resistance at the low end would suggest the bear market rally was resuming, as either larger degree wave "C" or as the beginning of a double zigzag of "C", still within large degree wave "(B)" or "(2)". Either of these would allow for further recovery and buy the market more time for the bulls. 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 is trying to firm up a bit after yet another successful test of support. Gold too should benefit immensely from a decline in the US Dollar, just as it has when priced in euros or yen, or any other currency that has been under the dollar’s thumb. The market awaits the result of today’s sixth Bank of England 25 ton auction after gold rallied by $1.60 yesterday in New York, a good sign ahead of today’s auction. We remain confident that the top in the dollar is going to be of great benefit for gold. Other of our gold indicators support this conclusion and the European central bank supply story can’t possibly be considered a surprise. The question still remains, when will prices begin to move up to prove that the supply story is fully priced in? We "think" it will be soon, but the markets will let us know when they are ready. We can only be prepared for the turn we see coming.
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. Initial resistance remains at 59, and a break above 63 - 64 is still needed to confirm a short term bullish reversal with next resistance above this is at 69, 72 -3 and 81. A move above 64 will also be break out above the P&F 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
Tuesday, May 23, 2000: 5/22: Another new short sale, the Turkish Investment Fund (TKF) 15 7/8, is a closed end fund that invests in Turkey. Investor’s Intelligence reported yesterday that Turkey gave a Point & Figure (P&F) sell signal yesterday in dollar terms. This is a VERY volatile issue and the sell signal followed a buying climax at $22 in January after it ran almost straight up from a 6 � to 8.00 base. My downside target is $10 and we are using $19.50 as the stop.
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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