BI-WEEKLY MARKET RECAP and TECHNICAL PERSPECTIVE

By: Larry Katz

March 26, 2001

Capsule

Medium-term support levels have been violated. All of the key momentum indicators moved to new lows with the averages confirming the new low in price at deeply oversold levels. The oversold condition allows for some further rally over the near-term to work off that condition. However, price rarely if ever toughs with downside peaks in momentum, especially when these indicators get as oversold as they just did. Sentiment is also improving but is still lacking in some areas. The bottom line is that any rally from here will fail and lower prices are expected. The bonds broke down out of their rising wedge pattern setting off numerous short and medium-term negative divergences. They are negative. The XAU is close to confirming the rally from October 2000 as corrective. However, sentiment is positive and medium and long-term momentum are also positive. 

Elliott Wave and Fibonacci

The decline the past two weeks on the S&P has violated a number of important Fibonacci price relationships both internally and externally. Externally the S&P moved well below a .618 retracement of the post October 1998 advance and at last weeks low was close to a 75% retracement. This adds further conformation to our long-standing wave count that the S&P completed intermediate wave 3 from 1982 and is in wave 4 now. We also broke well below the level where the decline from September 1 would have been 1.618 the length of the March-April decline. Since I was counting the post September decline as a second three from March the break of that relationship does bring into question this count.  I have also been counting the post January 31 decline as a “c” wave from September. Last week the S&P moved well below the level in which the “c” wave would have been equal to the “a” wave. That level was 1107. Wave “c” exceeded equality with wave “A” by enough of a margin to expect that it is not complete and a 1.383 or even a 1.618 relationship with “a” should be expected. Those two levels correspond to 1001 and 936 respectively. Since the second three (September 2000) has far exceeded a 1.618 relationship with the first three (March-April 2000) that suggests one of two possibilities. The first is that a 2.618 relationship should occur, and that yields a potential target near 970. The other possibility, and one I am giving a lot of thought too is that September was in fact the orthodox peak of wave 3 not March ending on a small failure.  For now I will stay with the original idea that it was March. We now hove a cluster of potential targets between 936-1001. The 1040 area is a .383 retracement of intermediate wave 3 (1987-2000). 923 is the fourth save of previous degree and a .236 retracement on log scale, which measures moves in percentage terms is near the 975 level. We did get close last week to the higher end of the range when the S&P hit 1081. It is also possible to count the decline from January 31 as a completed five-wave pattern on the daily chart. As such we have to alert to the possibility that, at least as far as the S&P is concerned, the minimum requirements for the completion of intermediate wave 4 is behind us. Third waves tend to have the strongest or weakest breadth and the best participation both on the upside on downside. Last week had all of the characteristics of third waves. So while it is indeed possible to count the decline as a five and as such complete what would have to be counted as wave .5 of iii and v had all of the traits of third waves. As such it is much more likely that what we saw last weeks was either all of wave 3 or perhaps only wave ..3 of 3 leaving at least one if not two more 4’s and 5’s to complete the pattern. That said I would have to view last weeks rally as a fourth wave. How much further it travels will tell us of what degree it is in relation to the post January decline. Since it is a fourth wave we also need to be on the lookout for a possible triangle. This would also satisfy the rule of alternation. A lot of the uncertainties in regards to the DJIA and its longer-term wave counts have cleared up over the past two weeks with the DJIA moving below the March-October double bottom low near 9650. This also left no doubt that January 2000 completed a five-wave advance from October of 1998 and that this rally was in fact intermediate wave 3 from 1982, which began in 1987. I am counting the decline from January 2000 to October 2000 as a flat. There are two possibilities regarding the action following that pattern. My preferred count is that the March 8 peak completed a triangle from October 18. This triangle is either a “b” wave or an X wave from January 2000. Movements out of triangles are usually very strong and sharp. Elliott called them thrusts and what we saw the past two weeks fits post triangle patterns to a tee. If the triangle was a “b” wave then we need to see the thrust unfold as a five-wave “c” wave. So far the daily chart from March 8 is a three. The other possibility is that March 8 completed an X wave from January 2000 and the DJIA is tracing out a double three with the second three in progress now. Since the decline is so far a three this count is still a possibility. If this count turns out to be correct then I would count last weeks low as wave “a” of the second three. The 9350-9400 area was important as it represented the post triangle measured move as well as the 236 retracement of the post 1987 advance. That said we should look for the decline to bear a normal fourth wave .383 retracement relationship with the third wave it is correcting. That yields a target in the 7800-8000 area and that still seems a reasonable expectation before wave 4 is complete.  Given all of the above I am counting the current rally as either wave 4 or wave .2 of 3 of the post March decline. If the alternate count is correct than the current rally is a “b” wave from March 8. I am still counting the post January decline as wave 5 from September, which in turn is a large “c” wave from March 2000. Equality between waves 1 and 5 pointed to a target in the 1600-1624 area. It is possible to count the pattern from January 24 as a completed five-wave pattern at least weeks low if we count wave 5 as a diagonal triangle from march 6. If it is a diaginal triangle that is complete we should know very soon as post diagonal triangle patterns are very distinctive Wave 5 was almost perfectly equal to wave 1 (January 24-February 7) while wave 3 of the pattern (February 8-February 26) was a few points shy of being 1.618 wave 1. It actually was a near perfect 1.5 the length of wave 1. A move this week above last weeks high of 1754.65 would confirm the pattern from January 24 as complete on the weekly chart. Until that occurs we have to allow for the possibility that the post January decline is not complete and that the current rally is a fourth wave of some degree from January 24. A break much below 1540 would yield much lower prices in the neighborhood of 1300-1350 and allow for the possibility that wave 3 from January was not over. A move above last weeks high followed by a move below last weeks low at 1582 would indicate that the January March decline was most likely only wave 3 of iii from September or worse only wave 1 of .3 of iii. The NDX of the three averages that we focus has the best chance of having completed its post January decline. What we get this week will be important. Support: S&P; 1118-1119, 1103-1105, 1040-1042, DJIA; 9367-9372, 9264-9272, 8950-8990, NDX; 1688=1690, 1645-1650, 1582. Resistance; S&P; 1150-1154, 1174-1179, DJIA; 9563-9570, 9671-9682, 9775-9788, NDX; 1755, 1863-1870, 2036-2045. Trend changes for the next two weeks are: March 26, March 28 and April 3-4. the latter two are very important.

Bonds 

The bonds were able to move above the January 3 peak but in a series of three-wave patterns. The pattern from January 25 has taken the form of a rising wedge or in Elliot terms diagonal triangle.. The problem with these patterns is that it is difficult to determine just where they might complete, however, once complete it is very clear that they are over as movements out of them are very swift and in some cases violent. A good example of a post diagonal triangle pattern was the XAU from February 15 to February 27. My loner-term view is that the rally from January 2000 is either a “b” or second wave from October 1998. The pattern from January 2000 is corrective. I am counting the rally from September of last year as wave 5 of “c” from January 2000. The pattern from September on the weekly chart even at the current high is not a five as yet and as such I am counting the diagonal triangle as wave of iii leaving open the possibility that once this decline is over for one mote modest new high to complete the post January 2000 rally. The daily range oscillators are turning down from modest overbought levels but more importantly are showing short and medium-term negative divergences. The daily trend oscillators have turned down and short-term momentum is negative. The weekly range oscillators are near overbought and also diverging. The weekly trend oscillators are mixed but also diverging medium-term momentum on the negative side. Sentiment remains negative with Market Vane at 65% bulls and Consensus Inc at 57% bulls. Support: 105 03/32 +/-6/32, 103 27/32 +/-11/32. Resistance: 106 13/32-106 22/32, 107 12/32. Please note that these calculations are based on a constant bond chart and not any specific futures contract. The constant bond chart is currently running 4/32 below the June futures. Short and medium-term momentum is negative. Sentiment is negative and bonds have just broken down from a bearish rising wedge formation. I am bearish short and medium-term.

XAU

I have been operating with the idea that the October low in the XAU was the culmination of a large five-wave decline from 1996 with the fifth wave of that pattern from September of 1999 taking on the form of a diagonal triangle. Longer-term this still looks like the best count, at least at this point. However, the rally from October’ low has unfolded in two very distinct five wave patterns on the daily and weekly chart while the monthly chart shows what is so far a three-wave pattern. The two rallies were also within a point of being perfectly equal in length. The decline from February 27 has retraced more than .618 of the February 15 rally but has not yet broken below the low of February 15 and this leaves open the possibility that this decline may still be a deep second wave from February 15. However a move below 45.64 would confirm the rally as a three. This does not mean the rally from October is over as it is quite possible that the rally into February was an “a” wave of a larger pattern but it would confirm that the post October rally is not, at least under Elliot a new bull market. Short-term momentum is still negative but getting oversold. Medium and long-term momentum is still very positive especially long-term (see the march 12 report). Thus it is likely that even in a worse case scenario the current decline is a “b” wave. However, I have moved to neutral in all time frames and remain there for the time being.

Indicator Review

So far the month of March is looking worse than February. The DJIA has lost nearly 1000 points or close to 10%. The S&P is down over 122 points and that too is close to 10%. Even the broad based NYSE Composite is down by close to 10% as the old economy stocks are beginning to somewhat catch up on the downside. The DJIA broke down from a descending triangle when it moved below the double bottom low of March and October 2000. This formation break has given a price projection using traditional technical measuring techniques in the 7500-7700 area. This by the way is quite close to the Fibonacci price targets discussed in the Elliott Wave section. Price/volume relationships remain negative with volume expanding on the down sessions and that also confirmed the break down out of the topping formation. We did, however see a large expansion volume last Thursday, a session that saw the DJIA come back from a near 400 point loss to close only 90 or so points lower. The volume on that day did have some earmarks of capitulation but in my view it was still not enough. The follow-through rally Friday saw volume contract and that failed to confirm the reversal of sorts on Thursday. Breadth, which had been holding up far better than the averages from October through the middle of February has been extremely weak. The daily new highs have weakened as the market has come down but are still too high for an important bottom. The new lows have expanded and confirmed the new lows in price both on a daily and weekly basis. The high/low indicators are negative. The Russell 2000 has lost about 6 ½% so far in March. The short-term is neutral but very oversold so a bit more rally would not be a surprise. The medium-term is negative. The Value-line has lost 6.6% in March. It has moved towards the area of important support  near the October and December low. The short-term is neutral but deeply oversold so a bounce is possible. The medium-term is negative. The NASDAQ Composite has lost about 10% this month as has the NDX. However both averages actually closed higher this past week outperforming both the DJIA and the S&P. The short-term is neutral but also improving and a buy signal is not far off. The medium-term is also neutral but also close to turning positive. Both of these averages could double from last weeks low and that would only take them towards a 50% retracement of their losses from the march 2000 high and slightly above their 200 day moving average. This is not a forecast but an observation about just how far they have gone down. The DJTA has about kept pace on the downside as it has lost close to 10% in March. The short-term is neutral. The medium-term is negative but getting oversold. The DJUA and UTY lost close to 10% so far in March. They failed right near important medium-term resistance and have given back most of the gains from the mid January low. They are negative in all time frames.  

Momentum

The breadth oscillator is turning up from deep oversold levels. The volume oscillator is doing likewise as it reached its most oversold level in the 30 years that I have data. The 3-day oscillator moved back to neutral after confirming the new closing low on Thursday. The McClellan oscillator is turning up from deep oversold levels. The one common thread of all these indicators is that they all confirmed the low on Thursday. The 10-day and open 10-day Arms are deeply oversold. The five-day Arms is close to neutral and not far from where it was on March 8. The 21-day Arms is very oversold. The new 10-day Arms is neutral but close to oversold. The daily range oscillators are turning up from oversold. They are showing a small divergence on the S&P but have confirmed on the DJIA. The daily trend oscillators are negative. The weekly breadth indicators are neutral but declining. The weekly range oscillators are at the top end of oversold but are confirming price. The weekly trend oscillators are negative. The technical barometer has improved and is back to neutral but is not yet close to levels that would indicate a bottom was close

Sentiment   

The sentiment composite has been at +12 for the past two weeks. This is neutral but still the best level since October. However, readings over +15 are usually seen at lows following declines of the magnitude we are currently witnessing. Investors Intelligence last week reported a small increase in bulls to51.6% bulls and a likewise drop in bears to 30.9%. This is the 20^th straight week of over 50% bulls and this key indicators remains deeply negative. On the other hand, both Market Vane and Consensus Inc are showing extremely low levels of bulls with the current weeks reading of 19% and 13% respectively. The American Association of Individual Investors (AAII) showed a nice increase in bears with the bull/ bear ratio the best since late December. This indicator is now neutral. NYSE members moved to the sell side for the latest reporting week but only modestly so. This indicator is bullish. The commitment of traders report showed a nice drop in the net short position of the commercial hedgers along with a small decrease in the net long position of the small trader. This is an improvement but the net, net of it all is that the COT remains very bearish and not close to what we see at important lows. The insider sell/buy ratio has continued to weaken. Last weeks single week reading was the most negative since September 1997 and March of 1998. The 8-week moving average is also negative and the worst reading since around that same period. However, both of those times occurred with stocks rising not falling. The CBOE put to call ratio 10-day moving average is close to bullish but not quite there. The OEX ratio is neutral but closer to bullish. The Rydex ratio is positive at least when compared to post October 1999 standards. However, prior to late 1999 it is at levels that were seen near tops and not close to good lows.

Summary and Conclusion

In the march 12 report I had been of the view that the market was getting closer to a good medium-term low that would lead to a strong bear market rally. I did make a point of saying it was possible to see the market unravel from current levels but my preferred view was that we were closer to a low. I was obviously wrong but lucky for us we were able to report this to subscribers on both the daily letter and nightly update as well as on the website. The last two weeks the market has been under extreme pressure with the DJIA in fact losing close to 1100 points. Technically a lot of improvement has been made as the market has moved down. A number of sentiment indicators have improved nicely. The 10-day average of the CBOE put to call ratio for one and the Rydex ratio. However, Investors Intelligence is still way out of whack and nowhere close to levels seen at important lows and in fact is still at levels seen near market peaks. This has to improve. Most of the key momentum indicators are just coming off deeply oversold levels. The McClellan oscillator has just moved below –200 and the volume oscillator hit its most oversold reading in over 30 years of data. A bounce can occur at anytime to help relieve this oversold condition but the fact is that every one of these indicators also confirmed price. Historically, when these indicators reach levels this oversold it has rarely if ever marked a price low as it represents a momentum thrust in reverse. The normal pattern has been for a relief rally fo9llwoed by lower lows on an easing in momentum (i.e. a higher low in the indicators). Sometimes such as 1990 we saw two lower lows with two higher highs in the indicators. So even if we did see a momentum low last week, and at this point we cannot even be sure of that, the possibility that we saw a price low is very, very rare and not likely. So even in the best case scenario this decline is not over, at least as far as the DJIA and the S&P is concerned.  Not only did we get conformation from all of the momentum indicators but we also got conformation from a number of internal measures such as the number of new lows. On Thursday the daily new lows confirmed the move down in price hitting their highest daily reading of the year and coming close to levels seen last year. The number of new highs has weakened but is still far too high for a good low as they historically move to single digits at important bottoms as another sign of capitulation as investors finally throw in the towel on the few remaining issues that have been holding up. For example, in both October of 1998 and 1994 we had several days in a row of single digit new highs, and low single digit at that.  The following is from the daily report of last Friday and I fell it is important enough to repeat here. “Third waves have clear and specific characteristics. During rallies they display the strongest momentum and the best internals. In essence everything is in gear. In declining third waves we see the most negative breadth, the strongest volume and momentum indicators are at their worst. In other words third waves are the most dynamic portion of a decline. Keep in mind that “c” waves are also third waves and fit that pattern to a tee. This is in a word what we saw last week. While it is possible to count the decline from January as a completed five-wave pattern on the S&P, given all of the above and more it is most likely that even in a best case scenario the decline was only a third wave or even only a third of a third leaving one but possibly two lower lows in the coming weeks to complete the pattern from January. This is also the case with the DJIA and the NYSE Composite. However, the NASDAQ is in the best position of the three averages that I regularly follow to complete its post January decline. As discussed a move above last weeks high of 1755 would be a strong indication that a good rally in this area was about to unfold. It may sound crazy to think that the NASDAQ averages can hold up and rally even as the S&P and DJIA are moving lower but we saw some of that last Thursday when the DJIA was, at its nadir, down close to 400 points, the S&P down close to 31 points while the NASDAQ was only slightly negative at its worst but mostly in positive territory. Short-term the market can bounce a bit further and that could help to relieve the oversold condition a bit more but I do not see this rally as long lasting even by short-term standards and I remain neutral. On a medium-term basis things are definitely improving but as good as some indicators are getting we still have a long way to go before they are at levels consistent with bottoms following declines as sharp as the one we have just seen. After the short-term rally runs its course my expectations are for a move back below the recent low. In what fashion this decline unfolds will be important and add a lot of value to determining how much closer we are to a good low. For now I remain neutral on the medium-term with a downward bias. Back in early 1999 I wrote an article forecasting a price target for intermediate eave 4 on the S&P of 1525-1577, with an idealized target of 1550. Following that peak the biggest decline since 1987 on a percentage basis was expected as wave 4 unfolded. Idealized price targets for wave 4 were 950-1000. A number of those forecasts have been satisfied with the S&P peaking at 1552.87 on March 24 of 2000 and also experiencing its biggest decline on a percentage basis since 1987. Price targets have not been met as yet although we are getting closer. Technical indicators and sentiment measures are improving a lot but are still not consistent with important long-term lows. One key long-term indicator is the percentage of stocks above their 200-day moving average. The most important lows of the past 14 years has seen this indicator below 30% and in most cases well below. It is currently at 49.8%. It has also just recently given a sell signal as it moved above 70% ands back below. This is one example and we could also look at the Investors Intelligence survey as another. The bottom line is that while things are also improving on a longer-term basis we are not there and I remain bearish

Stock index futures traders are flat as are QQQ traders. For Monday QQQ traders can take a 50% long position only on a move above 48.85 with a stop of 39.44. Rydex switchers are holding a 20% precious metals and 10% OTC position. Make sure to call the Noon pacific hotline for any changes. The morning hotline will be on at 7:15 AM pacific.  

The percentage of NYSE stocks above their 200-day moving average is 48. Bottoms do not occur, especially following declines such as we are experiencing until this indicators moves below 30% and back above. As we can see in most cases it moves well below 30%. Sell signals are issued when the indicator moves above 70% and back below as it did in mid February.

The chart below shows the Nova+OTC to Ursa ratio back to 1997. Note that pre 2000 how low it had to go before we had a bottom and where it used to go to signal tops. The arrows pointing down at tops occurred on early 10-97, 4-98, 7-98 and 7-99. The lows occurred on 11-97, 6.98, 10-98 and 10-99

The bonds are breaking down out of a rising wedge. Note the divergence between last weeks high and the high of early January. Also note the divergence between the peaks within the rising wedge.

The chart below on the S&P shows that it is possible to count the decline from January as a five on the daily chart. However, given market internals and momentum it is much more likely that we have either finished wave 3 of the pattern or even wave .3 of iii (not shown).