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Capsule The decline from the January peak has done a lot to undo the excesses that had built up during the January rally. Momentum is now at or near oversold levels and a number of sentiment indicators are at levels seen near good medium-term lows. It is my view that the bulk of the decline is over and that the market is setting up for a solid medium-term bear market rally that could last for several months. The bonds have remained in a tight range with a lot of volatility. This may continue for the short-term but the medium-term remains negative. The XAU has confirmed that the corrective process from late December is over and wave 3 or “c” from late October is underway. Sentiment is excessively negative and momentum in all time frames is bullish. Elliott Wave and Fibonacci In the February 5 issue I made the following comment, “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”. This S&P did clearly fall below the December 21 low and is also declining in clearly impulsive fashion but so far anyway it has not settled the debate as to whether the March or September peak’s last year represent the orthodox top of the post 1987 advance. And frankly at this point it really does not matter (it will down the road, however). The decline from January 31 is, as mentioned above taking on very impulsive characteristics. I am counting the decline as a “c” wave but at present we cannot determine whether this “c” wave is related to the September-December decline or is it wave “c” from November. If the former then we could count the entire post September decline as a simple or maybe not so simple a-b-c and a second three from March of last year. If the latter than the post September decline would have to be counted as a double three lending support to the idea that September was in fact the orthodox peak of intermediate wave 3. The rally from December 21 to January 31 did exceed a .618 retracement of the November 6 to December 21 decline by a decent enough margin to suggest that the rally was correcting the decline from September to December 21. Moreover, the post December 21 dadvance stopped about 8 points from a 50% retracement of that decline, which adds support to the idea that the decline from January 31 is a “c” wave related to the post September decline. Fibonacci price relationships with the September to December 21 “a” wave give us two possible targets. The first is 1212 where ”c” would be .618 “a”. The other is 1107 where “a” and “c” would be equal. A 1.618 multiple of the March-April decline yields a target near 1184 while a .618 retracement of the post 1998 advance is 1164. These areas seem more reasonable a target. It is possible to count the decline from January 31 as a completed five wave pattern on the daily chart but that would involve a very extended fifth wave. I point this out because Friday’s low was 1215 and that is very close to the 1212 level mentioned above. However, while there is an acceptable five already in place it is much more likely that the decline from February 15 is wave .3 of iii leaving a couple of 4’s and 5’s left to finish off the pattern. It is also interesting to note that the decline from February 15 was almost perfect 1.618 multiple of wave .1 of iii. The hourly chart from February 15 can be counted as a completed five on Friday February 23 but ideally one more minor new lows would give the pattern a better look but in either case a rally is close at hand. The bottom line for the S&P is that the bulk of the post January decline is likely behind us with wave .3 of iii either complete or nearly so leaving a couple of 4’s and 5’s to finish up the pattern and set the stage for a very strong “b” wave rally. The DJIA after several attempts at resistance near 11,000 broke badly last week confirming that area once again as very important resistance. The pattern from October 18 to the February 6 low is corrective but still hard to decipher. The initial rally from October 18 to November 6 can be counted as a five. The subsequent advance from November 30 or December 21 is corrective. This rally is either a “b” wave of an irregular from November 30 or December 21 or a “c” wave diagonal triangle from November 30. The latter confirms the post October rally as corrective. The former allows for the possibility that the entire post November 6 pattern as correcting the October 18 five wave rally. In spite of it all the DJIA has yet to penetrate the .618 retracement of the rally from October 18 and in spite of last weeks sharp break it is still holding above the double bottom low of November 30 and December 21. However, the way in which the DJIA fell last week does seem to fit in with the idea that a diagonal triangle did complete but at this point nothing is confirmed. If we are in a “c” wave beginning on February 6 we still do not have a five wave pattern in place so further downside would be expected. The decline from last Tuesday’s peak can be counted as a five on the hourly chart and also as wave .3 of ii. This leaves open the possibility of a small fourth wave rally to get underway now. The nature of any further will tell us a lot about where the DJIA is within its pattern. I am counting the post January 24 decline in the NDX as a fifth wave from September. The post February 15 decline can be counted as a completed five on the hourly chart. As is the case with the S&P, this decline can be counted as fifth wave from January 24. This wave would be slightly extended but not to the extent of the S&P. In fact the post February 15 decline was not even equal to the January 31 February 14 decline let alone 1.618 its length like the S&P. This adds a bit of weight to the possibility that Friday did in fact complete the post January decline. Given the S&P’s heavy weighting in technology stocks it is hard to imagine lower lows in the S&P, which looks necessary while the NDX has already made its low. However, that would not be unlike what we saw in opposite going into the January top as the NDX peaked on January 24 while the S&P did not peak until a week later. So, while it is possible that the NDX like the S&P may need a couple of small 4’s and 5’s to complete its January decline it is also a reasonable expectation that the NDX has already completed its five wave pattern on Friday. The NDX may need couple of modest new lows below last weeks low is possible to complete the pattern as far back as September but it is possible that the low is already in place. The nature of any further rally will be important. The bottom line for the NDX is that even in a worst case scenario the bulk of the decline is behind us and the NDX is setting up for a very solid bear market rally. Support: S&P; 1226-1228, 1210-1212, 1198-1200, DJIA; 10,345-10,355, 10,175-10,195, NDX; 2120-2125, 2179-2188. Resistance: S&P; 1259-1260, 1273-1275, DJIA; 10,520-10,528, 10,595-10,606, NDX; 2121-2127, 2173-2180. Trend changes for the next two-week are as follows: February 28-March 1, and March 5-6. Both periods are very important. Bonds From the January 25 low the bonds have rallied and declined in what is best counted as three-wave patterns. Last weeks decline did not violate the January 25 low. This, along with the fact that we are looking at corrective patterns leaves open the possibility that the bonds are tracing out a triangle from the January 3 high as discussed in the last report. As long as the January 15 low near 101 25/32 holds this will remain a good possibility. I am counting this possible triangle as a fifth wave from September, which would also be a larger “c” wave from the January 2000 low. This in turn would complete a large corrective rally from October of 1998. The daily range oscillators are neutral but weak. The daily trend oscillators are negative and short-term momentum is negative. Medium-term range oscillators are just starting to turn down from near overbought levels and are slightly negative. The weekly trend oscillators have also just turned down. Medium-term momentum is negative. Sentiment remains mixed with Market Vane remaining negative at 61% bulls while Consensus Inc is close to bullish at 31% bulls. Support: 101 25/32, 101 +/-10/32. Resistance:105+/-6/32, 106 25/32-107. The bonds have been in a trading range since early January. The sentiment indicators reflect that as one poll is near bullish and the other bearish. As long as the trading range remains in tact a push to a modest new high to complete the pattern from September and as far back as January 2000 remains a viable possibility. I remain neutral for the short-term. In spite of the possibility of a modest new high we are still faced with a very negative medium-term momentum picture that keeps me in the bearish camp. XAU I have been viewing the post December pattern in the XAU as corrective. The last few weeks especially have been frustrating indeed but the action of the past week has confirmed that the pattern down was corrective while the action on Friday looks to have confirmed that the corrective pattern is over. The XAU moved well enough above a .618 retracement of the wave 2 or “b” decline to suggest that to be the case. Short-term momentum and the daily trend oscillators have turned up joining an already positive weekly and monthly momentum picture, and adding further conformation to the idea that wave 3 or “c” from last October is underway. The latest survey from Market Vane and Consensus Inc show the percentage of bulls at an extremely low, and from a contrary view bullish, 14% and 16% bulls respectively. Just a couple of weeks ago a national weekly publication ran an article suggesting that gold may never again rally. I am of course paraphrasing but the essence of the article was just that. This is not unlike the death of equities cover in 1982. I guess after 21 years of bear market action this should be the kind of mindset we should see. The kind of mindset that sets the stage for a major reversal. This is not unlike, but in reverse to what we saw last year in stocks after a virtual 18 year rise. There is minor support at 49.10 and then 48.50. There is some modest resistance near 52 and 53.26 with more important targets near 58-60. While there is always a possibility that the rally from February 15 is a “b” wave from late December, the sentiment and momentum backdrop argue strongly that the next wave up from the October 2000 low is underway and in the early stages of the advance. I am bullish in all time frames. Indicator Review
February is almost behind us and it sure has not been as kind as January was. With only three days to go before months end the DJIA S&P and NYSE Composite have not only wiped out all of January’s gains they did so in very convincing fashion. The S&P is showing a loss for the year of 75 points or 5.68%, the DJIA is down 345 points or 3.2% and the broad based NYSE Composite has given up 33 points or just over 5%. The DJIA is still holding above its November-December double bottom low and remains stronger than the others but it did get hit hard last week and may start to show some weakening in its relative strength. The S&P, which had broken a down trend line in late January failed miserably as it broke back below that trend line and also severely below its December 21 low. The NYSE Composite, which un up until very recently had been holding up better than the S&P and more in line with the DJIA broke hard last week and came within less than a point of its October low. Volume has been neutral to weak and on balance the price/volume relationships have been on the negative side. However, late last week we did see some pick up in volume coincident with the sharp declines and recoveries on both Thursday and Friday. Breadth, which has been just stellar for the better part of the past three months finally weakened last week with the A/D line showing back to back days of nearly 2 to 1 negative action. The weekly A/D line was also very weak, and in fact had its first negative week in over 2 months. The daily new highs had been diverging with their peak readings seen in late December-early January for several weeks going into the January peak. They have weakened a bit as they should given the price action. The new lows began to expand last week with price moving lower and have confirmed on a short-term basis. However, they are well below levels seen in December in spite of the fact that the S&P and NYSE Composite are below their respective levels. This is a potential bullish divergence of medium-term degree. The high/low indicators are mixed with one component still positive but overbought while the other is negative. The weekly new highs hit their lowest level since mid November and the new lows their highest weekly total of the year. It was, however only a four-day week but the weekly new lows are showing a similar divergence as the daily numbers. However, the weekly high/low indicator did turn down. The Russell 2000 is also showing a loss for the year as February did wipe out January’s gains but when compared to the listed averages the loss was minor and less than 2%. Moreover, the RUT is still well above its January and December low. However, the short-term is still negative but it is also very oversold so it should be in a position to rally. The medium-term is neutral but is weakening. The Value-line is below its January close but unlike the other averages is still up over 4% for the year. The short-term is still bearish but like the RUT is very oversold and should bounce. The medium-term is neutral. The NASDAQ Composite and the NASDAQ 100 were as weak as the S&P and on a percentage basis even weaker. Both broke below their early January low The composite did manage to close back above those lows but the NDX has not. For the year they are down 8.4 and 12.2% respectively. I moved to neutral short term on Thursday night and although I see the possibility of some further weakness I am going to remain neutral with a bottoming bias. I am of the same view on a medium-term basis. The DJTA is down sharply in February and about flat for the year. The short-term remains negative and the medium-term is neutral. The DJUA and UTY have rallied right into important medium-term resistance. The short-term is neutral but close to turning negative. The medium and long-term remain negative. The breadth oscillator is close to oversold and turning positive. The volume oscillator is deeply oversold. It too is turning positive but needs work. The–day oscillator moved up from oversold levels and is on a very short-term rally alert status. The McClellan oscillator is deeply oversold and just slightly above where it was in October. The 10-day and open 10-day Arms are fairly oversold. They are not as oversold as they were in late December-early January and that may also be viewed as a positive divergence as price is lower. They are positive. The 5-day and 21-day Arms are oversold and positive. The daily range oscillators are into oversold territory but are also confirming price from the January peak. They are oversold enough to support a bounce but also oversold enough to suggest lower prices once the bounce is complete. The daily trend oscillators are still negative across the board. The weekly breadth oscillators are just beginning to correct the overbought readings from late January and are neutral. The weekly range oscillators are neutral to weak. The weekly trend oscillators are neutral on the DJIA but also weakening. They are negative on the S&P and the NDX. The sentiment composite at +9 is only low neutral and could stand further improvement. Investors Intelligence reported over 61% bulls for last week while the percentage of bears dropped to 28.6. This is the third week in the past four of over 60% bulls and the fifteenth straight week of over 50% bulls. This is a big problem. Market Vane and Consensus Inc remain favorable. There was also some improvement last week from the American Association of Individual investors, which reported more bears than bulls for only the second time in months. This is an improvement and may be a plus for the very short-term, however, the indicator is still slightly negative and needs a lot more work. NYSE members continue to be very strong net buyers and this remains a big medium-term plus. On the other hand, the commitment of traders report shows that commercial hedgers in the S&P futures remains heavily net short and that number weakened further for the latest reporting period. In addition, the small speculator is heavily net long and this combination has tended to be very negative. Corporate insiders have also stepped up their rate of selling in recent weeks. Last week we saw the highest sell/buy ratio in over 3 ½ years. The eight-week moving average is still neutral but barely so and is at its worst reading in nearly 3 ½ years. The CBOE put to call ratio improved a lot last week and basis the 10-day moving average is closer to levels seen at good trading lows. The Rydex ratios have also improved and the overall ratio is back to levels seen at the November and January low. There ahs also been some improvement in the asset levels of both Ursa and Arktos but neither are back to levels seen at good lows and we could use more work in this area. Summary and Conclusion I have for the better part of 2001 been of the view that the market was setting up for a solid medium-term bear market rally. In the January 22 report I stated, “Short-term indicators have turned negative and a decline looks eminent. This decline should be part of a medium-term bottoming process. This may or may not involve a modest new low but once complete a solid medium-term bear market rally should unfold.” Last week the S&P and NASDAQ averages broke below their December and January lows and finally a number of previously negative sentiment indicators are heading towards levels that were seen at good trading lows. The Investors Intelligence survey being an exception, however, both the CBOE put to call ratio and the Rydex ratios are close. Momentum meanwhile is also oversold with some indicators approaching levels seen at the October November low. The Arms indexes, the McClellan oscillator and the volume oscillators are all there or close. The Arms indexes are also showing potentially bullish divergences as they are not as oversold as they were in late December-early January. Add to the equation what looks to be a near completed Elliott wave pattern and I can finally see the distinct possibility that the market is getting close to that so far elusive rally. However. While things have definitely improved, and we are most likely close I do not think we are there as yet. For one thing, a number of the oversold momentum indicators are oversold enough to suggest a reverse momentum thrust which, in most cases takes time to dissipate. This will likely involve a couple of modest new lows on an easing of downside momentum. This fits in well with the wave count in the S&P that looks to need a couple of 4’s and 5’s to complete the pattern from the January peak. This would not be unlike the pattern going into the January top following a momentum peak in late December-early January. This would also give some of the sentiment indicators such as Investors Intelligence some time to work off the negative readings and move to a level that could indeed support a good rally. This will also allow for individual stocks to begin their own rebuilding process and create some modest bases to support a good rally. The bottom line is that the bulk of the post January decline is most likely over. There should be more frequent rally attempts over the coming weeks with a couple of new lows along the way to complete the bottoming process and set the stage for a solid rally. Due to the downside momentum readings any initial rally should fail but that is to be expected at this juncture. Short-term I am neutral on all three averages, the DJIA, S&P and the NDX. While we look to be closer to a good bottom there is still risk and lower prices are expected. I am maintaining my bearish view on the S&P and DJIA. I am neutral on the NDX. Long-term we are still in the throes of a bear market that could very well last into the latter part of 2002. I view the expected coming rally as nothing more than a strong bear market advance and remain long-term 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 chart below on the S&P shows the two possible counts from January 31. The alternate count shows the possibility that a five-wave pattern is already complete. However, the fifth wave in that count is very very extended. This is Ok but we also do not have a good alternation between waves 2 and 4, and that is necessary. The preferred count shows the pattern as nearly complete with a couple of 4’s and 5’s needed to finish off the pattern. Since both wave 2’s were simple, we should look for wave 4 to be a bit more complex.
The
Rydex ratio (top chart) has come back to levels seen at the October, early
December, and early January low. The assets in Ursa are improving but are still
far from their levels seen at those lows. Moreover, neither are anywhere close
to where they were at the late May low (left end of the chart). They are
improving but need a bit more work to support a solid medium-term advance. The
open 10-day Arms is very oversold but also not as oversold as it was at the
January low. This is a potential bullish divergence.
The
McClellan oscillator is near the levels seen in October. Note the divergences
into the December low. Note also the divergence from its peak in early January
into the price peak in late January. It is oversold enough to expect a similar
pattern this time around as well. That is a rally and lower low with a higher
oscillator reading. Following
a five-wave advance from October to late December the XAU traced out a text-book
three-wave corrective pattern into last weeks low. The “c’ wave of that pattern
was a diagonal triangle or declining wedge and the sharp rally last week after
breaking out of that wedge confirms the pattern. Note also the bullish
divergence at the “c’ wave low from the daily trend composite and how it also
broke out above a declining trend line.
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