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REALITY
CHECK UPDATE
Published Every Tuesday
and Friday |
| ARCHIVE:
APRIL
2000-SEPTEMBER
2001 |
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Contributed by
Mitch Harris
President: Market
Trend Realities,
Editor: The Reality Check
Newsletter |
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October 9, 2001 |
| STOCKS |
| REALITY RATIO: +0.09
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Last Signal: 09/07/01, TRADING BUY
Dow: 9,605.85 OTC: 1687.66
The Reality Ratio continued its recovery from its deepest oversold reading since 10/99, confirming the upturn we were hoping for. The slower moving average continued lower, with the short term MA moving UP through it to further confirm the market s upturn, after it had dropped into the -.40 oversold zone last week. We think that the potential for prices to reverse lower again remains high in the short term, offering the potential to set the stage for higher prices after either a brief consolidation or a retracement that should end with a "higher low. This would likely occur within the next few weeks and appears to have begun.
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TUESDAY, OCTOBER 9, 2001: The markets were mixed between flat and lower yesterday after the US began their bombing campaign on Afghanistan on Sunday afternoon. Investor s appeared to take it in stride as we have been well prepared for it emotionally over the past few weeks. Investors have (so far) even managed to take into account a second confirmed case of Anthrax in Boca Raton, Florida, along with trace amounts found on an office typewriter, confirming that this was NO coincidence. While we began expecting for prices to consolidate last week, we remain optimistic that they can do so in a relatively orderly manner in preparation for higher prices into the end of the year, as we move to the seasonally most bullish time of the year for our stock markets.
Some of our indicators are already backing off the very extended levels reached on the initial recovery highs, again offering some evidence that prices are consolidating only and will hold up relatively well ahead of the rally s resumption. Our intermediate to longer term indicators have all turned up from very deeply oversold levels, and from this, we may conclude that things have a LOT of room for improvement, but not so much room for a lot more deterioration. Our 10 Day A/D Line trend indicator has been bullish for 5 days now, and while this can quickly change, it has confirmed the bullish trend for the short term. Some of our shorter term trading oscillators have begun to back down. At a minimum, this is providing relief of the short term overbought condition created by the initial upside thrust. After this runs its course, the implication is for the rally to resume. It appears to us that the risks will remain "event" driven and not necessarily economic or earnings related, as investors are ready to accept the war as an excuse for them to remain poor over the immediate future.
The Elliott Wave structure continues to support the case for one last downturn before a 5th and final intermediate term wave of decline looks like it would be complete. If this turns out to be the case it would still allow for quite a significant rally to begin as we move through the end of the year. In the event that the Dow does make another low, we think there will be an increasing number of bullish divergences developing as many indicators and stock issues have likely seen their lows for the move. This would help to guide us toward the next potential upturn and its developing leadership.
Short term resistance is between 91-9200, which repelled the first attempt to get above 9200. Higher resistance is near 9430, 9650-80 and near 10,000. Very sort term support begins at Friday s 8951 low, with more meaningful levels near the 9/26 high at 8618, with more 8472. A drop below this would indicate a deeper decline was under way, likely to at least test the 8235.81 closing low, and potentially to new lows and a minor 5th wave of decline. Lower support remains at 8062, and then near 7750, 74-7500 and 7000.
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TREASURIES
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Treasury yields didn t trade yesterday in accordance with the Columbus Day holiday. Here, the yield has come back down to touch a new low last week on the expectation for the military strike that did begin over the weekend. We think this has become fully discounted into prices and that the risks the Fed has been TOO accommodative will be the next risk that traders begin to focus on. The 5.274% low reached last Wednesday is the next key level, with the 3/22, 5.217% low likely to be another stiff barrier remaining just beneath it.
The extending rally was likely also the result of highly expected weaker economic results, and more saber rattling by our military and allies who claim to have solid evidence that Osama Bin Laden was directly behind the recent aggression. Stated on Friday, "We KNOW that there is likely to be further efforts to destabilize our economy, markets and society, while we also KNOW that the US will make their first strike at any time. We do not know for sure how the markets will react, but it will be likely that whatever the reaction, it will probably be short lived. Therefore, we prefer not to attempt to predict too much or recommend acting on this expectation."
The Treasury markets are now dramatically overbought and have stretched themselves into major resistance from the lows reached in March. Regardless of whether or not the yield reverses from here or from lower levels, we do not think the risk/reward makes any sense as an investment. The Fed may again cut rates to stimulate the markets and/or to calm fears of panic, but these actions are likely to be quickly reversed once order is restored and emotions cool down. Further, if the economy does begin to recover, the Fed will have to reverse these actions as many believe that the seeds of inflation are being sewn now, as prices begin to rise faster than incomes, or economic activity.
Last week s fading memory of the confirmed a bearish reversal by breaking support at 5.617% must now be considered the end of minor wave "4" of the rally that has continued. While we turned out to incorrectly interpret this, it now provides
The recent upside reversal to a high of 5.633% provides a clear level of key support to keep the overall bullish trend in tact. Ultimately, ANY push above this will confirm a major trend reversal. The rally also bullishly resolved the sell alert formation on our longer term P&F chart. Next resistance is at the key 5.217% level. Higher support remains near 5.80%, the 5/15, 5.901% high, and then near 6.00 - 6.025%. |
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GOLD
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Gold & the XAU continued to remain mixed yesterday with the futures higher and the XAU flat to lower. Prices appear to be consolidating here too. We also remain unimpressed with the price action in the face of the beginning of what is being called World War III. Ultimately, this will change, but for now, no one seems to be too interested. Perhaps another internal act of terror will be the spark but even the destruction of our nation s largest icon to the business world failed to boost the metals too much.
Our daily momentum indicators remain bearish after turning down from over-extended levels last week. Of course, this cannot rule out the potential for another "event" spike, but generally once this is factored into prices, the shock value has passed.
Initial XAU support is at the 9/6, 54.48 low, with more critical short term support still near 52. Beneath this, longer term support remains at the 2/14, 45.64 low and then at the 7/14/00, 41.61 all time low. A sustained breakout above 60.44 would be very bullish as it would also break above the long term downtrend line drawn from the 2/7/96, 155.60 high. Above this, the XAU will still have to contend with another substantial technical barrier and bearish chart formation (long term P&F formation, High Pole at the Bearish Resistance Line) before the long term trend can be considered bullish. A push above the 5/18, 66.54 high that also produced a major buying climax (BC) is needed to resolve this, requiring a move to 68 to do it. We remain neutral against these parameters.
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PORTFOLIO CHANGES |
Tuesday, October 9 , 2001: We plan to a second position to Three Com Systems (COMS) below $3.75. They still have $4.73 per share in cash and a book value of $6.61. They also recently announced a share buyback and that they ve made progress in improving their margins. This is also a good "January Effect" candidate, which has been starting earlier each year. We will probably sell the more expensive position before year end.
[Part of our offensive is to have a good defense! That means limiting losses and protecting gains]!
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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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