Last Signal: 7/7/00, BUY
Dow: 10,635.98 OTC: 4023.20
The Ratio turned sharply higher, breaking out of the narrow range of the past few weeks. Unfortunately, the Ratio line has already surged very close to the +.40 level that would trigger an overbought sell alert signal. We think that further gains are due to be met with renewed selling pressure. Further gains may prove unsustainable and offer the opportunity to lighten up in anticipation of a downturn. Our trading parameters are outlined below.
TUESDAY, July 11, 2000: The markets seem content to believe that every economic number will be a relevant contribution for the Fed to discontinue their tight money policy of the past year or so. While we agree that some signs of economic slowing have emerged, we are not as confident that the momentum is turning. The risk is that it will re-accelerate, especially if market interest rates continue lower, as consumers aren’t likely to change their "gotta have it" spending habits on a dime. We are also less confident that the tight labor market, higher production costs, complacency over the market’s historically high (over) valuation, and difficult earnings comparisons in the second half of 2000 offer great prospects for a resumption of the bull market.
The short term trend has resolved itself by breaking out of the narrow trading band of recent weeks by pushing above the initial resistance we had been sighting at 10,600. Bulls still have to contend with stiffening resistance at 10,750 and 10,860. We remain bearish against these resistance levels and many of our trading indicators are at levels that are consistent with the short term tops of June, May and April. Since the Dow Industrials topped out earlier this year at 11,750, each trading rally has made progressively lower highs, retracing precisely a Fibonnacci 78.6% of the preceding rally. Currently, this resistance is at 10,750. Yesterday’s rally topped at 10,703, making it more and more likely that a top is either at hand, or is quickly approaching. A sustained move above 10,860 is needed to turn us bullish, but I think that for this to happen anytime soon, the market would already be very extended, again making it unlikely. A decline below 10,600 would be the first quick sign of a reversal, with an hourly close below 10,400 needed to confirm it. A decline below the 6/30, 10,336 low would confirm that the trend has turned bearish, with lower critical support at 10,250. A break of these lower levels will confirm our preferred Wave analysis that intermediate wave 3, within larger degree wave (3) is underway and should ultimately carry prices below the 9732, March low.
TREASURIES
Treasury yields have become choppy and indecisive near resistance at 5.85%. Short term trading indicators are turning bearish, but our longer term indicators are bullish. This offers the strong potential for consolidation ahead of further progress that takes the yield firmly lower toward next resistance at 5.72%, the 5.65% April low, and then to our ultimate yield objective of 5.50%. The argument for this is supported by a heavy calendar of new corporate supplies being brought to the market in the near term. The argument for ultimately lower rates is supported by the Fed’s commitment to slowing the economy down, combined with the Treasury Department’s ongoing buyback program through the rest of the summer, at least. As stated last week, the rally in the equities markets has drawn interest away from Treasuries, but if our analysis is correct, this may not last much longer. A rise above initial support at 6.05% would confirm a short term bearish reversal, with next support at 6.20 - .25%, 6.32% and 6.40%.
GOLD
The XAU & Gold "appear" dead in the water, but we remain hopeful that this will still be resolved with an upside breakout. Sentiment is way too bearish to expect a big drop anytime soon. We think it is likely that the market is buying time ahead of tomorrow’s next squandering of 25 tonnes of their gold reserve. Hopefully prices will pick up after this has concluded, especially as it seems to have already been priced into the market. remain submerged.
The XAU remains bullish against key support from the 4/13, 54.24 low which held by the margin of just 8 cents with Friday’s 54.32 low. A break of this level would suggest a test of the 8/31/98, 48.73 all time low. A move above 64 is necessary to resolve the current "high pole at the bearish resistance" (HPBr) short term chart formation, as well as to break out above the downtrend line drawn from the 92.72, 9/99 high. This would be significantly bullish. Higher resistance is at 69, 72 -3, and then 82.
PORTFOLIO CHANGES
Tuesday, July 11, 2000: 7/7: Adobe Systems (ADBE) was stopped out at 136 (-12.4%). Several new idea’s are under consideration (including Biogen and EMC), but we need more evidence before we take on anything new.
Interim Update 7/11/00:
Because the market appears to be reversing this morning's strength as we thought it might this morning, am recommending two new short sales at current prices.
1) EMC Corp (EMS): Is a leading provider of data storage systems. It has a VERY high 130+ P/E Ratio, a good amount of insider selling and a bearish "High Pole at the Bearish Resistance" (HPBr) chart formation. It also had a buying climax (BC) at 82 in June. We are using 75 for the price shorted.
2) Biogen (BGEN) is a leading biotech company, but has several very bearish short term divergences, including the daily RSI, Stochastics and Williams %R indicators. They too have a great deal of insider selling and appears to be rolling over after a technical retracement from its recent low of 48 1/2. The stock has plunged from an earlier 2000 high of 129, and we think there is more downside ahead.
These are both in very strong market sectors, that we think are very extended and offer good prospects for downside reversals. In case we are incorrect or too early, wWe will establish stop loss parameters by Friday morning's update, or we will let you know sooner if they should be covered.
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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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