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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 5, 2001 |
| STOCKS |
| REALITY RATIO: +0.226
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Last Signal: 04/20/01, TRADING SELL
Dow: 10,579.85 OTC: 2163.18
The Reality Ratio turned down again from last week s "higher high" and remains relatively overbought and bearish for the immediate future. We are viewing the current bounce of the last few days as just that, with lower prices anticipated as we move toward the middle of June.
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TUESDAY, June 5, 2001: Rumors of another Republican defector swirled yesterday, this time surrounding John McCain, who is to be meeting with President Bush today or tomorrow. He has become disillusioned over his party s lacing support over his campaign finance reform efforts. Of course, he has denied any thought of leaving the GOP. It seems like many within Bush s own party are less than sanguine over his leadership and the continued shift to the right, as it does not represent the belief of most Americans.
As stated on Friday, it appeared 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, ahead of another leg of decline before a better low would be in place. The bounce that has materialized has indeed been on lethargic volume and a general lack of commitment, along with renewed building of short interest, which may fuel higher prices in the intermediate term as they find reasons to cover them. Our most important short term trend indicator, the 10 Day A/D Line has turned bearish, but for it to remain so, the daily declines will have to accelerate over the pace of advancing issues, as the spread remains very narrow.
As the earnings "pre-warning" season is just beginning, investors do not seem too anxious to make new commitments, as NYSE volume was its second lowest of the year yesterday and the worst of the year for the OTC Composite, according to CNBC. According to Chuck Hill, of First Call, earnings warnings are accelerating instead of decelerating, lacking the needed earnings visibility that investors have suddenly decided IS important after all. This is in sharp contrast to just a year or so ago, when we were told that in the Great New Era of investing, "earnings no longer mattered"!! We knew that was garbage then and we know it now, as a company s EARNINGS are the bottom line to why anyone would invest in it! While an actual earnings rebound may be a long row to hoe, the rally is likely to resume as we approach the tail end of this Pre-earnings period, as companies doing (relatively) well begin to report. As the saying goes, NEVER SHORT A DULL MARKET", we say "if you like to short, keep a finger near the COVER button". We think that a continuation of the downturn from the 5/22 high is setting up for the infamous "summer rally".
As the odds have already increased for the Dow to push toward a new high, we think this is less likely for the broader market, made up of mid and small caps that have been outperforming the large caps for over a year, as they may begin to build a top, lagging behind the blue chips as a summer rally shows 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 be looking for.
The Dow Industrials, Transport s, Utilities, the NYSE and the OTC Composite have all moved up on their "High Pole" P&F chart formations, as suggested on Friday. This should still be followed by lower prices even in the event that we are only in a modest correction ahead of higher prices later. We remain defensive against these bearish chart patterns for the near term. Our Elliott Wave analysis, allowed for the current minor wave "b" bounce and should still be followed by a wave "c" decline and lower prices, before there should be an end to the correction, EVEN in the event that further gains lie ahead. This should clearly take more time, as one week of narrowly declining prices is not enough time to have sufficiently corrected the 2200 point gain from the 10/18, 9106 intraday low.
Stiff longer term Dow resistance remains at the 5/22, 11,350 high to the 4/00, 11,425 top, with shorter term support at 11,200. Further gains above this would greatly increase the odds that the 11,750 high will be tested. Our 10,800 initial downside objective was essentially reached on Friday morning at 10,835, before the bounce started. Initial support is at the 11,000 breakout point with our downside target currently between support at 10,800 and the 5/4, 10673.22 low. Any decline below 10,835 would satisfy the minimum "c" wave requirement for the correction to end. A CLOSE below 10,673 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 got a boost on Greenspan s comments that the door was still open for anther 25 basis point rate cut at their next FOMC meeting later this month. The markets continue to see the Fed s short term rate policy as the key to the long end of the market. We disagree with the assessment and see the current rally as a technical rebound within the larger bear market, which will ultimately reassert itself with a rise above the 5.90 - 6.00% level.
The yield reached a low of 5.66% yesterday before giving up a bit of the gain into yesterday s close. For the near term, we see more bullish potential, as minor wave "c of 2" continues within the larger, primary bear market. The push lower eliminated the potential for the rally to be within a "corrective flat", making it most likely the "zig zag" pattern we had also identified as a likely possibility. Next resistance is approaching near the 5.62% level, with lower resistance near 5.56% (the Fibonnacci 50% retracement level), 5.50 - .45% and then at the original 5.40% breakout point. This counter trend rally should soon provide a "selling" opportunity for the bears, as opposed to a "buying" opportunity for bulls.
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. 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. Short term support is down to 5.74% and near 5.85%. 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 is TRYING to bounce after becoming quite quickly oversold within its initial downside acceleration. A rally here will only be considered a bounce and not the resumption of the rally that we think ended. There were simply too many signs of this to ignore, simply because we are long term gold bulls. The last few weeks saw too many key downside reversals and buying climaxes for that.
A minor wave "ii" bounce toward resistance near 63-4 is possible, but our suspicion is that further weakness will emerge. Next strong support is near 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. While this has so far managed to resist this, it would significantly raise the odds for our more immediately bearish potential, rekindling the prospects that a final 5th minor wave of decline has now started. 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. The silver lining here is that if our longer term analysis is correct, we will ultimately clear the way for smooth sailing to higher (and potentially much higher) prices!
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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