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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 19, 2001 |
| STOCKS |
| REALITY RATIO: -0.194
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Last Signal: 04/20/01, TRADING SELL
Dow: 10,579.85 OTC: 2163.18
The Reality Ratio fell back below the neutral line into the red for the first time since early April, as prices peaked on the Fed s last interest rate cut, but have been very slow to work lower, as no one seems to be in a hurry to sell into strength, with perhaps the one significant exception of America s corporate insider s who have shrewdly taken advantage of the market rally to dump loads of their stock. In itself, this is a huge lack of confidence that we have started a new bull market. The ratio itself has come down to the oversold side of neutral, but the moving averages do not appear to have come down enough to support a renewed strong uptrend, making it likely that a bounce here will continue to find more sellers.
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TUESDAY, June 19, 2001: The markets have remained under selling pressure through last week s quarterly "triple expiration" of options and futures, getting some of our shorter term trading oscillators oversold. Last night s 1 penny better than expected quarterly earnings announcement from Oracle Systems (ORCL) has the markets firmer this morning in the pre-opening hours, and indeed, we were looking for at least a bounce from last week s weakness. On the positive sign, this can be seen as a sign of strength, and we ARE still expecting the current selling to be setting the stage for a summer rally. Perhaps the EU blocking of the GE/HON merger will relieve some of the selling pressure on GE since it was announced, allowing it to resume its leadership roll as the market s most important bellwether.
Beyond a short term bounce, our concern is that the markets have not really corrected much in relation to the huge, 2200+ point rally from the 3/22, 9106 low, falling slightly short of a Fibonnacci .382 retracement by close to 70 points at Friday s low. From the 5/22, 11,350 high, the selloff has been in 3 very clear minor waves, typically a simple corrective pattern within an ongoing larger trend, which in this case is considered to remain UP. While the markets may still not yet be out of the woods beyond the need for a short term bounce, it has been weathering the negative "pre-announcement" season relatively well, and the bottom line is that we think further gains lie ahead, at least until we can assess the value of the next rally within the context of our overall wave analysis.
Against this bullish view, we are using the lower level of key support near the 10,448, 4/24 low. We don t expect a close below this in the event of continued selling, but it is where we have placed our trading parameters on the downside. Initial resistance is near 10,835 and then at 11,180. Stiff longer term Dow resistance remains at the 5/22, 11,350 high to the 4/00, 11,425 top. A push above this would confirm the beginning of the next leg of advance and greatly increase the odds that the 11,750 high will be tested. Our downside targets of as low as the 5/4, 10673.22 low" has also been reached, satisfying the minimum "c" wave requirement for the correction to end, again, if this is a simple correction to unwind the market s recent overbought condition. The OTC Comp closed just below our cited 2000 level yesterday at 1988.66, but this may just be a psychological break that can attract the buy on dippers.
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TREASURIES
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Treasury yields reversed higher on our short term P&F Chart yesterday, perhaps marking the end of the countertrend rally that has unwound the market s oversold condition from the 5.90% yield that was reached back on 5/15. At last week s 5.62% low, the rally fulfilled the .382 Fibonnacci retracement from the 5.217%, 4/22 low. A further upturn here would provide greater evidence that minor wave "2" within the larger, wave (3) bear market was beginning. Ultimately, this would be confirmed with a push above the 5.90% high. This upturn came just after we pointed out that our trading indicators (RSI & Stochastics) had failed to confirm the rally at the yield lows, showing bearish divergences.
Perhaps the market is beginning to sense the end of the Fed s rate cutting policy, percolating inflation, heating up trade pressures with the EU, a sense that the economy will begin to pick up (whether it actually does or not!), and news from the Congressional Budget Office (CBO) reduced their projected government surplus figures to only $200 billion from 2000 s $236 billion, citing the weaker than expected corporate profits and economy, combined with Bush s proposed $300 tax rebate, estimated to cost $74 billion, and a 7-8% hike in federal spending over the next two years. Give our "leaders" ANY sense that there is money to spend and they ll squander it and lots more! To us it looks like the bloom is coming off the rose!!
The bear market rally appears to quickly be running its course if it hasn t already. Next lower resistance is near 5.56% (the Fibonnacci 50% retracement level), 5.50 - .45% and then at the original 5.40% breakout point. This counter trend rally may be providing the "selling" opportunity for the bears that we had been expecting. 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 resistance is near 5.74% and 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: Gold stocks diverged bearishly from the physical metal yesterday, with the XAU down .86 while cash gold gained $1.00. We see this as a sign of further weakness to come as the stocks often lead the metal itself, and the bulls seem out of gas again. Another sign of caution for us is that our XAU/gold ratio gave a sell signal on its Point & Figure chart (P&F) with yesterday s disparity and this has been a consistent early warning indicator for us. We pointed out this divergence last week and it has grown more visible yesterday.
We are continuing to use the key 56 level on the XAU for both our short and long term charts, as any move to this level or lower will have negative connotations for each. A move above 67 on the XAU would renew the uptrend. Last week s oversold bounce may continue for a while longer but we do not see the signs of building upside momentum that are needed ahead of a sustained upturn. XAU resistance remains near 60, 63-4, and then at the 5/18, 66.54 high. Again, a push above this would renew the bullish trend, and also increase the odds that the bottom is in after all. In this event I would begin to lean toward the more bullish wave interpretation, where the higher high would be counted as the minor fifth wave within a larger degree wave (1) rally.
Lower support below the key 56 level is at the 2/14, 45.64 low and then at the even more critical 7/14/00, 41.61 low. The silver lining to any further weakness in the near term 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 |
Tuesday, June 19, 2001: 6/18: We pulled the plug on Iomega (IOM) yesterday at 2.15 (-37.71%), after they announced their new CEO and a lowered outlook. We hope we re wrong, but we are afraid that they may be running into greater difficulty than they can overcome. We also covered our QQQ and SPY shorts yesterday. QQQ 41.40 (+16.78%); SPY 121.90 (+6.30%). These were intended as short term trades and did well. Also, we re-added our purchase of Conseco (CNC) at 15.50%, after we sold it on May 3 at 20. It has since corrected 25%, looks very oversold to us and should be able to at least test its high at 20.
[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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