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REALITY
CHECK UPDATE
Published Every Tuesday
and Friday |
| ARCHIVE:
APRIL
2000-MAY
2001 |
|
Contributed by
Mitch Harris
President: Market
Trend Realities,
Editor: The Reality Check
Newsletter |
|
August 21, 2001 |
| STOCKS |
| REALITY RATIO: +0.129
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Last Signal: 08/17/01, TRADING SELL
Dow: 10,240.78 OTC: 1967.03
With the Dow remaining well within a broad trading range since its May top, the Reality Ratio finally broke down to give a confirmed trading sell signal. HOWEVER, because of how well it and many of its component indicators have held up during the recent prolonged selling, we are interpreting this to be "lagging" and a BULLISH divergence. Perhaps we are not being realistic but we see so many constructive technical signs that we think it is
likely too late to get bearish for the month ahead. This issue will provide supporting data for our pre-emptive conclusion. I will also point out that because the ratio never quite reached an overbought extreme, an upturn here still allows for this extreme to be reached and this could last for a while once reached!
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TUESDAY, August 21, 2001: There may yet be hope for the
bulls! Yesterday's bounce came just in time, after a fourth successful
test of key support since first reaching 10,120 on July 11. We are
encouraged by many of our indicators that are either acting very well,
or have become very oversold during the recent selling. These are signs
that typically precede a significant upturn.
Yesterday, the Investment Company Institute (ICI) reported that $1.5
billion flowed OUT of US equity funds in June, the first outflow since
March when the market bottomed. We think this may be a sign for another
turning point now, as this is a turning point now, as this is a
"rearview mirror" type indicator, one that tells us what "happened" at
about the time when the move is over. ICI also reported that US Bond
funds had a huge +$6.9 billion inflow. Here too, we think that move to
bonds is ending now.20
The markets should be relatively flat ahead of the Fed's post FOMC
meeting announcement, typically around 2:15 pm. It is fully expected
that they will cut rates by another BC%. While we agree with this
expectation, we think that if they want to stimulate the markets,
economy and consumer confidence, that they would be much better off
taking NO action, issuing a statement of confidence that they would
continue to monitor the impact from the six rate cuts already made, as
they should only now begin to show their influence. This would go MUCH
further to boost much needed confidence than another BC% rate cut, as
the markets would read this to mean the Fed sees signs of recovery. Of
course, they are not likely this forward thinking.
Still most impressive to us is that even in the face of declining market
averages since the 5/22, 11,350 price peak, the A/D Line remains at its
highest level of the year. Our 10 Day A/D Line indicator has been
bullish for the past 17 trading days, telling us that more individual
stocks are going up than down, even as the averages have declined. This
is by far our main reason for optimism in the face of much despair, as a
rising A/'D Line is a precursor for prices to follow.20
An initial push above the last Dow high at 10,478 would turn the short
term trend positive and should lead to another test of the resistance at
10,600. Above this key short term level, higher resistance remains near
10,800, 11,000, 11,180, and then at the more significant intermediate
term barrier of 11,350. Support remains near 10,200 and then at the key
7/11, 10,120 low. A close below this would most likely usher in a cascade of stop loss selling, and force a change of our outlook.
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TREASURIES
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Treasury yields remained firm ahead of the Fed today. The
yield exceeded Fibonnacci resistance near 5.48% by a small amount,
reaching a low of 5.422% on Friday. This still remains within our more
critical resistance of 5.40% and next Fib. resistance at 5.363% (.786
retracement). With a BC% rate cut fully discounted already by the
markets, we expect there to be selling on the news, hopefully as money
flows back into the equity markets.20
Many of our technical trading indicators are showing glaring bearish
divergences by not confirming the yield low reached last week. These
include Stochastics (which are also overbought), Rate of Change (ROC),
Momentum, and MACD. These generally are resolved by leading to a trend
reversal, and is what we expect. The large mutual fund inflow in June is
also evidence that bullish sentiment has been building dramatically, and
we see this as a contrarian warning, ESPECIALLY as the public has become
heavily invested, as they are generally the last ones in.20
Next lower resistance remains near the 5.40% level. A push above the
8/6, 5.617% high is needed to confirm a short term bearish reversal. A
break above the 7/6, 5.771% high would confirm a more substantial
bearish trend reversal and indicate to us that the larger degree wave
(3) bear market was underway. Higher support is at the 5.975-6.025%
level and would be the next upside target for the bears. |
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GOLD
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Gold & the XAU pushed higher into Friday's Futures
expiration, with cash closing at $279, its highest close since May. The
futures reached what was considered resistance at $282. Prices gave back
most of Friday's gains yesterday, after the expiration related
manipulations that we see month in and month out passed! We are still
not convinced that the current rally is the beginning of a new bull
market for the metals. The next short term downturn and oversold
condition may be telling.20
The XAU pushed to a high of 58.44 on Friday, clearing short term
resistance near 57. Next resistance is at the 6/14, 60.39 high, and then
at the 5/18, 66.54 high. For (cash) gold itself, resistance at $276 is
being tested now, with more at $280 and $286. Support begins at $270,
which would be a High Pole at the Bearish Resistance (HPBr) on our short
term P&F Chart. Support begins near 52 and with more at the 2/14, 45.64
low, and then at the even more critical 7/14/00, 41.61 low.
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PORTFOLIO CHANGES |
Tuesday,
August 21, 2001: We are adding Cirrus Logic (CRUS)
to our Low Priced Portfolio after today's opening. The stock is "very"
volatile and deeply oversold and we think the chip group has great snap
back potential in the near term. It closed yesterday at 13.24.
[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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