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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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June 1, 2001 |
| STOCKS |
| REALITY RATIO: +0.355
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Last Signal: 04/20/01, TRADING SELL
Dow: 10,579.85 OTC: 2163.18
The Reality Ratio turned down again after moving to a higher high the week before. It still remains at a very extended level and vulnerable to a setback at least, over the next few weeks or more. In fact, the downturn is from the most extended level since briefly spiked above the +.60 level last July, just prior to its steep slide that lasted into early November. While we are not predicted a similar outcome at this time, the setback that we foresee can be serious enough to merit caution.
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FRIDAY, June 1, 2001: A shift in the political majority in the Senate, the beginning of another worrisome earnings warning season, combined with the end of month portfolio "adjustment" period have pushed and pulled the markets in recent sessions, ending with a small bounce yesterday after Wednesday s hard downside slam. The markets have sobered up quickly as the pre-warning period began with two key announcements, that neither Oracle or Sun Microsystems would meet their current earnings estimates. Yesterday s bounce was more likely related to it being the last day of the month than any new bullish development.
It appears to us that while the market may continue to bounce for a few days, it remains likely that it will fall short of renewing the rally that ended at 11,350 on 5/22. In other words, a further bounce should make a lower high and be followed by lower prices before higher prices will be resumed, and this is under our most bullish assumption. If this proves the case, further selling pressure in the first part of June should be setting the stage for the infamous "summer rally". As the odds have already increased that the Dow will make another push to a new high, we think there is a growing possibility that the broader market, made up of mid and small caps that have been outperforming the large caps for over a year, are beginning to build a top. If so, they will likely begin to lag as a summer rally may come with narrowing conviction. This would be evident in the A/D Line and other measures of breadth. At this premature date, it is simply a supposition that we will start looking for.
The Dow Industrials, Transport s, Utilities, the NYSE and the OTC Composite ALL show a "High Pole" P&F chart formation or another, suggesting that even in the event that a bounce develops, it should be followed by lower prices even in the event that we are only in a modest correction ahead of higher prices later. This alone warrants a more defensive view of the market in the near term. This is confirmed by our Elliott Wave analysis, which, under the more bullish interpretation, a bounce will be within minor wave "b" that will be followed by a wave "c" decline and lower prices. This should clearly take more time, as the last week of declining prices is not close to enough time to have sufficiently corrected the 2200 point gain from the 10/18, 9106 intraday low.
Dow resistance is at the 5/22, 11,350 high to the 4/00, 11,425 top. Further gains above this would greatly increase the odds that the 11,750 high will be tested. Support at the 11,000 breakout point has already given way, with our downside target currently between support at 10,800 and the 5/4, 10673.22 low. A CLOSE below this would indicate that an even weaker market was developing, with next support near the 4/24, 10,448 low. It will currently take a close above the 11,350 high to renew the rally.
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TREASURIES
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Treasury yields continue to play out their short term strength, continuing to correct its recent oversold condition. Little has changed this week, as the yield needs to hold below its recent 5.90% high to keep the potential for a push LOWER in force. This appears to already be taking place, closing at 5.76% yesterday, as minor wave "c of 2" of its corrective rally continues within the larger, primary bear market. We ve stated since last week that the yield is either tracing out a simple zig zag or a corrective flat that allows for another rally to 5.74% or "lower" (yields are reciprocal to prices), 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. This first short term resistance level is being tested now.
We remain confident that the yield is ultimately heading (much) higher, within larger degree wave (3) that began from the 4/22, 5.217% low. Even stronger resistance is near the 50% retracement level, at 5.562%. We do not think the yield should drop back below the 5.40% breakout point. A push above 5.90% would confirm that the bear market has resumed, making higher 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 continued its sharp follow through selling after the complex posted key downside reversals and several important buying climaxes last week. The XAU suffered both, a key reversal and a Buying Climax (BC) by making a new "52 week closing high" on Monday before ending lower for the week. Our leading indicator, the XAU/Gold Ratio also gave warning of a short term downturn, and also had a BC and "High Pole Top" (HPT) sell alert for the week. Gold issues, Agnico Eagle Mines, ASA Ltd, Freeport McMoran Gold and Copper, Meridian Gold, and Royal Gold ALL had buying climaxes as well last week (according to Investors Intelligence). These bearish signs are taken as a clear warning for the immediate future.
The XAU is quickly closing in on the 56 level that we warned would be a very bearish "High Pole at the Bearish Resistance Line" (HPBr) on our longer term 2X6 P&F Chart, and significantly raise the odds for our more immediately bearish potential, 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. Short term resistance is again near 59, then 63-4.
In contrast to the poor longer term risk/reward we see for bonds, we see the exact opposite here! Not even a new low will change this!
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PORTFOLIO CHANGES |
Friday, June 1, 2001: 5/31: We removed Adobe Systems (ADBE) 42.20 (+28.66), and ADDED it to the short sale portfolio at 42, on the bounce after establishing a "High Pole at the Bearish Resistance" (HPBr) short selling formation. We are currently recommending a broadly higher stop loss point, at 50 (this would limit the risk to about 19%). For those who want to play the short but think it's too much risk potential, you may try waiting for a greater bounce, which would not necessarily change the HPBr formation.
[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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