Last Signal: 7/14/00, SELL
Dow: 10,806.74 OTC: 4243.02
The Ratio reached a very extended extreme, far above the .40 level that triggers an overbought sell signal. We don’t see the advance making significant progress above current levels, and a downturn in the market would likely confirm the preliminary sell signal given after last Friday’s close.
Friday, July 21, 2000: Traders pushed the envelope right up against our bearish limit yesterday, ahead of today’s option expiration and on what were deemed words of encouragement from the "Great One", Alan Greenspan, who began his semi-annual Humphrey-Hawkins testimony before the Senate Banking Committee yesterday. While he went back and forth on the continued risks and challenges going forward, he did mention that the economy has the appearance that it is "tentatively" slowing. He also stated that it is not yet clear whether the economy will manage to slow to a more sustainable level or if it will re-heat as full employment continues to fuel strong consumer spending. While the outcome is clearly anyone’s guess, with strong consumer confidence and unemployment near a record low, we agree with Greenspan that the risks remain with the economies strong momentum.
That makes it likely that yesterday’s rally was at least partially fueled by short covering into today’s option expiration. The Dow pushed to a high of 10,874 before pulling back a hair, essentially stopped by the resistance we’ve been stating as our line in the sand at 10,863. This certainly has me considering the possibility that the rally has not yet ended, but it also has the strong potential for a serious double top from the June 5, 10,863 high, with another reversal here. If prices clear this key level, the rally will likely extend further, toward next resistance at 11,000 -11,100. A close below 10,680 would now confirm a short term top, with support at 10,600. A close below 10,336 would still confirm a more significant trend reversal.
TREASURIES
Treasury yields followed through after last week’s push through resistance at 5.85%, on the combined comments of encouragement from Greenspan with yesterday’s Treasury buyback of another $1.5 billion of long dated Treasury Bonds, which provided additional strength and encouragement for bond bulls. We had continued to hope for a temporary pullback with yields rising back above 6.00% for a short time, but it remains clear that with the Treasury Departments "reverse auction" program just surpassing the point of half complete, and bullish sentiment toward the economy slowing, the rally also has the potential to continue toward our yield objective at 5.50%. We think this would complete the entire rally from the January high, retracing .618% of the entire rise from the 4.69% low back in September of 1998 to the 6.75% high reached in January. Strong resistance remains between 5.72% - 5.65% and then at 5.50%. Support remains at 6.05% and would confirm a short term bearish reversal, with next support at 6.20 - .25%, 6.32% and 6.40%. Our longer term bond indicator, the Dow 20 Bond Average remains bullish as does the Fed’s commitment to slowing the economy down, again, combined with the Treasury Department’s ongoing buyback program through the rest of the summer.
GOLD
The XAU & Gold turned from a case of "no-interestosis" to "get out of townitis" as prices broke down through support on the spot gold and the XAU. While very disappointing, the support at 54.24 gave way after managing to hang in there since reached on 4/13. The only other support is at the 8/31/98, 48.73 all time low, which is not far off at all. The only words of encouragement that can be made here is that we’ve seen on other occasions where support has been breached in what is know as "gunning the stops", where old positions are covered, especially ahead of options and futures expirations, to force traders to liquidate as their stop losses are hit. This would suggest that an upside reversal was very close at hand, but we need more than conjecture before finding confidence in this. The bullish factors that we’ve pointed to recently remain in place, and will likely become even more bullish with this break of support, so the potential for a bottom is not out of the question. A move above resistance at 59 would suggest the bottom was reached, but a push above 64 is still neecded 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, but this is now a long way off.
PORTFOLIO CHANGES
Friday, July 21, 2000: 7/19: EMC quickly pushed through resistance, stopping us out at 83 for a 10.67% loss. We’ll likely replace this soon.
Article contributed by Mitch Harris: President, Market Trend Realities & Editor,
The Reality Check Newsletter, and reprinted here with permission.
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