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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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July 6, 2001 |
| STOCKS |
| REALITY RATIO: -0.161
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Last Signal: 04/20/01, TRADING SELL
Dow: 10,579.85 OTC: 2163.18
The Reality Ratio turned sharply higher with last week s rally, giving a trading buy signal by turning up from the more bearish side of a neutral reading. The signal came with the averages within BELOW where they were at the last Trading SELL signal, given on 4/20/01, when the Dow was at 10,579.85 and the OTC was at 2163.18. While the sell signal didn t provide a tremendously lower market to buy into, it did provide us with an opportunity to select trading positions while the market made virtually no net progress, and while many individual issues were slammed by their own warnings. We had been expecting the markets to set up for the beginning of a traditional summer rally, and we think that is getting underway now. We do not know how far it will go, but hope it will be enough to capitalize on it as a trading opportunity.
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FRIDAY, July 6, 2001: Against the normally bullish Fourth of July trading pattern, the market s have been overcome by last minute warnings that the already much diminished earnings estimates are being slashed deeper. I can t remember when our indicators (primarily sentiment related), have come into question so fast after others (primarily breadth) gave a pretty clear signal, but this happened, calling last week s trading buy signal into question. We are giving our "breadth" indicators the benefit of the doubt until they too reverse lower. One observation of this conflict between sentiment and breadth is that while sentiment has suddenly become very optimistic, these indicators are based on an assumption that an immediately unsustainable level has been reached. This is considered anecdotal, while breadth indicators such as the A/D Line and volume are indications of what s actually happening now. Recently these have taken precedence in our work, many as one of our most important indicators, the 10 Day A/D Line is rising and closing in on a new recovery high. This alone tells us that while the averages are falling, the majority of stocks are not. To us, this is a bottom line and while it may not be pretty or a blanket endorsement for the markets overall, it offers potential for better upside participation as we still anticipate a summer rally.
Perhaps, the end of the Q2 warnings and beginning of actual earnings releases will calm the selling pressures. Similar to last Friday, we saw in yesterday s trading that while the NY and OTC averages were down sharply, the declines only exceeded the advancing issues by a narrow sum, as many issues were NOT affected by the selling. The Dow closed at 10,480, essentially right on our cited Fibonnacci support level again at 10,492, with lower support down to last Tuesday s 10,394 intraday low. We will remain bullish against this level. Support at 10,492 is a 38.2% retracement of the 2200+ point rally from the 3/22, 9106 low to the 5/22, 11,350 high [11,350 - 9106 = 2244 X .382 = 857 - 11,350 = 10,492]. Stated last Tuesday, "the market s have so far, weathered the negative "pre-announcement" season relatively well. Again, we aren t sure this is still the case.
Against the bullish view, we continue using the lower level of key support now stretched to last week s 10,392 intraday low as a "must hold" level. We don t expect a close below this if the market is going to regain its upward momentum. Lower support is at the Fibonnacci 50% retracement level, near 10,229, allowing another 200 points of "rope" to give if needed for the buyers to regain their composure. With the past two days of sharp selling, initial resistance was lowered to 10,640 - 10,750 s cluster of consolidation. Above this, resistance is near 10,835, 11,000 and 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, but even a push above 11,000 would be a very encouraging sign.
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TREASURIES
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Treasury yields are having trouble attracting buyers too, and they don t have earnings warnings to contend with like stocks do!! Perhaps this makes the bonds look even more bearish (at least it does to us!). Preliminarily, we think Treasury yields are in the early stages of their primary wave (3) rise, which should ultimately take it well above last January s (1/00) 6.75% high. This morning s June non-farm payroll report is due this morning and will undoubtedly influence trading over the next few days. Any sign of employment stabilization will hurt short term sentiment among traders, wending the yield higher.
The current easy money Fed policy didn t help the long end of the bond market, and we don t think they will find relief when the Fed shifts this policy to neutral, as the expectation for the economy to pick up grows, and the risk that consumer and producer prices rise grows with it.
Before the upside reversal, the Treasury yield retraced an exact Fibonnacci 50% from the 5.217%, 4/22 low to the 5/15, 5.90% high, at the recent 5.567% low. This is a typical retracement in a bear market. Next lower resistance is at 5.50 - .45% and then at the original 5.40% breakout point ( with the Fib. .786 resistance at 5.363%). An upturn here above the last high at 5.90% would confirm the larger degree wave (3) bear market was well underway.
For the immediate bearish case to remain valid, the yield should NOT drop back below the last low at 5.567%. In the unlikely event that it did, next major resistance would be at the 5.40% breakout point. Again, 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 5.56% and 5.50%. |
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GOLD
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Gold & the XAU are also under siege, on the strength and resilience of the US Dollar. We don t know why foreigners would continue to support the greenback if US equities remain under selling pressure, but they have, right through the US corporate profit mess. In support of further weakness is the thick bearish sentiment combined with a very heavy net short interest held in the futures pits by the knowledgeable commercial traders.
The continued weakness has allowed us to lower our next buy point again, to 57 on the shorter term 1X 3 Point & Figure (P&F) Chart, where it would be a "low pole" buy alert. A push straight up to 61 would confirm the lower initial signal, but these numbers are still a long way off. For gold itself, our longer term P&F Chart suggests a challenge of the April low, near $256 or so per ounce. This makes long term support near $254 vulnerable, especially as downside momentum would have to pick up further to fuel prices to these lows. Next support for the XAU is at the key 2/14, 45.64 low and then at the even more critical 7/14/00, 41.61 low.
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PORTFOLIO CHANGES |
| FRIDAY, July 6, 2001: -- None Today -- [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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