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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 10, 2001 |
| STOCKS |
| REALITY RATIO: +0.00
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Last Signal: 06/29/01, TRADING BUY
Dow: 10,499.72 OTC: 2159.60
The Reality Ratio line turned lower, to an out and out NEUTRAL reading after last Friday s low volume but damaging 227 point selloff. While this line fell, the short term moving average line turned UP through the still falling intermediate term moving average line, confirming the 6/29/01"trading buy"! Seems difficult to comprehend while w2atching a week of low volume selling, but if there is an explanation, it is that the low volume hit the averages, but NOT many average stocks that are not so heavily influenced by them, as MOST stocks were not drawn down in the wake of the earnings warnings of some very high visibility issues.
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TUESDAY, July 10, 2001: Again, one of the keys to the quality of last weeks selloff was the volume. It was just not heavy enough to determine that the selling came with any particular conviction, with the individual exceptions of the specific issues that drove the thinly traded markets. While our trading buy is still under scrutiny, within the continued short term market weakness we see many anecdotally encouraging signs that tell us two things; that this should not be the beginning of a new, deeper down draft, and that the odds for a summer rally remain higher than average, at least before we may find new reasons for big concern.
Last week should have been the last full week of earnings pre-announcements ahead of the beginning of the actual earnings season. Usually, this is when we begin to see earnings reports that actually meet or beat their expectations, giving the potential for some selling relief. We see the potential completion of 5 wave declines in the Dow, NYSE and S&P 500 averages. At Friday s 10,220 intraday low, the Dow had retraced an EXACT Fibonnacci 50% of its rise from the 3/22, 9106 low to the 5/22, 11,350 high [11,350 - 9106 = 2244 X .50 = 1122; 11,350 - 1122 = 10,228]. Also, the OTC Composite did NOT make a lower low with the NY averages last Friday, creating a bullish price divergence. At its recent 1973.70 low reached on 6/20, at 1973.70, it too retraced EXACTLY 50% of its gains from its 4/4, 1620 low to its 5/22, 2328 recovery high [2328 - 1620 = 708 X .50 = 354; 2328 - 354 = 1974]. Based on our interpretation of the rules within the Elliott Wave Principle, it just doesn t get more precise than this, at least in offering predictive value for such key levels of support. These levels could very well turn out to be the climactic lows we had been looking for (albeit turning bullish a bit early).
In further support to our view that a summer rally still lies ahead, even with last week s apparent selling pressure, the volume was not heavy enough to draw any great, longer term conclusions, and even more impressive to us was that the breadth for the week showed 5589 advancing issues and 6571 declining issues. This is simply NOT that broad based for a market that was down in 3 of the 4 days for the week, particularly when Friday s A/D was 2 to 1 bearish! Our 10 Day A/D Line trend indicator managed to remain bullish throughout the week, weathering the selloff. While continued selling will not allow for this indefinitely, this too is considered a short term bullish divergence against last week s price decline.
A few other signs are telling us to remain patient and not overly bearish in the near term. Daily chart indicator RSI was VERY close to reaching an oversold reading at 32%. Also, Stochastics, Rate of Change and Momentum indicators were showing bullish divergences by making HIGHER lows, not confirming Friday s decline. We have also noticed a rise our short interest ratio indicator, which indicates short selling has re-emerged after being absent for much of the rally in recent weeks/months. This increases the market s buying power as short sellers will quickly buy to cover these positions as soon as prices start to move against them.
Of course, there are also things to be justifiably worried about, such as the alarming insiders sales to purchase ratio, which according to Argus Weekly Insider s report shows a very disturbing 7.27 times more selling than insider buying. We also are disturbed by several measures of sentiment, including a suddenly dramatic shift among investment advisors to a scale tipping level of optimism with the lowest level of pessimism since 7/30/99, according to Investors Intelligence. While these are clear warnings about the market, they are NOT the best short term timing indicators and do not in themselves warn that a decline is imminent. Next lower support remains at the Fibonnacci 50% retracement level, near 10,229, then 10,000, 9880 and 9650. Resistance begins at 10,640 - 10,750 s cluster of consolidation, 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 have become a bit oversold recently and allow for a bounce/trading rally to emerge from Friday s yield high. We see two wave possibilities developing in the near future. The first is for a bounce only with no new NET progress below the 6/25, 5.567% low. This would likely be a minor wave "2" consolidation, still well within the larger degree wave (3) bear market. Any move beyond the 6/25 low would indicate that a more complex double zigzag rally was developing, still allowing for further progress where it would remain unlikely to make progress beyond the 5.40% bearish trend reversal point from late March.
We also don t see much sustained progress for bonds in the event that we are correct that the equities markets begin to attract a new round of buyers. In this event, much of the fickle money that finds its way to bonds to hide from declining equity markets will move back to them. 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 (and our more bearish scenario discussed above) 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. |
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GOLD
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Gold & the XAU have been attempting to consolidate their recent losses, with the XAU holding just above 51 and gold holding above $265 per ounce. Looking at our longer term Point & Figure (P&F) charts, both remain on bearish "High Pole at the Bearish Resistance" chart formations, indicating that prices ultimately have further to drop. This does NOT rule out the potential for these markets to bounce to relieve their short term oversold conditions. What it implies to us is that it may be premature to think that a rally here is much more than a bounce, and unless these bearish chart formations find bullish resolution, we cannot get too optimistic on gold in the near term.
The 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, long term support near $254 remains vulnerable to the next challenge for the bears. Support for the XAU remains near 51, 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 but we are lowering our buy/stop on our short on Baker Hughes (BHI) to 35 from 43, because a bounce to this level would create a bullish "spread bear trap" (SpBrTrp) P&F 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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