Last Signal: 7/14/00, SELL
Dow: 10,806.74 OTC: 4243.02
The Ratio pushed modestly higher for the second week in a row but remains on an overall sell signal. It is still well below the .613 sell signal it gave on the week ending 7/14, for a bearish divergence against the higher market prices reached. We think the rally will run out of gas soon.
TUESDAY, August 15, 2000: The markets rallied sharply for the past week or so, primarily on the prospects of an economic slowdown and the perception that the Fed is finished tightening. While we see the same evidence and agree that further rate increases are tentative at this point, it speaks little in regard to the market’s basic over-valuation and the potential for diminishing earnings growth going forward. We are at the back end of the seasonality for a summer rally and as the amount of bullish expectations grow along with it, the prospects for another top and downturn grow too. Our overall forecast for the year accounted for a secondary top as late as into the end of August and we think we are very close now.
Technically, yesterday’s 863 upticks was noted as a closing "tick" sell signal, which implies that a market turn is quickly approaching, as traders confidently threw in the towel to buy into the end of trading. This is a very early warning and used as a 1st sign of an approaching reversal. The fact that the rally has been on generally light and divergent volume, and that we are into an option expiration week make us even more wary of a reversal. Yesterday’s seemingly strong price gains couldn’t even generate 800million shares traded. Bubblevison would like us to attribute the light volume to vacation season, but if that is true, there’s nothing to make us believe that traders will come back as buyers!
We are moving up our initial support level to 11,900, with key support now between 10,500 - 464 from the 7/28 low. A break of this level would signal a trend reversal that we still think will test critical intermediate support at the 6/30, 10,336 low. An eventual break below this level would likely usher in a cascade of selling to a test of the 9732 March low. The Dow pushed deeper into resistance to close yesterday above our sighted 11,140 level. Next resistance is at 11,220 and then major resistance at 11,425. As stated in the past few updates, "while we still think that (much) lower prices remain ahead [as calculated in the June issue of Reality Check], they may be put off until the summer rally that we had thought ended already finally runs its course." Any push above 11,425 would make it likely that the January high at 11,750 will be approached and tested, but we still see this as unlikely.
TREASURIES
Treasury yields are hanging on to much of their recent gains, but our short term trading indicators continue to look very vulnerable to a setback, as does the mounting bullish sentiment. While the Treasury Department’s buyback program remains supportive, we think the market is discounting the end of the Fed’s tightening, perhaps prematurely. Of course, time will tell as the markets have become fully convinced that the Fed will refrain from a seventh rate hike when they meet on August 22. While they may or may not act next week, we think there is too much confidence on a 50/50 proposition, as it will be their last opportunity to act ahead of the November election. We think it appropriate to begin getting progressively less bullish on further strength toward our 5.50% yield objective. A move to this level would complete a .618 Fibonnacci retracement of the entire rise, from the 4.69% low of September of 1998 to the 6.75% high reached this past January.
If the Fed does act again on August 22 it would most definitely be perceived as the last of them and be a bullish factor. If this is the case, we would take advantage of it by becoming cautious sellers. Initial support is just beneath 5.85%, 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 and the Treasury Department’s buyback program should remain supportive through August. Resistance is at 5.72%, 5.65% and then or targeted 5.50% level.
GOLD
The XAU & Gold showed signs of life with a late Friday surge of almost $3.00 on gold and better than 2 points on the XAU. This was enough to raise our leading XAU/gold ratio to a Point & Figure buy signal, a good sign from this early timing indicator. Prices have had plenty of chances to push the XAU toward its all time low, but it has so far not happened. Friday’s strength was clearly on the Bank of Japan’s (BOJ) first interest rate hike in the past decade, a fundamental change that may turn the yen higher against the dollar, especially if it is the beginning of a trend toward higher rates in Japan as the Fed stops tightening in the US.
Stated on Friday, with bearish sentiment fully entrenched, the potential for a sharp rally on any further breakdown is growing, as the lower prices are likely being discounted by the markets now. At some point, this selling would attract short covering and other related buying. While the potential for a test of major support at the 8/31/98, 48.73 all time low remains fully possible, the recent selling climaxes (on the XAU & Newmont Mining the previous week), along with the XAU/gold ratio upturn and many other favorable factors offer a great deal of potential for a powerful rally to begin at any time. A new P&F buy signal would be given with a rally through initial resistance to 56, which would now suggest the bottom was in. Next resistance is at 59 and then at 64. This would be significantly bullish. Higher resistance is at 69.
PORTFOLIO CHANGES
Tuesday, August
15, 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
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