Last Signal: 6/2/00, BUY Dow: 10,794.76 OTC: 3813.33
TUESDAY, June 13, 2000: Our suspicion’s of the poor quality of last week’s rally seems to be playing out as thought, supported by what we see as many early warning signs of an earnings squeeze on Wall Street. With pre-announced disappointments in P&G, Citrix Systems, Computer Associates, Goldman Sachs, Home Depot, McDonald’s, and Circuit City Stores, just in the past week, it is likely to be just the tip of the iceberg. If such large market leaders like these can disappoint with little advanced warning, imagine what may lie ahead for the many companies that are putting off their news for as long as possible. We will be investigating the possible reasons for this in more detail in this week’s June issue of Reality Check. For a sample, email us at: mtr@fuse.net
We also see the same technically bearish signs that we had been pointing out. Yesterday’s NYSE volume of less than 760 million shares was just slightly above the lowest day of the year (723 million) and the NYSE daily A/D Line isn’t far from its 5/25 YTD low either. With the Dow as much as 1688 points above the March low, this remains a very bearish longer term "breadth" divergence, even as our shorter term, 10 day A/D Line Indicator remains bullish.
While mixed, some of our short term trading indicators are now bearish. We continue to argue based on our wave interpretation, that we have just completed minor wave "c" within one larger degree wave "ii", within another larger degree wave "3" decline. Stated on Friday, "if this proves correct, the market(s) will soon be accelerating to the downside, breaking sharply below the recent trading range support at 10,250 - 200." Yesterday’s decline may have been the beginning of this. Yesterday’s reversal so far has the appearance of the fifth lower top since the Dow’s March high. While prices have not yet come close to challenging the above mentioned critical support, once it does it will confirm that wave 3 of the bear market decline has begun to accelerate on the downside. If this is what develops, the last rally will have been proven to be a huge bull trap, as these buyers will ultimately be forced to sell below what they just paid. Resistance begins at last Monday’s 10,860 high, and upper resistance remains between 10,950 and 11,100. A push beyond this will suggest that a more complex bear market correction was developing (probably a double zigzag corrective rally), and not necessarily change our overall bearish view. Initial support at 10,760 gave way yesterday, so far confirming a "short term" high. Next support at 10,550 is much more important because it would be a high pole at the bearish resistance line (HPBr) on our longest term Dow p&f Chart, and a very negative sign. Support at 10,200 is still considered critical and where we have drawn a line in the sand for the bullish case. A close below this level would suggest new lows were ahead.
TREASURIES
Treasury yields remain bullish, but overbought short term. We think that lower yields likely remain ahead, but are still hoping for a back up first, perhaps to 6.10% or higher, ahead of the next rally. The markets are awaiting this morning’s Retail Sales report, and tomorrow’s bigger May CPI report. We don’t personally see that report too critical, because of how blatantly the government manipulates the numbers. Also, while the consensus is that the Fed will refrain at their June 27 meeting, we are not as sanguine about it as the market is, primarily, because while there are some signs that the economy is finally slowing, there is nothing to suggest that "prices", wage pressures and consumer confidence are responding.
We hope the rally will push below the 6.65% level reached in April, perhaps stretching to resistance at 5.50% before completing the entire bear market rally. This would have retraced a Fibonnacci 61.8% of the entire rise from 4.69% (10/98) to the 6.75% high of this past January. Next resistance is at 5.85%, 5.72% and at the 5.65% April low. Support is at 6.00 - .05%, 6.20 - .25%, 6.32% and 6.40%.
GOLD
The XAU & Gold’s rally remains alive, bouncing back after the last few days of rest. The resumption has come suspiciously close to the effective date for when the new derivatives accounting standards mentioned last week will go into effect. The new accounting rules have been imposed by the Financial Accounting Standards Board on "all" derivatives and will go into effect on June 15. This will force public corporations to effectively change their reporting of the value of "all" derivatives holdings from a simple footnote in their financial statement to fully disclosing the current market value of derivative positions. This will make them open to public scrutiny (and honest book keeping). The old accounting practice allowed a company to simply bury their losses without having to declare them. This practice had largely been responsible for the huge forward selling shell game that had perpetuated the gold carry trades and kept gold prices artificially low for years now. Companies holding huge derivatives losses suddenly must scramble to close tons of bad trades, transferring huge paper losses to realized ones ahead of the changes that will force these losses to be disclosed.
It is very hard to believe that all of the bad trades have already been cleared from their books, simply because there are way, way too many to have had a market impact for just 2 or 3 days. Perhaps gold’s pullback of the past few days has been more related to the dollar becoming deeply oversold and due a bounce. The weakened dollar is another of the many bullish factors that support further strength for the metals. The XAU remains below key resistance at 64. A push above this is still needed to confirm the bullish reversal we’ve been waiting for. We still remain confident that the next great rally has started and remain bullish against XAU support from its 4/13, 54.24 low. A break of this level would suggest a test of the 8/31/98, 48.73 all time low. A move above 64 would also resolve the current "high pole at the bearish resistance" (HPBr) chart formation. We think it will be bullishly resolved.
PORTFOLIO CHANGES
Tuesday, June 13, 2000: 6/9: Shorted Adobe Systems (ADBE) at 121/stop 136; 6/12: The first position on Autozone was sold (AZO) at yesterday’s 28 1/16 close (-3.77%); Novellus Systems (NVLS) 52 (11.83%) was also sold yesterday after a P&F sell signal. Advanced Micro Devices (AMD) was added to the shorts added at 89 after a buying climax (BC) last week at 97.
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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