BI-WEEKLY MARKET RECAP and TECHNICAL PERSPECTIVE

By: Larry Katz

March 12, 2001

Capsule

Short-term the market may be close to a bounce and a move towards the top end of the recent trading range on the S&P is possible. However, there are still enough negatives to expect the rally will fail and be followed by a move below the late February low. I still view this as part of the medium-term bottoming process, that when complete should lead to a solid medium-term bear market rally. The bonds remain within the bounds of their post January trading range. Once complete a rally to modest new highs above the early January peak is expected to complete the rally from January 2000. The XAU moved into important resistance late last week. Momentum remains positive but until we get through this resistance we have to be aware of the possibility that a satisfactory three-wave rally is complete.

Elliott Wave and Fibonacci

Whether the orthodox top of the post October 1998 wave 5 rally ended in March or September is still unresolved. While either count is acceptable under the wave principle, for now and until forced to change, I am going to go with the March high as the orthodox top. Since the initial decline from the March top was a three the decline from September is either a “c” wave or a double three. The decline from September to October and the decline from November 6 to December 21 are both three-wave patterns. Thus it is near impossible to count the post September 1 decline as a “c” wave. That said the post September decline needs to be approached as a second three from March of 2000. That said we now have to approach the decline from January 31 as a “c” wave directly related to the September to December 21 pattern, at least under this count. The decline from January’s peak may in fact be counted as a completed five-wave pattern at the February 23 low, but that would also include a very, very extended fifth wave. That fifth wave in fact traveled more than the length of wave’s 1-3 inclusive and was closer to a 1.383 multiple. That is further than even an extended fifth wave should travel. Thus it is more likely that the decline from February 15 to February 23 is a third of a third from January 31. In fact at the February 23 low this decline was almost a perfect 1.618 multiple of the February 2-February 14 decline adding further support to the idea that the post January decline is not complete. The decline from February 27 to March 1 did slightly penetrate the February 23 low. On the daily chart it is possible to count that decline as wave .5 of iii. However, that decline on the hourly chart was a clear seven-wave corrective pattern and I am counting it is part of wave .4 of iii, which is taking the form of a triangle. Since wave .2 was a very simple pattern the triangle serves to satisfy Elliott’s rule of alternation. The triangle itself is nearly complete with the decline late last week all or most of the “d” wave implying that a post triangle thrust below the February 23 low is not too far away. This will remain the preferred count as long as the weekly chart remains down. That said, a move above last weeks high of 1267.42 would invalidate this count and also confirm that the decline from January 31 was complete. Until that occurs my expectation is for lower lows to complete the post January decline. This should also complete the post September 1 decline and could also complete the decline from March 2000 and the “a” wave of intermediate wave 4 from 1982. The DJIA completed its post 1987 advance in January of 2000. The decline from that high into the October 18 low traced out a text-book flat. While that low did indeed satisfy the minimum requirements for the completion of intermediate wave 4 from 1982. A short.236 retracement of the post 1987 advance would yield a target near 9350 while a more normal fourth wave retracement of .383 would yield a target of 7879. This is also not too far from the October 1998 low. That is the fourth wave of previous degree and a natural support level under the wave principle. In addition, 7919 is a .236 retracement of the post 1987 advance on logarithmic scale, which measures moves on a percentage basis. This is more useful in working with price patterns over several years. Therefore, it is more likely that the decline into October is wave “a” of a much larger decline and that the rally from the October 18 low is either a “b” or “x” wave. Whether that pattern (the post October rally) is complete or not is another story. I can certainly make the case that it was complete at the February high but the decline from that high is not impulsive and at this time I am favoring the idea that wave ‘b” is still in progress and a move back above the February peak is likely but where we are in that pattern is still not clear. Although the February 6 peak did slightly exceed the November 6 peak the DJIA for all intents has remained within a fairly tight range of 11,000 or so on the upside and about 10,280-10,290 on the downside. The rallies and declines within this range have been three-wave patterns so it is possible that the DJIA is tracing out a triangle. Whether this possible triangle is a “b” wave from October or a “b” wave of a larger “b” wave from November 6 is not clear nor is clear yet where within this possible triangle the DJIA is. On a short-term term basis the rally from March 1 has been confirmed as complete on the daily chart and as a three-wave pattern on the hourly chart. The decline from Thursday’s high is so far correctve and has not yet moved below the  .618 retracement of the rally from March 2 so it is possible that the decline is a “b” wave from March 2. This would allow for a rally back above Thursday’s high and towards the upper end of the range. Until the DJIA moves out of the trading range the pattern will remain inconclusive. I am currently counting the decline in the NDX from January 24 as a fifth wave from September 1 and the post September 1 decline as a “c” wave from March 2000. The decline from January 24 to March 1 can be counted as having completed three-waves with the rally into last weeks peak all or part of wave 4. The decline from that high did move to new lows but so far cannot be counted as a five on the hourly chart. That leaves open two possibilities. The first is that the decline is a “b” wave of an irregular, which will lead to a rally back towards last weeks peak to complete a more complex fourth wave. The latter is that wave 5 is in progress and has more to go. The alternate count allows that what I am counting as wave 1 is in reality a series of 1’s and 2’s and that instead of the current decline being all of wave 5 it is a smaller degree fifth wave leaving a couple of 4’s and 5’s still to unwind. The post January decline has already exceeded a .618 relationship with wave 1 (September 1 to October 18). The next relationship is equality ands that yields a potential target close to 1625. In the best case scenario discussed above the MDX is now in a fifth wave down from January 24. At Friday’s low this decline has exceeded a .618 relationship with wave 1. Equality with wave 1 yields a potential target of 1720. Thus even in the best case scenario Fibonacci relationships imply that the decline is not complete no matter what course it takes.  Support: S&P; 1224-1226, 1214-1216, DJIA; 10,500-10,515, 10,290-10,300, NDX; 1800-1820, 1720-1735. Resistance: S&P; 1242-1243, 1252-1254, 1267, DJIA; 10,7850-10,760, 10,950, 10,965, NDX 1883-1888, 1937-1945.

Bonds

The bonds have remained within a trading range since peaking on January 3. The rally from the January 25 low took prices towards the top of that range but has done so in a clear confirmed three wave advance on both the daily and weekly charts. From an Elliott perspective this rally is a “b” wave of either a flat or a possible triangle. I am favoring the latter and as such expect the trading range to develop further. If correct the triangle should lead to a modest new high above the January 3 high to complete a “c” wave from September and a large a-b-c from January of 2000. This in turn should complete wave 2 or “b” from October of 1998 and set the stage for a move below the January 2000 low. The daily range oscillators are neutral but weak. The daily trend oscillators are positive but not exceptionally strong. Short-term momentum is neutral. The weekly range oscillators are neutral but also weak. The weekly trend oscillators are slightly on the negative side. Medium-term momentum is neutral but weak. Short-term sentiment is mixed with Market Vane at 60% bulls negative while Consensus Inc is neutral at 42% bulls. Support: 104 16/32 +/-5/32, 103 15/32 +/-9/32. Resistance: 106 6/32-106/10/32, 106 25/32-107. Short-term momentum is neutral and sentiment mixed to slightly negative. The post January trading range should persist for a while longer and I remain neutral on the short-term. While my expectations are that the ultimate resolution of the trading range should result in a modest move above the January 3 peak it will most likely be the end of a larger pattern and I remain bearish on the medium and long-term.

XAU

My preferred wave count has the decline from September of 1999 labeled as a fifth wave diagonal triangle from February of 1996, which could very well mark the end of the bear market from 1980. Short-term momentum is overbought but still positive. Medium-term momentum is very positive and long-term momentum, basis monthly indicators is just beginning to turn up from oversold levels while also confirming huge divergences going back to the 1998 third wave low. All of this seems to support my long-term counts and remain a very positive factor for the long-term bullish case. The daily chart from February 15 can be counted as a five-wave pattern at Friday’s high. The weekly and monthly chart show three-wave patterns from the October 2000 low. The rally from February 15 was almost perfectly equal in length to the rally from October to mid December. The rally from October also stopped very close to a .383 retracement of the decline from late September 1999 to October of last year. The five-wave rally does allow for some corrective behavior but if the bullish case is correct it should be fairly well contained. I am going to move to neutral from bullish on the short-term as a correction could get underway at anytime. Medium and long-term I remain bullish but it is important that the XAU move above resistance near 57.50 soon. There is support at 52.50 and then near 49.60. there is obvious resistance near 57.50 with next resistance near 64.

Indicator Review:

February ended sharply lower while March so far has been mixed. The DJIA is showing a modest gain in March as it has gained nearly 200 points. The broader based NYSE Composite is slightly higher as it is up by a couple of points while the bench mark S&P 500 is lower by nearly 10 points from its February closing price. All three averages are still under water fro the year with the S&P at its lowest level on a closing basis since March of 1999. The NYSE Composite and the DJIA are holding up far better and remain locked in trading ranges going back to mid October. Price/volume relationships remain weak to negative. The latest rally last week was gain accompanied by a drop in volume showing very little conviction behind the rally. Breadth, on the other hand has been relatively strong with both the daily and weekly A/D lines doing far better than the averages. The high/low statistics have also done quite well with the latest rally accompanied by a strong expansion in the new highs both on a daily and weekly basis. The new lows did expand on the last decline and again on Friday. This did confirm for this move. However, the number of new lows are holding well below where they were in late December. The S&P is well below its late December low so when compared to this average this is a potential bullish divergence, however, if compared to the broader based NYSE Composite there is no divergence. The high/low indicators are neutral on a daily basis. The weekly indicators have just turned down and are neutral. The Russell 2000 has spent the past two weeks in a fairly tight trading range and has shown no net change. The short-term is neutral to slightly negative. The medium-term is neutral but very close to turning down. My expectation is that the short-term trading range will resolve with a move to the downside. The Value-line is showing a modest gain since late February. The short-term is neutral but very close to turning negative. The medium-term is neutral but weak and not far from turning negative. The NASDAQ Composite and the NASDAQ 100 have picked up in March where they left off in February and are down by nearly 5% for the month of march and at new multi year lows. It is clear that the decline is not over but it is still likely that we are in the latter stages of the decline and as such I am going to remain neutral on the short and medium-term. The DJTA is showing a very modest gain. The short-term is neutral but also weakening and could reverse back to negative on any weakness early this coming week. The medium-term is neutral as well but also very close to reversing to bearish. The DJUA and UTY are trading just below important resistance. The short-term is still neutral but very close to confirming a top. The medium and long-term remain negative.

Momentum

The breadth oscillator is close to overbought and negative as is the volume oscillator. The 3-day oscillator is neutral but close to a sell signal. The McClellan oscillator has moved back below zero after a brief move above. It is neutral but weak. The 10-day and open 10-day Arms are borderline oversold. The 5-day Arms is slightly negative while the 21-day Arms is oversold. The daily range oscillators are neutral but weak. The daily trend oscillators are neutral but close to turning positive. The weekly breadth oscillators are just beginning to correct their recent overbought condition and are short-term negative. The weekly range oscillators are oversold but have confirmed price. The weekly trend oscillators are negative.

Sentiment

The sentiment composite improved nicely and at +14 is at its best level since mid to late December. However, it is still only neutral and while good is not yet at levels that could support a sustainable advance. Investors Intelligence has seen a very modest drop in bulls and even more modest increase in bears. This is a step in the right direction but the bull/bear ratio while improving is still very negative and needs considerably more work. Market Vane and Consensus Inc. are very bullish. The American Association of Individual Investors (AAII) survey has improved but is still slightly negative and needs to improve further. The NYSE members continue to be strong net buyers of stock and this key measure of smart money remains positive. On the other hand, the commitment of traders reports showed another increase by the Commercial hedgers in their S&P short positions while the small speculators are showing another increase in their net long positions. This remains a very negative development. In addition, the insider sell/buy ratio has continued to weaken and the eight week moving average is borderline negative, The CBOE put to call ratio basis the 10-day moving average has improved but is still not where it was in October. The Rydex ratios are bullish and could support a decent rally at any time. There was also some improvement in the level of assets in the Ursa and Arktos funds but they are not yet where they have been at other good trading lows.

Summary and Conclusion

As a technical analyst I spend my time looking at price pattern ands indicators to read the health of the market and pay little or no attention to fundamentals as it pertains to coming up with an opinion in regards to the future direction of the stock market. To me the only value a news release has is to see how the stock or the market reacts to it. If a stock or the market is hit with a slew of bad news and fails to go down much or even rallies that is important as it implies that the news is already reflected in the price. Conversely, if the market or a stock is hit with good news and does not go up then we have a clue that the good news is already priced into the stock or the market. Keep in mind that the market is a discounting mechanism it looks well into the future. Last year around this time the NASDAQ and the S&P made their all time highs and began to fall. What back then did the market, in its infinite wisdom see that the majority did not. The answer lies in the current earnings reports. The market a year ago saw what we are now seeing in the news today. In January the FED cut interest rates on two occasions. One was a surprise pre meeting cut. This is exactly what the pundits wanted and they got it. Companies are continuing to hit the market, almost on a daily basis with bad news. The market has not reacted favorably to bullish news such as rate cuts and has continued to react negatively to negative news. The message is clear, the worst has yet to be discounted. One of these days and it could be soon we will see the market react positively to some negative news or actually positively to some positive news. Frankly not much has changed technically from where we stood two weeks ago. There has been some further improvement in sentiment. The sentiment composite has moved higher and is where it stood in late December. The CBOE put to call ratio is about the same, which is high neutral and we have seen some further improvement in the Rydex ratio, which as of Friday is bullish. There has also been some improvement in the level of assets in the Ursa and Arktos funds. They are not yet at levels consistent with good trading lows but have improved enough to support a bounce. Consensus Inc and Market Vane are bullish but they have been for the better part of the year. There has also been some improvement from the American Association of Individual Investors but in spite of it all, this indicator is still slightly negative and has a long way to go before becoming bullish. The is exactly the same case with the Investors Intelligence survey which has now reported over 50% bulls for 18 straight weeks. The percentage of bears has improved from near 28% to 34% but that is a long way from even neutral. In addition, the past week saw another rise in net short positions from the commercial hedgers in the S&P futures and another increase in net long positions from the small speculator. This is extremely negative especially since it is occurring with prices moving lower. Momentum is mixed but on the negative side. The breadth and volume oscillators are just rolling over from overbought levels while the McClellan oscillator has moved back below zero. The Arms indexes remain positive but frankly they have been bullish throughout most of the year. However, the new 10-trin developed by Peter Eliades of Stock Market Cycles is very close to issuing a sell signal. I am not totally familiar with this indicator, however, the last four signals occurred on November9, December 15, January 18 and February 6. Those were all at or near good trading tops even the December 15 occurrence. The weekly breadth oscillators have just begun to correct after reaching modest overbought readings in early to mid February and do not look to be close to completing that process. The bottom line is that nothing over the past two weeks has changed. I am still of the opinion that we are getting closer to a food medium-term low that could support a sustained and exploitable rally. I am also of the opinion that while we are indeed closer to that low we still have some work cut out for us and that the bottoming process should involve a couple of lower lows below the February low on the S&P before that process is complete. Short-term I see enough to suggest that a rally is not far off and a move back towards last weeks high on the S&P is possible. This rally if it does occur should be viewed as part of the trading range and should be followed by a move back below the February low. Short and medium-term I am going to remain neutral with a bottoming bias towards the medium-term. 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. Rydex switchers are holding a 20% position in Ursa and 40% position in Precious metals. Make sure to call the Noon Pacific hot-line for any changes. 

The chart below shows two of the possible counts on the NDX from the January peak. The first shows that last weeks decline is wave 5 of 3 and the one on the bottom labeled alt shows last weeks decline to be part of wave 5.   

The chart above shows the monthly momentum of the XAU. Note how it has just turned up and has also confirmed a major divergence. Note also at the 1996 high the major negative divergence.

The sentiment model below has move up to where it was in late December. This could support a bounce. However, it is not close to where it was in October of 1998 nor at the low of October 1999.

The new 10-trin gives a sell signal when it moves below .80 and then back above .80. The January 18 signal was a little early but the S&P made very little progress from that level. The other signals were fairly timely. Note how oversold it go at the October low. It also gave mild rally signals in late November and again on February 23.

The decline into the October low in the DJIA completed a classic a-b-c flat. This is best counted as the “a” wave of a larger pattern. Since the October 18-November 6 rally the DJIA has remained in a fairly tight trading range. The rallies and declines have been three-wave structures leaving open the distinct possibility that the pattern is some sort of triangle but at this point we cannot be sure which way that triangle will break.