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Capsule The short-term indicators are bearish and the decline that began last week has further to run. However, a number of sentiment indicators are very negative and this needs to be corrected before a sustainable advance can get underway. Medium-term the technical backdrop is improving and I am still of the view that a fairly strong rally is not too far off but a deep test or even a break below the early January low for the NASDAQ averages and the late December low for the S&P is a possibility. The bonds have improved and a move above the early January peak is a strong possibility to complete the topping process from mid September. The XAU is getting closer to finishing up its post December 15 correction and a move above the December peak is expected once this pattern runs its course. Elliott Wave and Fibonacci The S&P completed wave 5 from 1987 at either the March or September 200 peak. The decline from September breaks down nicely as a three-wave pattern on both the daily and weekly charts, with the third wave beginning on November 6. The post November 6 pattern can be counted as a simple a-b-c structure as can the September 1 to October 18 pattern. Thus the entire structure can be counted as a very clean double three. The decline from March to April counts out cleanly as a simple a-b-c three-wave structure. If the orthodox peak did in fact occur in March than the entire structure would have to unfold as an a-b-c or a double three. Since it is impossible to count the September 1 decline as either a c wave or an a-b-c that leaves us with two possibilities. The first is that the March peak was the orthodox high of wave 5 and the post September 1 decline is only the a wave of a larger pattern. And wave c is about to unfold to carry the S&P back below the December 21 low. The other possibility is that the orthodox high of wave 5 and in turn the entire post 1987 advance occurred on September 1. At this point I have no preference. I do need to point out that even if we are about to enter a c wave from the September peak and move below the December 21 low this would not settle the point as to whether the orthodox peak of wave 5 occurred in March or September. However, if we do not move to new lows and do so in a five wave c wave it would add a lot of strength to the idea that September was in fact it. From a wave perspective either peak will do and really the only reason I favor March is that the high on March 24 was 1552 and that was only two points from my long-standing target of 1550 first discussed in early 1999. However, the 1530 level reached in September was less than 2 percent from 1550 and that is quite close. In any case a five-wave pattern from 1987 is complete and is in the early stages of being corrected. Moreover, it is definitely alternating from the wave 2 1987 crash and that adds further support to the longer-term counts that we are indeed in a fourth wave. There had been a possibility discussed in the last report (January 22) that the rally from December 21 was a d wave of a diagonal triangle from September 1. I also mentioned that if the S&P moved above the January 5 low it would likely invalidate that count as the S&P would have moved above the 50% retracement of the post November 6 rally, which was wave c of that pattern. Well the S&P not only moved above the January 5 peak but also moved above the .618 retracement of the November 6 rally. Unless wave d is going to unfold as a triangle, and since it is a fourth wave that is indeed possible, this count is not correct. While there is an outside chance that the rally from December 21 low is a d wave from September 1 it is much more likely that it is either all or part of a b wave from September 1. If it is all of a b wave then we will know soon enough as a five wave decline should unfold. If not then it is most likely that the rally was an a wave of a larger pattern. Whether that pattern turns out to be a triangle or a flat is another question and one that cannot be answered with any degree of confidence at this time. The DJIA continues to frustrate as it relates to the Elliott pattern. It did once gain fail right near the 11,000 level and that was the third time the DJIA has turned back from this level. On a long-term basis we have a satisfactory five-weave pattern from October 1998 to January 2000 completing a large five-wave structure from October (December 1987. I am currently counting the decline from January to October of last year as a simple flat and at this time I am viewing that decline as wave a of intermediate wave 4. Since it is a fourth wave it is not necessary for those lows to be broken as it is possible that the entire structure can evolve as a triangle. Given the excesses that have built up in the market over the past several years this is not my preferred count but it is a possibility that the DJIA may stay in an extended trading range for quite a long time. On a shorter-term basis, the DJIA came within 4 points or so of the early January peak but did not take it out. The rally from the January 12 low is a three and since it did not take out the early January peak it is possible that this rally was part of the post November 6 triangle discussed in the January 22 letter. If so it would most likely be a d wave and that would bring us one step closer to a positive resolution on the short-term. However, as has been the case for what seems like an eternity on the DJIA there are any number of possible counts including the pact that last week completed a more complex b wave from November 30. Until the DJIA moves decisively above the 11,050 level or below support just below 10,500 the wave structure will remain unclear for the short to medium-term.. Unlike the S&P, the NDX did in fact move below its December low in early January and can be counted as having completed a five-wave diagonal triangle from the September 1 high. This is not the cleanest of counts but it is possible. The rally from early January has unfolded in what is clearly a three-wave pattern on the daily chart and also stopped right near a 50% retracement of the post October 20 decline, Thus it is possible that this rally was wave d of a diagonal c wave from September 1. Ass mentioned above it is possible to count that pattern as already complete at the early January low but it would give the structure a better look if we got a lower low now and it (a lower low) would hopefully relieve some of the excessive complacency that has built up (more on this later). As discussed through most of last week it is possible to count the rally from January 26 on the S&P as a fifth wave from January 8 and the January 8 rally as a c wave from December 21. The decline on Friday took the S&P deep enough into the post January 26 low to suggest that the S&P is correcting the entire post January rally but more likely the post December 21 advance at a minimum. The DJIA on Friday did confirm my suspicions that the rally from Thursday was a post triangle thrust. There is a clean five-wave rally from January 26, which is best counted as a c wave from January 12. This was also confirmed on the daily chart as the DJIA moved below Thursdays low. The NDX moved well below the January 26 low and in fact moved below the previous weeks low confirming the rally from January as a completed wave on the weekly chart and as a three. It is possible that the NDX is close to completing a zig-zag from January 24 but it is equally possible that the NDX is in a third wave from January 24. There is a five wave pattenr that can be counted as complete from Thursday so a bounce is possible but further weakness early Monday would confirm that the post January 30 decline was extending. Support: S&P; 1340-1342, 1316-1319, DJIA; 10765-10,775, 10,679-10,690, 10,480-10,500, NDX; 2429-2435, 2349-2358, 2320-2329. Resistance: S&P; 1359-1360, 1367-1370, DJIA; 10,950-10,960, 11,000-11,050, NDX; 2565-2571, 2625-2637. Trend changes for the next two-week are as follows: February 6-8, February 13, February 15-16. All are important. Bonds The bond rally from the January 25 low is so far a three-wave structure but rallied far enough to lock in the decline from January 3 as a three. Since the decline from October 1988 to January 2000 is a five it implies that the next wave down also has to unfold as a five. The fact that the post January 3 decline is a three is a strong argument that wave 2 or b is not complete and a move back above the January 3 high is a likely prospect. How that will play out, however, is another question. One thing is clear and that is that the rally from January 2000 is corrective. The easiest of patterns is that the rally from September 25 is a c wave. Since that rally is so far a three then it would go without saying that the post January 3 decline is wave 4. The decline into January 25 slightly exceeded a 50% retracement of what can be counted as wave 3. This was not enough to completely invalidate it as all of wave 4 but does leave open the possibility that the bonds are in the early stages of a fourth wave triangle and could remain in a range for a while longer. The daily range oscillators are neutral. The daily trend oscillators have turned positive and short-term momentum is slightly on the positive side. The weekly range oscillators are neutral to weak. The weekly trend oscillators are negative and medium-term momentum is weak. Sentiment is mixed with Market Vane at 72% bulls is quite negative while Consensus Inc was a more benign 39% bulls. Support: 103 3/32 +/-7/32, 101 17/32 +/-17/32. Resistance: 105 06/32 +/-6/32, 106 25/32-107. Short-term momentum is slightly positive and along with the wave structure supports the idea that a modest new high is possible, especially if stock weaken further. However, long-term Elliott counts and the weak medium-term momentum backdrop argue strongly that any new high over the next few weeks will likely be the culmination of a larger pattern. I am going to move from neutral to bullish on the short-term and remain neutral on the medium-term. XAU The XAU shows a clean five-wave advance from late October into mid December on both the daily and weekly charts. The correction that has evolved from that peak is unfolding in what is a clear corrective fashion. Thus it remains my view that the post December 15 decline is a second or b wave from October and that a third or c wave is not far off. From purely wave form the minimum requirements are in place to support the idea that the correction is over as last weeks low did slightly penetrate the January 12 low not far from the fourth wave of previous degree. Short-term momentum indicators are showing positive divergences at this low but until the trend oscillators either turn up, and they are close and we move through resistance just above 51.20 a move back below last weeks low towards support just above 46 can-not be ruled out. While the short-term is improving I am going to remain neutral until we get further conformation Medium and long-term momentum remain positive and along with the wave structure support the idea that once this correction is behind us a dynamic rally is to be expected. Adding further to the bullish argument is the fact that sentiment on gold futures as reported by Market Vane and Consensus Inc. remain quite subdued and bullish. Whether we get one final shakeout on the short-term the medium and long-term remains bullish. Indicator Review
The DJIA ended the month of January nearly flat as it gained .51 points while the S&P did close higher. Thus the January barometer does point to higher prices for 2001. Late last week the DJIA began to rally while tech stocks were weak reversing the pattern seen earlier in the month and continuing a pattern that has been in place for well over 18 months. I still believe that the market is in the process completing a medium-term shift in relative strength back towards technology but some further development in that process is likely. Keep in mind that I view this as only a medium-term shift and part of a bear market rally in technology and the NASDAQ. The S&P was able to break a declining trend line drawn off the September 1 and November 6 high but the follow-through was not real impressive. It is, however holding above that line so from that perspective it is a plus. The DJIA rallied right back into resistance around 11,000 that has stopped it in early November and again in early January. Price/volume relationships have been weak to negative as volume has slowed as the rally has progressed. It is neutral to weak. Breadth, on the other hand has held up very well and has on most days been as good or stronger than the averages. However, the past few days of last week it has begun to slip a bit but on balance both the daily and weekly totals have been good. The daily new highs have been good during the recent rally but are also failing to move above their late December-early January peaks and this has set off short-term divergences. The new lows have been almost non-existent and of little consequence. On a weekly basis the new highs have expanded and is positive as is the weekly high/low indicator. The Russell 2000 has rallied the past two weeks but gave a lot of it back late last week. The short-term is back to neutral and close to going negative. The medium-term is slightly positive. The Value-line also had a good two weeks but like the RUT fell off sharply late last week. I am moving to bearish from neutral on the short-term. Medium-term I am slightly positive but not exceptionally so. The NASDAQ averages reversed their early month strength and ended lower the past two weeks losing well over 6%. The short-term momentum indicators have turned down and I have moved to bearish late last week. The medium-term is neutral. It is improving but there is still some risk. The DJTA had a good couple of weeks and moved back towards the area of the January 4 peak. The short-term is neutral. The medium-term is still positive but is weakening. The DJUA and UTY rallied strongly. The short-term oversold condition has been completely relieved and the rally carried both right into important resistance. The short-term is still neutral but the majority of the rally is likely behind us. I remain bearish on both the medium and long-term. The breadth oscillator is overbought and continues to diverge. The volume oscillator is showing a similar pattern. And both are on short-term sell signals. The 3-day oscillator is on a confirmed sell signal and has a long way to go before reaching oversold levels. The McClellan oscillator is neutral but very week and has been declining in spite of the rallies last week. It is well below its peak and on a short-term sell signal. The 10-day and open 10-day Arms are neutral but are closer to oversold especially the open 10. However, both have moved down sharply from their extreme readings and are not as favorable as they were a few weeks back. The 5-day Arms is neutral but closer to overbought. The 21-day Arms is close to neutral but still positive. The daily range oscillators are neutral but close to turning down. The daily trend oscillators are positive on the DJIA and neutral but close to a sell signal on the S&P. Weekly breadth measures are overbought and in need of a correction but did reach levels tend to support the idea that a medium-term advance is close at hand. The weekly range oscillators are still weak but are rising from oversold levels. The weekly trend oscillators are turning up and are positive. The sentiment composite at +9 is neutral but only marginally so. Investors Intelligence reported 61% bulls this past week and has been close to 57% bulls for 4 weeks and over 50% for 12 straight weeks. This is not the kind of readings from this indicator seen at bottoms but more so tops. The percentage of bears is down to 30% not excessive but still very low as is the bull/bear ratio. Market Vane moved up a bit but remains favorable. The same is true of Consensus Inc. However, the American Association of Individual Investors (AAII) reported net bulls at +31 and this key measure of public sentiment remains extremely negative. The insider sell/buy ratio has increased a lot in the past few weeks. Although still neutral the 8 week moving average is at its highest level since July of 1998 when it was beginning to head down from bearish levels. The most positive of the sentiment indicators that I follow continues to be the member sell/buy ratio and this is very positive. The CBOE put to call ratio has moved down sharply basis the 10-day moving average. It is not as bearish as it was in September but did move below its early November low. The OEX ratio has improved and is high neutral. The Rydex ratios have also weakened. The Nova to Ursa ratio surpassed its September and November peak and the overall ratio came close. The levels of assets in Arktos improved late last week but is still very close to a multi year low while the Ursa level did on Friday hit multi year lows. These key indicators remain very negative. Summary and Conclusion There has been some very fine work done on the presidential cycle and its historic patterns. Most notable has been from Sherman and Tom McClellan of The McClellan Market Report. The presidential cycle fits in perfectly with the four-year cycle, which by the way is not due to bottom until sometime in late 2002. There is also a decennial pattern, and although I am not as familiar with it, it does have some merit. There has been only 4 occurrences, for which I have data that the presidential election has occurred in the first year of a new decade. Those were 1020, 1940, 1960 and 1980. The fifth occurred just this past year in 2000. Combining both the presidential pattern or four year cycle with the decennial pattern yielded some interesting results. On three of four occasions, 1982 being the exception, the low recorded in the second year of the decade and presidential cycle moved well below the interim low seen in the year of the presidential election year and the zero year of the decennial pattern. In 1982 it did come close. There was, on all four occasions an interim rally in the first year of the pattern but they yielded vastly different results. In 1920 and 1940 the DJIA did little if anything and essentially moved sideways. In 1961 following the 1960 low we actually saw a modest new high that was followed by a near 30% decline into the 1962 low. And in 1981 the DJIA rallied back to the 1000 level, which had been a serious resistance point as far back as 1966. The average decline from peak to trough from years zero to two was close to 35% and only once did the DJIA make new highs. If we are to follow the pattern this time around then a rally should occur this year, the odds of new highs in the DJIA are minor but a possibility and the most important factor is that a move below the lows recorded last year is highly likely into the four year cycle low due in 2002. As longer-term readers are aware, I do not put much emphasis on cycles but this does seem to fit in well with my longer-term wave counts so it bears watching. A number of momentum indicators have reached levels that are consistent with the initiation phase of a good medium-term advance. This includes the breadth and volume oscillators I follow as well as the McClellan summation index. Weekly breadth measures have also moved up high enough to support higher prices on a medium-term basis. I am very impressed with the action in the A/D line and view this as a plus and last week we saw a very sharp rise in the weekly new highs. However, the new high list has been dominated by closed end bond funds and preferred stocks and not by common stocks and this can be seen in the daily list of new highs, which by the way peaked in late December. There is probably some distortions in the A/D lines due to this but how much is not easy to tell. However, on the surface we have to respect what they are saying and I am viewing these developments as bullish on a medium-term basis. In addition the weekly trend oscillators have turned up and are now positive. That said, the short-term picture has turned more negative over the past two weeks. The breadth and volume oscillators are still overbought and diverging and are close to rolling over while the McClellan oscillator has been making a series of lower lows having peaked back in late December. The weekly breadth oscillators while bullish medium-term are also at levels that suggest a decline is likely. But the most negative aspect of the market remains the sentiment backdrop. I know I have been harping on this but given the circumstances it is in my view a very important development that needs to be corrected before a sustained advance can unfold. Investors Intelligence at 61% bulls and the American Association of Individual Investors at only 19% bears are just not consistent with important medium-term lows. In addition, the CBOE put to call ratio, basis the 10-day moving average moved below where it stood at the early November peak while the Rydex ratios did likewise. Short-term I remain bearish and expect to see lower prices. On a medium-term basis nothing has changed. The S&P is in the process of completing a bottom that will allow for a solid bear market rally. There is a possibility that the S&P and NASDAQ averages can make new lows. This in fact may be necessary to get rid of the huge complacency that has built up to allow for the rally to be sustainable. If the sentiment backdrop is not corrected the rally may well be very limited in terms of points. I have been debating as to whether or not to issue a sell signal for the medium-term as there is a decent chance that a break of the lows is possible. It is risky but given the sentiment backdrop and the short-term technicals I am going to move to bearish from neutral on the medium-term in the anticipation of setting up for a better buy signal. Long-term I remain bearish. We are holding a short position in the QQQs from 65
5/8. They closed at 61.50. The stop was
lowered to 65.40. Cover ½ of the position at 60.60 or better. Make sure to call the early morning hotline
for any changes. 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
breadth oscillator did reach levels in early January that are consistent with
medium-term strength. However, short-term it is showing a number of divergences
and remains overbought. This volume oscillator is showing a similar pattern and
both are short-term negative. The
high/low index below has moved up strongly and has also reached levels
indicative of medium-term strength as it is well above the 80% level.
While
the high/low index on the preceding page is bullish the chart above shows that
the number of new highs peaked in late December and have not as yet come close
to those levels. This is another short-term negative. The
chart below shows the two Rydex ratios I follow. The top chart is the Nova to
Ursa ratio. It just moved above the levels seen at both the September and
November peak. The lower chart is the Nova + OTC to Ursa ratio. It just hit the
level seen at the November peak. Neither are anywhere close to where they get
at important lows and this key indicator is extremely negative.
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