Last Signal: 7/14/00, SELL
Dow: 10,806.74 OTC: 4243.02
The Ratio turned down to confirm the 7/14 sell signal, as we expected last week. With the extreme reached and the markets still FAR from their all time highs, it is likely that the recent lows will be tested and broken, confirming the resumption of the BEAR market.
FRIDAY, July 28, 2000: The markets were besieged with selling this week due to concerns over weakening earnings growth and the renewed uncertainty over the Fed’s next move after their August 22, FOMC meeting. Of course, we’ve continued to warn about each and were well prepared for the market’s downturn from its July 20, 10,874 high, especially after our Reality Ratio gave its most recent sell signal on 7/14. The market’s will key in on today’s Q2 GDP report, which will offer fresh news on whether the economy is slowing enough for the Fed.
As stated on Tuesday, the break of support at 10,600 confirmed an intermediate term double top from the 6/5, 10,863, and the 7/20, 10,874 highs. The Dow bounced off support near 10,515 yesterday, after closing right on it Wednesday. While the next big test for the Dow is at the key, intermediate support at the 6/30, 10,336 low, 5 minor waves down in the Dow, S&P and OTC averages allow for an attempted rally to develop against the larger bearish wave structure that we are confident is in force. Our work suggests that the larger degree wave (3) decline of the primary bear market is developing. Short term resistance is near 10,680, 10,750 & then up to the 10,874 high. We think (much) lower prices remain ahead.
TREASURIES
Treasury yields continued to push lower yesterday, reaching the lowest level since early April. The strength came after the release of yesterday’s strong Q2 Employment Cost Index (ECI) which rose 1% after a stronger 1.4% in Q1, and the surge in June Durable Goods of a full 10% was the largest since 7/91. The market somehow took these numbers to reflect a slowing economy, soft landing and that the Fed would not have to tighten again in August. We don’t know how this conclusion could have been reached, but the market’s are moving the yield closer toward the extreme we are looking for, discounting a soft landing that still lacks the supporting evidence. An error in judgment could lead the market to our next objective of 5.50%, before they recognize that the Fed’s work is never done! We think that for this target to be reached, we will have to see both, the yield and investor sentiment back at a bullish extreme that will likely precede the next major bearish reversal.
The yield dropped to a low just below 7.75% yesterday, moving quickly toward the beginning of next resistance between 6.72% and 6.65%. Beyond that, there should be little in the way of our 5.50% target. The Treasury Department’s $30 billion Treasury repurchase program should continue supporting the bullish trend, but it will soon become fully discounted by the market as we move through the month of August. The rally should be within intermediate wave "C" of primary wave (2) of the long term bearish trend. When completed, this would be followed by the next larger wave of selling. A push to 5.50% would be a .618% retracement of the entire rise from the 4.69% low of September of 1998 to the 6.75% high reached this past January. Initial support was recently established just beneath 5.95%, with more at 6.05%. A move above this 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 have shown no sign of revival, simply managing to remain flat for the past few days. This weeks 52 week low allows for the XAU to post a major selling climax (SC) for the week if it can close above last Friday’s 50.75 close. This is well within reach and it was just above it with yesterday’s close. The market is back at the point where conditions are good for a sudden price surge. Trading indicators are very oversold and sentiment is in a state of pervasive pessimism. As stated on Tuesday, we think we’ve seen a capitulation of selling already. It is uncertain whether there will be another round of this type of wholesale liquidation, and it becomes less likely once it ends the first time, which it has. The potential for testing major support at the 8/31/98, 48.73 all time low remains high and very close, and therefore cannot be ruled out. Initial resistance is near the recently broken support near 55. A move above 59 would suggest the bottom was reached, but a push above 64 is still needed 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
28, 2000: NONE TODAY
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 .
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