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Capsule Technical indicators remain mixed but short-term sentiment is back to negative. A medium-term low is closer than it a few weeks ago but has not been confirmed. Further work in the sentiment area is needed before a real exploitable rally can take hold. Look for more choppy and volatile behavior from the equity markets and possible new lows before. The bonds continue to move in opposite direction from stocks. A top of medium-term degree is close but not confirmed. The XAU is correcting the post October 25 advance. Further weakness near-term is expected but once complete the positive medium-term trend should reassert itself. Elliott Wave and Fibonacci I am still
approaching the post September decline in the S&P as either a “c” wave or a
second three from the March 24 peak. The weekly chart shows what looks best as
two distinct patterns from September. The first culminated in October and the
latter began in early November. Both of those declines are best counted as
corrective patterns. However, the
decline from November 6 can be counted as a completed a-b-c as the December
11-December 21 decline can be counted as a five on the daily chart. Thus it is
possible to count the pattern from September as a double three but that still
does not satisfy the pattern as either a “c” wave or even a second three from
March. That leaves us with a couple of possibilities regarding the post
September 1 decline. The first is that the entire structure is taking on the
form of a diagonal triangle with the December 21 low completing wave “c” of
that pattern. This pattern would need a modest new low below the low of
December 21 to finish off both the September and March declines and set the
stage for a large “b” wave rally. This would also put the S&P more in line
with the preferred count facing the NASDAQ 100. The rally from December 21 has
unfolded in corrective fashion stopping right close to a 50% retracement of the
decline from November 6 and has also overlapped the October 18 low (wave “a”).
If correct then a move back below the December 21 low is eminent but one
complete should set the stage for a very strong “b” wave rally. Since the post
September 1 decline has already well exceeded equality with the decline from
March 24 to April 14 (wave “a”) we should look for the post September 1 pattern to approach the
1.618 multiple of that decline. That would yield a price target just below the
1200 level (1185 to be exact). This interestingly is not far from a .618
retracement of the entire rally from October 1998 to March 2000. In addition,
if wave “e” is underway now and travels the same percentage of wave “c” that
wave “c” traveled of wave “a” (81%) we get a price target near 1200, which is
not too far from the 1183 level. The
alternate count is that the September decline is only the “a” wave of a larger
a-b-c. This would allow for a much bigger rally now and would be followed by a
“c” wave decline. The next couple of days will clear up a heck of a lot in
regards to the S&P. The decline from Wednesday’s peak is very close to a
.618 retracment of the rally from December 21 having violated a .618
retracement of the rally from Wednesday. A break of that level near 1285 would
then most likely confirm that the rally from December 21 was in fact wave “d”
of the diagonal triangle and the current decline wave “e”. The DJIA moved slightly above the November 6
high but could not break through important resistance in the 11,000-11,025
zone. This level has stopped the DJIA on three occasions since the October low
and is becoming more than just marginally important. Moreover, the rally from
December 21 is corrective on the daily chart and the entire post October rally
is also corrective. Whether the post December 21 rally is a “b” wave of a
slight irregular from November 6 or the completion of the rally from October 18
is not clear. Either count is possible but both allow for a move back below the
December 21 low. How that decline unfolds will be the key. There is still a
possibility of some sort of a triangle developing in the DJIA. However, I
cannot tell yet whether it is going to unfold as a bullish or bearish one and
furthermore if there is a triangle it is still next to impossible to confirm as
complete. A move above
the 11,050 area would be bullish but until that occurs the possibility of a
move back towards the October low is the more likely course of action for the
DJIA. The NASDAQ 100 did move below the December 21 low last week before
rallying sharply. The drop into last weeks low can be counted as the completion
of wave “e” from September 1, the completion of wave “a” of “e” or as the
completion of only wave “c”. My preference given all of the internal
relationships is that it was either the completion of wave ‘e” or more likely
wave ‘a” of “e”. The latter allows for a modest new low with Wednesday’s rally
most likely wave “b” of “e”. In either
case, if the decline is not complete it is most likely close and a modest new
low as is the case with the S&P could set the stage for a fairly strong intermediate
degree rally. There are clusters of internal support ranging from 1975 to 2050.
A break below 1902 would eliminate the bullish possibilities and set the stage
or an extension and possible acceleration of the decline. The hourly chart of
the S&P can be counted as a very clean five-wave decline from Thursday’s
high into Friday’s low The five-wave decline indicates lower prices. This can
occur in one of two ways. The first is after a rally that would also confirm
the five as a completed wave or immediately which in turn could turn the five
into a corrective pattern but in either case we should expect to see Friday’s
lows broken. The DJIA hourly chart also counts well as a five. The same that
applies for the S&P also applies for the DJIA It is possible in the DJIA to
count this five as a “c” wave of an irregular from Thursday. However, given the
depth of the retracement of the rally from Wednesday this is not the most likely count. The
NDX also shows a clean five wave drop from Thursday into Friday.. The five down
indicates lower prices. As is the case with the S&P this can occur after a
rally of immediately. Support: S&P 1285-1290, 1250-1254, 1200-1204, DJIA;
10,550-10,562, 10,180-10,200, NDX; 2250-2265, 1970-2020. Resistance: S&P;
1316-1318, 1328-1331, DJIA: 10,780-10,792, 10,874-10,900, NDX; 2363-2372, 2435-2446. Trend changes for the
next two weeks
are as follows: January 8, January 13, January 17-18***, January 20. ***
extremely important.
Bonds The bonds have exceeded the upper end of resistance by a very modest amount. However, the most important factor to keep in mind is that the rally from January 2000 remains corrective and should still be viewed as a second or “B” wave from the October 1998 to January 2000 decline. Given the pattern that is unfolding I am now counting the rally from September’s low as either a second three or a “c” wave from January. The rally is so far a three wave pattern on the daily and weekly chart so if a “c” wave is correct we should see one more modest new high above the high of last Wednesday. The rally from Wednesday’s low has moved into the area of a .618 retracment of Wednesday’s reversal and decline. This rally is either a “b” or second wave from last weeks peak or the beginning of wave 5 from September. At this point it can go either way but this weeks early action will be the key. The daily range oscillators such as RSI have turned down from overbought levels and have left a negative divergence in place. The daily trend oscillators have also moved lower and are also showing negative divergences. Short-term momentum is negative. The weekly range oscillators are slightly overbought. The weekly trend oscillators are positive. Medium-term momentum is slightly positive. Sentiment measures remain very negative with Consensus Inc. at 62% bulls and Market Vane at an overly excessive 82% bulls. Support: 103 17/32 +/- 10/32 and 102 17/32 +/-12/32. Resistance: 105 23/32+/- 5/32, 107 21/32+/-12/32. The bonds have continued to move completely opposite to the equity market. That was very apparent on Wednesday as stocks rallied sharply while bonds reversed course and had their worst one ay performance in a very long time. Momentum is weak and turning negative while sentiment is excessive. A modest new high is not out of the question over the near term especially is stocks weaken further but the bottom line is that if a top is not in it is very close. I am going to remain in the bearish camp for both the short and medium-term. XAU The rally from October to December 21 is a clean five-wave pattern on both the daily and weekly charts. The decline from that high is corrective. The decline has exceeded levels that would have allowed for the possibility that it was only correcting the post December 13 advance leaving little doubt that it is correcting the entire rally from October’s low. This, however, further confirms that the rally is a five and that the decline is correcting only that rally. This also indicates that once the correction runs its course a move back above the December 21 high is expected as wave 3 or “c” unfolds. This would in turn add further support to the idea that October 25 did indeed mark the completion of the diagonal triangle from September 1998 and also wave 5 from 1996. There is support at 48.50, 47.83 and important support near 46.50. Resistance will be found at 51-66 and 53.30-53.50. A move above the latter would confirm that wave 3 or “c” was underway. Short-term momentum is still weak and while it is possible to count the correction as complete I suspect we have more to go and that the current decline is only part of the pattern. As such I am going to stay neutral for the short-term. Medium and long-term I remain very bullish. Indicator Review
After a modest year end rally the averages went back on the defensive last week with all of the major averages closing sharply lower. The DJIA managed to hold onto a small piece of those gains. The NYSE Composite was nearly flat while the S&P gave it all back and then some. Last week, however, was not without its thrills as we were witness to some fairly strong price swings and some marked increase in volatility as if 2000 wasn’t wild enough as it was. January has been known to set the pace for the year. That was clear last year as January was down and the S&P produced its worst yearly performance since 1981. The first five trading days of the new- year have a high correlation to the month as a whole. So far the S&P is down quite sharply and Monday is day five. It will be interesting to see not only how Monday goes but the entire month as well. Volume patterns were interesting last week. The strong reversal day on Wednesday as the FED lowered interest rates produced record volume and had looked rather bullish. However, the following day, Thursday saw prices fail to follow-through and close down sharply and they did so on even bigger volume turning a positive into what appears to be a big negative. This also occurred near important resistance at just above 11,000 on the DJIA and not far from a declining trend line on the S&P. Breadth on the other hand has remained very positive. Last week both the daily and weekly A/D lines scored gains and fairly solid gains in spite of the weakness in the averages. This may be due in some part to positive seasonal factors but still has to be viewed as somewhat positive. The high/low statistics are showing similar positive patterns with the number of new highs doing quite well. However, the list is dominated by closed end funds and preferred issues while the number of common stocks on the list are not as impressive. Nonetheless the high/ low indicators adjusted for non-common issues are still positive. The Russell 2000 ended last week down sharply and gave back nearly all of the previous weeks gains. I am going to stay neutral fro the short-term and move back to neutral on the medium-term as well. The value-line was also lower last week but only slightly so and did manage to hold onto a good deal of the gains from the last week of 2000. The short-term is neutral. The medium-term is slightly positive but also very close to moving back to neutral. Early this coming week will be the key for this average. The NASDAQ Composite and the NASDAQ 100 remained under pressure as they lost 2.5% and 3.1% respectively last week. This was in spite of the fact that they had their largest point and percentage gain ever on Wednesday. Unlike the listed averages they did not rally in the last week of 2000 and continue to under perform. The short-term is neutral but close to important support. I am moving back to neutral on the medium-term and the possibility of a modest new low has risen dramatically. The DJTA has had a stellar two weeks. It is extended and very overbought short-term and I am neutral. The medium-term is very positive and looks a lot higher. The DJUA and UTY recorded huge losses last week in excess of 14%. The breakout in late December was a false one and has failed badly confirming both a short and medium-term reversal. The short-term is negative but very oversold and a rally could happen at any time. The medium-term is negative and looks considerably lower. The long-term is neutral but close to confirming an important top. The breadth oscillator is very overbought but has also reached thrust levels that under normal circumstances imply a kick off to a medium-term advance. The volume oscillator is overbought but has yet to reach thrust levels. The 3-day oscillator is at neutral levels but also on a short-term sell signal. The McClellan oscillator is slightly overbought but also diverging and on a short-term sell signal. The 10-day and open 10-day Arms are still deeply oversold. The 5-day and 21-day Arms are also oversold. The daily range oscillators are neutral. The daily trend oscillators are neutral. They could turn negative on any further weakness or positive on any strength. The weekly breadth oscillators are close to overbought but are also positive. The weekly range oscillators are neutral. The weekly trend oscillators are negative but beginning to ease. The technical barometer has weakened considerably and is at its most negative combined level since just before the July 1998 top. It is designed to forecast turns from three to five months. In 1998 for example it was even more negative in February and five months later we had a second sell signal in July. I would view the current reading as short-term negative and a warning sign for the spring The sentiment composite has eased but is still slightly neutral at +9. The sentiment polls continue to give off mixed results. Both Consensus Inc. and Market Vane remain very bullish and are at levels that tend to support a good rally. Investors Intelligence has improved a bit but even so the bull/bear ratio is still negative and has a long way to go before even hitting neutral levels let alone bullish levels. We have also seen some minor improvement in the American Association of Individual Investors (AAII) report but there is still far more bulls than bears and this measure of public sentiment has a long way to go before becoming even slightly positive. NYSE members have continued to be net buyers and have done so for 12 straight weeks This is one of the more bullish indicators. The insider sell/buy ratio is neutral. The CBOE put to call ratio is not excessive but is nonetheless slightly negative. What was negative was just how quickly it moved lower after only one day of rally. The OEX ratio is extremely negative. The Rydex ratio is neutral but closer to bullish. There was also some improvement in the levels of assets in both Ursa and Arktos, but neither are anywhere near levels seen at good lows and both have just reached levels seen near tops. So while they are improving they still have a long way to go. Summary and Conclusion Coming into the new year I was of the view that the market was getting closer to a good medium-term low that could once complete set the stage for a solid medium-term rally. I had, after Wednesday, thought that that low was in place. It was not based on the FED’s lowering of interest rates that day no it was based on the strong technical readings generated on the rally. We saw record volume accompanying a solid reversal day along with strong upside momentum. Frankly my opinion has not changed. I still see the market as being close to completing a medium-term bottom and setting the stage for a solid multi week and possibly multi month rally. In fact it is still possible that Wednesday did in fact complete that process and the subsequent decline into Friday is still only a correction of that rally like I had originally thought on Thursday. We did generate some positive medium-term momentum from a few breadth related indicators and the Arms indexes remain extremely oversold. In fact, they have been oversold for an exceptionally long time. We are also seeing very positive readings from a couple of sentiment polls as both Consensus Inc and Market Vane are at levels basis their 4 week moving averages that have been seen near other good trading lows. However, the failure to show even an iota of follow-through to Wednesday’s strong gains and to cap it off on Thursday with even heavier volume as the averages essentially failed is a big concern. Moreover, the rally produced another of those sharp drops in the short-term sentiment indicators such as the put to call ratio and the Rydex numbers. This has been a rally killer throughout most of last year and it looks like nothing has changed. This has been one of my bigger concerns and one of the major factors keeping me cautious. In fact, I have yet to see a real give up or capitulation and that is something that I fell is going to be necessary before a the rally I am expecting will get underway for real. That said the market still has some work to do before this rally I am expecting gets underway. It may involve more base building or sideways action or it may need further new lows to set up the sentiment indicators in a better position to allow for a more sustained advance. That is not to say that we cannot rally from here. It is indeed possible but given the speed in which these indicators turn will most likely keep a lid on the upside. Keep in mind that good medium-term rallies are usually greeted with skepticism not an almost immediate acceptance. That proverbial “wall of worry” is just not there yet in some areas. I moved back to neutral on the short-term on Thursday and see no reason to switch at this time. I saw enough on Thursday and especially Friday to reverse the bullish signal for the medium-term and I am going back to neutral. While I do see a rally coming it is not the beginning of a new bull market but a continuation of the topping process that began last year. I do see the possibility of new highs in some of the averages. The NYSE Composite and the Value-line look to need another new high to complete their post 1998 pattern. The DJIA is 50/50 but a new high is possible. As far as the S&P and the NASDAQ my view there is that the rally can be very dynamic, especially the NASDAQ but it will be nothing more than a bear market rally. Long-term I remain bearish. Stock index futures traders are flat. Stand aside for the morning. Rydex switchers are holding a 20% Ursa and 40% precious metals position. Make sure to call the Noon Pacific hotline for any changes. The
daily chart of the S&P shows two distinct three-wave patterns from the
September 1 peak. The December 21 low either completed a double three from that
high with the rally into Wednesday wave “a” of a larger “b” wave or the rally
into Wednesday was all or most of a “d” wave of a diagonal triangle from
September 1. Note the clear three-wave rally into Wednesday and also the
overlap with the October 18 low.
The
breadth oscillator has broken out and moved to levels that have been consistent
with medium-term momentum thrusts. It is not as bullish as it was coming off
the 1198 low but is bullish. The volume oscillator while overbought has not
broken out and is nowhere near where it was following the 1998 low. This lack
of conformation suggests to me that while the breadth oscillator is positive it
is not as bullish as it was in 1998. The
McClellan oscillator in late December also reached levels that could be viewed
as a thrust signal. However, it failed to confirm the higher high on January 3
and has turned down leaving a negative divergence in place. It is still
overbought and short-term negative.
The
3-day oscillator is showing a similar pattern to the McClellan oscillator. In
fact, it looks quite like the pattern seen at the December 11 top. This key
short-term indicator is on a sell signal. The
asset level in both Ursa and Arktos did improve a bit on Friday but on
Wednesday both moved below the level seen at both the December 11 and November
6 peaks. In addition, they have yet to come close to levels seen at the late
November or mid October low.
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