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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 25, 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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FRIDAY, May 25, 2001: The markets broke their sharp uptrend with Wednesday s sharp decline and price reversals. Yesterday, prices followed through with early sellers that managed to find enough bottom feeders to bring the markets back to close a bit higher. The weakness came with the announcement from Vermont Senator, James Jeffords that he was jumping the Republican ship because the party has moved too far to the right for his taste. For the first time in history, this has shifted the majority from Republican to a 50/50 split with Democrats, changing the prospects for MUCH of the Republican agenda! Also challenging the bulls was the reported semi-conductor, "Book-Bill-Ratio", which fell from 50% to 42%, an all time low. This ratio measures the amount of new orders booked against the orders that were shipped and is a leading indicator for business conditions within the entire tech sector. It still does not confirm the markets hoped for economic rebound, which has supported the technical rebound.
The negative divergences we had been pointing to have lead to the market s price reversal this week. The question remains, how deep can it get? During the old bull market, the 1.25 day decline would have been about all of a rest eager investors would have stood for. Yesterday s recovery was reminiscent of this, leaving the jury in the jury room as we close this pre-Memorial Day holiday weekend. The continued signs of economic weakness continued with yesterday s report of the highest level of initial unemployment claims since 6/94, and a 9.5% plunge in April New Home Sales, the steepest since a 10% drop in 4/97.
The market averages all declined enough on a print basis to signal warnings that further weakness lies ahead. Our Dow 50X150 chart declined enough from Tuesday s 11,350 high for a High Pole Top (HPT), "Sell Alert" formation, as did the Transportation Average on its 10X30 chart, and the OTC Composite 10X30 chart. To bullishly resolve these, the Dow needs to move up to 10,400 (where there is older significant resistance), the Transports would need to rise to 3010 (the middle of its resistance zone between 2970-3030), and the OTC Composite needs to push above 2330. We would NOT claim that this would be too difficult to accomplish, but the markets remain very overbought and momentum appears to have turned down, forcing the market to "prove it" with bullish resolution(s).
Even under our recent, more bullish opinion, the markets are very over-extended and this merits a retracement of at least a good amount of its recent gains, toward at least the original breakout point, at 11,000 for the Dow, and perhaps lower, toward 10,800. This would only become more exacerbated if the market pushes higher, especially with strong resistance at 11,400-25 just above. For this reason, we would not recommend any new positions unless prices back off to our listed support.
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. We do not think the Dow should move below the 5/4, 10673.22 low, and is our bullish line in the sand.
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TREASURIES
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Treasury yields remain very weak and have already reversed higher again over the past two trading days. While still giving the bulls the benefit of the doubt for the very near term, the yield needs to hold below its recent 5.90% high. A push above this would be taken as a strong implication that the market is even weaker than we thought, and that minor wave 3 within larger degree wave (3) is already beginning. On the bullish side, the yield should still be within its minor corrective wave 2 rally, where the rise is wave "b" of either a simple zig zag or a corrective flat. This still allows for another rally to 5.74% or "lower" (yields are reciprocal to prices), within minor wave "c" of "2", BUT, with resistance at 5.74%, 5.70% and then 5.62%, it is clearly possible that even within this more bullish potential, it will likely provide a "selling" opportunity for the bears, as opposed to a "buying" opportunity for bulls.
The long end of the market has clearly suffered at the Fed s hand on the short end. The only explanation we can give is that the markets see inflation as a much greater problem than we are being told about. This may be even a worse omen as the Fed has continued to buy back longer dated maturities. Perhaps part of the message is that this type of activity will soon be discontinued, as the new Treasury Secretary, has recently hinted that this activity may not go on forever.
We see further efforts to rally will find greater 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. Contrary to the belief of the majority, we think it likely that the yield is ultimately headed ABOVE the 6.75%, 1/00 high. |
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GOLD
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Gold & the XAU posted key downside reversals in the last few days with yesterday s sharp follow-through selling on the rumor that Russia s President Vladimir Putin was considering the sale of Russian gold to help victims of floods in Siberia's Yakutiya region. This morning, Reuters is reporting his clarification, "I didn't say that Russia intends to sell gold. I reacted positively to a proposal on the possibility of a mutual settlement of debt on a so-called gold loan which Yakutiya took from Russian authorities." (gees&we don t know how that could have confused markets around the world!).
Momentum indicators have turned bearish from overbought levels and indicate that at least a short term top is in place. Gold s been slipping back all week long, after last Friday s strong $13.50 price surge. We had suspected this to be largely related to option and futures expiration as there was scrambling to "roll out" expiring shorts, stating on Friday, "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." This has been the case as prices have finished lower every day this week. The XAU will most likely have not only a key reversal but a Buying Climax (BC) by making a new "52 week closing high" on Monday before closing lower for the week. Our leading indicator, the XAU/Gold Ratio is also warning of at least a short term downturn, by a likely BC and "High Pole Top" (HPT) sell alert for the week. Perhaps these bearish signs can be overcome, but they are a clear warning for the immediate future.
The XAU closed in on the low end of our cited support between 63 - 59 yesterday. A further drop straight back to 56 would be a very bearish "High Pole at the Bearish Resistance Line" (HPBr) on our 2X6 P&F Chart, and significantly raise the odds for our more immediately bearish Wave interpretation, rekindling the prospects that a final 5th minor wave of decline still lies ahead.. Lower support is at the 2/14, 45.64 low and then at the even more critical 7/14/00, 41.61 low.
From Tuesday s comments, 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. Prices are testing this level as of yesterday. 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 mental stop loss point for remaining bullish.
In contrast to the poor longer term risk/reward we see for bonds, we see the exact opposite here!
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PORTFOLIO CHANGES |
Friday, May 25, 2001: 5/23/01: We made a few very short term trading recommendations:
Short Sale #1) Sell Short the QQQ's (Nasdaq 100 Tracking Units), with a very tight stop/loss set at 52. This is just 4 ticks above its 51.96 high! We would look for a decline to at least the 46 level, & potentially lower over the next week or so. This was done at 49.75
Short Sale #2) Sell Short the SPY (S&P Spiders), with a very tight stop at 132.15, just 6 ticks above yesterday's 132.09 high. With the NY averages reversing after ending very well defined 5 wave rally's, the odds of this being the beginning of at least a correction is very high. Here, the downside appears to be to "at least" below 125 (the wave "4" low of one lesser degree). This one was sold at $130.10.
[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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