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.
FRIDAY, July 14, 2000: The markets continue to rally into the end of this "pre-options expiration week," moving through much of the resistance we’ve been listing recently. We continue to expect a downside reversal as experts have suddenly proclaimed this the "beginning" of the summer rally. I have to find this humorous as the current rally began from the 6/22, 10,335 low, over three weeks ago. This appears to be evidence that the tail does indeed wag the dog!
After Tuesday’s downside reversal, the markets bounced back but have so far not made much greater progress. Many seem to be suddenly getting very bullish very quickly, but we still remain somewhat skeptical against the resistance from the June 5 high at 10,863. As the Dow has approached this level, many of our daily indicators have become very over-extended, indicating that further gains may not be sustainable, and that a downturn is approaching.
This is also true of our short term sentiment indicators, such as the CBOE 5 day put/call ratio, the Options Volatility Index (VIX) and the Odd Lot Short sales Ratio. The CBOE 5 day P/C ratio dropped below .4 yesterday, as only 4 out of every 10 options purchased over the last week have been downside bets, indicating that the majority of option traders are not concerned over a bearish reversal. The VIX has been hovering near 22, very close to an extreme that also indicates bullish complacency among options traders. This is another measure that indicates that speculators have little concern that the market will decline. The Daily Odd Lot Short Sales Ratio is reported in Investor’s Business Daily and has just turned up from close to a low near 4%. This is consistent with the complacency seen among small investors ahead of other recent trading tops. If tells when investors who can only afford to short less than 100 share lots are too bullish or bearish, indicating that the opposite is about to occur. It is a very good short term contrary indicator and warns of a reversal.
Prices resolved their recent narrowness by breaking out above resistance at 10,600, approaching the more significant June 5, 10,863 high. We have remained bearish against this level, and while approaching this, we think the market is too over-extended to sustain itself above it. Initial support is now at 10,600. A break of this level would provide the first quick sign of a reversal, with an hourly close below the 6/30, 10,336 low needed to 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 overcame sellers and the large supply of corporate and agency bonds this week to push through resistance at the 5.85% level. With our longer term bond indicator, the Dow 20 Bond Average turning bullish, we continue to see the yield moving lower toward our ultimate target of 5.50%. Next resistance is at 5.72%, then at the 5.65% April low. As previously stated, this analysis 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. The rally in the equities markets has continued to draw some interest away from Treasuries, but if our analysis is correct, this may be ending now. Initial support remains at 6.05% would confirm a short term bearish reversal, with next support at 6.20 - .25%, 6.32% and 6.40%.
This morning’s trading will likely be determined by the release of the June PPI and Retail Sales data which is set up to be weaker than expected as estimates seems on the high side to me. We’ll see how it spins.
GOLD
The XAU & Gold remain under the difficulty of no-interestosis after the disappointing results from Wednesday’s seventh Bank of England (BOE) auction of 25 tonnes of British gold reserves. Demand for this auction was the lowest of all of their auctions so far at just 1.3 bids per ounce. This is not a good sign, but some bullish analysts have suggested this is because potential bidders have figured out that not bidding will force the BOE to squander their gold at the lowest possible price, allowing them to buy it in the open market for even cheaper. I won’t argue in favor of this theory, but it is a nice rationalization. We think their sales are the biggest squandering of a nation’s hard assets since Hitler raped, ravaged and pillaged Europe. The difference is Hitler took what he wanted by force. Sentiment remains very bearish and we hope that the long over-due rally will begin soon, now that the auction is out of the way.
The XAU remains bullish against key support from the 4/13, 54.24 low which held by the margin of just 8 cents with last 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
Friday, July 14, 2000: As stated in Tuesday’s update, on 7/11, we recommended shorting Biogen (BGEN) at 71 and EMC (EMC) at 75. BGEN had a bearish high pole (HP) and EMC had an even better short selling formation, a high pole at the bearish resistance (HPBr). Both also have loads of insider selling and EMC’s P/E ratio is over 130, showing very high expectations. For EMC, we are using a new high at 83 for a stop/loss, and for BGEN, we because BGEN has already dropped nicely, we are using a stop at 74 for a very limited risk.
Article contributed by Mitch Harris: President, Market Trend Realities & Editor,
The Reality Check Newsletter, and reprinted here with permission.
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