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.
FRIDAY, May 26, 2000: No matter how you cut it, higher interest rates are BAD. Bad for the economy, bad for the stock markets, bad for consumers, bad for lenders and bad for small business. While they may well be what is necessary to constrict the excesses created by such an extended period of overconfidence, spending and the growth of debt, these conditions cannot be ignored forever. We have stated before that "the market is finding out exactly where ‘forever’ ends and reality begins." The only potential beneficiary is ultimately the long end of the yield curve, as an economic slowdown (some still remember these as recessions) eventually allows rates to fall back as the Fed begins to re-stimulate the economy and marketplace by lowering interest rates. Today’s na�ve generation of stock market speculators are just beginning to realize why the Fed has received so much respect, on a larger scale than the days surrounding their FOMC meetings. Much of the pain they are currently feeling could have been spared had they just done their homework and looked at what those of us who came before them had learned, that YOU DON"T FIGHT THE FED!!! And that YOU DON"T FIGHT THE TAPE!!! They have been fighting both.
We think yesterday’s reversal and follow through selling was very significant after Wednesdays bounce. It is starting to ware on the bulls, who have yet to throw in the towel in the capitulation selling that I am expecting just ahead of the next real trading opportunity. I think it will happen soon, but there have been no signs of it yet. In fact, the daily A/D Line made a new low yesterday. According to our records, yesterdays A/D Line reached -21,539, against the low that was reached at -21,151 on 3/14, just one day from a 9735 test of the 9732 low of the week earlier. This " leading" indicator suggests that prices may soon follow before the next meaningful rally begins, but admittedly (for one bit of hedging), many of the rules have been routinely broken of late. Yesterday’s 10,266 low was dangerously close to breaking what we have been calling the next level of "significant" support, at 10,250. A break of this level would significantly increase the odds that a new low will soon follow. Remember, during much of the bull market, short term trading indicators became overbought and extended as the markets continued higher. In a bear market, we hear them tell us the market is oversold all the time, but it will likely become VERY oversold before rallies of significance develop. In other words, prices will routinely become "oversold" as they go even lower, presuming this is a REAL bear market. Critical support is at 10,250 - 200, with next major support at the March 8, 9732 low. Resistance begins at 10,500, 10,650, 10,720, 10,960, 11,140 and so on.
TREASURIES
Treasury yields have enjoyed a flight of capital seeking safer alternatives to the mounting losses suffered on Wall Street. The yield recovered back to below 6.10% yesterday on the flight to safety, along with the announcement that the Treasury Department will by back another $2 billion of older, higher yielding issues. Our Wave interpretation of this allows for this technical bounce within the minor wave "b" within at least a larger correction with the minor "c" wave ahead. This would bring yields higher at least one more time to perhaps test the support at 6.32%.
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 remain at 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 allow for further recovery and would buy the market more time for the bulls. Sentiment among futures traders of 44% still remains relatively high to expect this rally to be able to progress through the layered resistance that would allow a new recovery low. This resistance is at 6.00%, 5.85% and 5.65%. Support remains at 6.25%, 6.32%, 6.40%, 6.65% and at the 6.75% January high.
GOLD
The XAU & Gold surprisingly remained under pressure with the weakness in equities and the search for alternative places to hide money. Gold broke support that triggered a lot of stop losses, creating even more selling. We suspect that this "gunning of the stops" will quickly run its course and allow for a better attempt at recovery, but the move below $271 must be considered a significantly bearish development. On the positive side of this, the XAU was lower, but remains above its critical short term level from the April 13, 54.24 low. Support beneath this is at the all time low of 48.73 that was set on 8/31/98. The XAU closed just beneath initial support sighted on Tuesday at 57, which I "hope" can quickly recover. Resistance begins at 59, but a break above 63-4 is still needed to confirm a short term bullish reversal.
Our trading indicators continue to suggest that the next large move should be up. Heavy bearish open interest among gold bears remains bullish, as does the low number of futures traders who are optimistic, which is at just 22%.
PORTFOLIO CHANGES
Friday, May 26, 2000: We were looking to establish a new short on Merrill Lynch yesterday before an earnings downgrade on Goldman Sachs drove the sector down. We will still attempt to do so on a bounce above $95, as it appears the stock is completing a fairly massive double top.
Article contributed by Mitch Harris: President, Market Trend Realities & Editor,
The Reality Check Newsletter, and reprinted here with permission.
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