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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 13, 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 watching 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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FRIDAY, July 13, 2001: HAPPY FRIDAY THE 13TH!! What a difference a day makes, especially when it is the official launching of the earnings season with positive news from behemoths, GE and Microsoft! We hope this is the beginning of the summer rally we had been prematurely expecting, as the worst of the quarter s earnings news should have past with the pre-announcements. We saw developing signs of a bottom over the last week or so, and these apparently did lead to yesterday s sharp upside price reversals lead by of all things, TECHNOLOGY STOCKS!! While it took longer than we thought it would, it was what we thought would lead the markets higher.
The 5 wave declines in the Dow, NYSE and S&P 500 averages extended themselves a bit beyond the EXACT Fibonnacci 50% retracement it had reached on Monday were sharply reversed yesterday to offer strong evidence that the decline is over, at least in the near term. Worries over corporate earnings, the economy, Argentina s (likely) debt default, an overly robust US Dollar, over-extreme bullish investor sentiment, and a weakening EU are ALL great reasons for concern, but for the foreseeable future, we think prices have the opportunity to test their recent highs. This would leave plenty of room for trading profits to be made in the coming weeks.
To us, one of the clues that the selling pressure was not as strong as many feared was the low volume that came with a holiday shortened week (and great weather that kept traders at home and on the beaches of Long Island!). We didn t think it would take much in the way of up volume to reverse prices. One of our indicators that has the potential to contribute to the buying in the short run is our short interest ratio indicator, which has initially turned down ahead of the bullish price reversal. This should continue to fall as short sellers quickly find the need to buy back their shorts to close them out ahead of what they perceive will be even higher prices. This process will add to the buy side volume of any developing rally.
Other indicators we cited on Tuesday that showed bullish divergences also helped lead to yesterday s upside reversal, as they failed to confirm the last of the selling pressure. These included 14 day Stochastics, 10 day Rate of Change and 12 day Momentum. These indicators were already making higher lows against each day s lower prices, which was a telling sign that the downside momentum was ending. They have ALL turned bullish, as did 14 day RSI.
Also mentioned on Tuesday was the disturbing trend of insider selling and the hard to believe extreme bullish sentiment as measured by the Investors Intelligence weekly survey of independent newsletter writers, which is now even more extreme, with 51% bulls and just 25% bears. While these two indicators in themselves are NOT used for precision like market timing, they will become more critical over the next few weeks. If the market does indeed rally, this sentiment measure will run the increased risk of becoming even more extreme and unsustained. Ultimately, this will become a more immediate concern. Perhaps this will occur once our other trading indicators move back to overbought levels and combine to offer a more clear immediate message.
Support now begins at Wednesday s 10,120 low, and then at 10,000, 9880, 9650, 9375m and at the 3/22, 9106 spike low. Resistance begins near 10,640. A push above this would confirm the short term low, with further resistance near 10,760 - 10,785, 11,000, 11,180, and the stiff longer term Dow resistance from the 5/22, 11,350 high. 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 very encouraging.
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TREASURIES
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Treasury yields have bounced as we had envisioned with Tuesday s update as they had become very oversold. It remains too soon to have greater confidence in one of our two wave possibilities over the other. 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 don t see much potential 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 as a hiding place 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 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 seen a very slight short covering bounce as the July futures go off the board today and many roll out their contracts to future expirations. This has become typical of expiration weeks as well as during the week of options expirations, which is next week. While prices may indeed rally in the near term, we are not yet convinced that it will be anything more than re-positioning ahead of these events.
XAU support remains just above 51. Looking at our longer term Point & Figure (P&F) charts, both the XAU and cash gold remain on bearish "High Pole at the Bearish Resistance" chart formations, indicating that prices ultimately have further to drop. The current effort to rally should serve to relieve their recent oversold conditions. 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, where it would be a "low pole" buy alert on the shorter term 1X 3 Point & Figure (P&F) Chart. 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
13, 2001: -- 7/11: Storage Technology (STK) hit our 13 stop and it was removed for a (-3.26%) loss. 7/12: We added Motorola (MOT) 17.60 after yesterday s strong opening. We ve been watching it for quite a while and it has had two selling climaxes, a higher low and broke out above its short term downtrend line on yesterday s opening. Also yesterday, we covered our short on Rowan Co. s (RDC) at 18.67 (+37.24%) after it reached our 19 downside target.
[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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