Last Signal: 7/14/00, SELL
Dow: 10,806.74 OTC: 4243.02
The Ratio continued to move higher, again approaching an overbought reading above .40. So far, the lower high against the market advance is considered an overall negative divergence. The potential for a bearish reversal is growing..
FRIDAY, August 25, 2000: The low volume, divergent rally has pushed further into overbought territory and resistance as the perception that the economy is accommodating the Fed’s actions to slow it down. Many expect that once we pass beyond the Labor Day holiday that the traders and investors that have been on vacation will return to the markets flush with cash and ready to spend it. This is their reasoning behind the low volume and unconvincing, flat breadth breath during this rally. Perhaps they will prevail, but the lack of conviction among the bulls, even under this scenario argues against it as the foundation of this rally has been weak. Also, once we move beyond the favorable period around the holiday and month end portfolio dressing period, the seasonality will quickly become bearish through the end of October, when the dominant 39 month cycle is due to bottom.
One of the clearest warnings that we have been observing remains the Option Volatility Index (VIX) which stretched to an even greater extreme of bullish complacency among OEX traders yesterday, making a new low for the year at 18.95. As described one week ago, this measures the amount of option premium speculators are willing to pay for near the money OEX calls versus puts. Readings below 20 are considered an extreme level of bullish complacency that generally goes unrewarded, as it indicates prices are near their upside extreme. The last time this fell below 20 was in late December, just ahead of the early January peak as the market had trouble throughout the first month of the year. Many other indicators are either at very bullish overbought extremes or showing negative divergences by not confirming the price gains. Prices will not rise against these warnings indefinitely.
We are again raising the initial level of support for the Dow from 10,900 to 10,970 - 900. Key support remains between 10,500 - 464 from the 7/28 low. A break of this level would signal a trend reversal that should lead to a test of critical intermediate support at the 6/30, 10,336 low. The Dow pushed through resistance at 11,140, leaving next resistance at 11,220 and then the key level at 11,425. The lower level may be tested today, but we are skeptical that it will have enough momentum to get through it, especially after the market has become so extended on low volume. Overall, our bearish case still allows for prices to rise toward 11,425, but a break above this would force a re-examination of it as the only resistance above that will be near the January, 11,750 all time high.
TREASURIES
Treasury yields also made additional progress after the Fed again refrained from hiking rates for the seventh time, offering encouragement that the economy was slowing enough to allow the Fed to do nothing while waiting for future evidence that their tight policy had slowed things down just enough. Many have even been suggesting that their next move will be to ease, but not until mid 2001. I think that’s just a bit too far out to worry, care, or think about for now. These are generally the same folks that can’t figure out the immediate future, let alone what will happen a year from now.
So far, the bulls have been moving the ball up field, grinding out a few yards at a time, without taking any big hits. The Fed’s inaction has been taken as a sign that they are finished tightening, keeping traders optimistic. This is becoming a concern as sentiment has been getting unsustainably optimistic. Their policy statement was also taken as a sign that the economy “has” cooled enough, from their earlier, more anecdotal statements that the signs were not yet enough to draw any strong conclusions. Now, it seems more a question of whether the economy will show enough momentum to re-ignite as consumers still hope to continue their haphazard spending habits after a brief rest.
While our short term trading indicators continue to look vulnerable to a setback, our longer term Dow 20 Bond Average remains firmly bullish.
As stated in recent updates, we plan to use further gains to become progressively less bullish, particularly if the yield proceeds toward our 5.50% objective. This would be the completion of 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. Initial support remains 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 at 5.72% gave way and the yield was close to testing the 5.65% level yesterday. A push through would be a good sign that we are closing in on our targeted 5.50% level.
GOLD
The XAU & Gold continues to look like it is desperately trying to make a stand near current levels as gold itself dropped to test the May low near $271 (cash), while the XAU has held on above 50 by the very fine strands. The news was that new short sales were being established in Europe that carried over to US speculative fund selling, both on the dollar’s strength. We think the dollar is at a very critical juncture right now, where to continue the bearish case, it must not make much further upside progress. It is currently on a “high pole at the bearish resistance” (HPBr), a bearish Point & Figure chart formation. A downside reversal would lend to our bearish confidence, but a gain of another full penny would be a bullish resolution of it. For now, it remains bearish overall, and renewed weakness would offer bullish support for the metals.
Most of the recent weakness has been driven by speculative selling, meaning that the pressure is based on new short sales being established, rather than real investor selling. These types of trading positions are always temporary, as the holders need to pay back the gold they had to borrow before establishing their short sales. Whether this happens sooner or later, it is expected that they will be very bearish and holding many of these positions at the ultimate bottom. This offers the potential for it to happen at any time.
The “potential” good thing for now is that the rise and then pullback on our 1 X 3 P&F chart would give a short term buy confirmation if it can rise above 55. With sentiment still plenty bearish, an upturn can be confirmed at any time without much effort or surprise. A new P&F buy signal would be given with a rally through initial resistance to 56. This would provide some evidence that a bottom was in. Next resistance is at 59, then at 64, and 69. Support is at the recent 49.55 low and then at the critical bear market low reached on 8/31/98 at 48.73. We can only wait for something of analytical value to emerge.
PORTFOLIO CHANGES
Friday, August 25, 2000: 8/24/00: Storage Technology (STK) was bought in our low priced portfolio at 13 7/16, on the opening after reporting better than expected earnings. STK appears to have broken out of a major base and above its long term downtrend line. It also broke out of a HUGE descending triangle formation that indicates the termination of its downtrend from over $50, and it broke out above its 200 day moving average. It also has had 3 major selling climaxes (SC) below $15 and recently had 2 insiders buy.
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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Fax: (513) 421-8733 , or by email at: mtr@fuse.net .
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