BI-WEEKLY MARKET RECAP and TECHNICAL PERSPECTIVE

By: Larry Katz

April 9, 2001

 Capsule

Sentiment and momentum are improving but have not reached levels that can support the idea that a bottom is in place. On a short-term basis further sideways behavior is expected as the S&P completes its post March 22 trading range. This trading range is expected to resolve to the downside and should lead to a more sustainable rally once complete. The bonds may be able to rally further over the very near-term, however, rallies from current levels should be viewed as being part of a short and medium-term down trend that is not complete. The XAU is beginning to show signs that a new up leg in the post October advance may be close to getting underway but we need to see a little more before that can be confirmed.

Elliott Wave and Fibonacci

From late 1998 I have been of the view that the rally from October of 1998 was a large degree fifth wave that once finished would put the final touch on a 13 year rally from October (December) 1987. This rally (post 1987) I am counting as intermediate wave 3 of primary wave 3 which began in 1982 and that a decline on par with 1987 was to unfold. In early 1999 I presented a cluster of Fibonacci price relationships pointing to a target for minor wave 5 and intermediate wave 3 in the 1525-1577 zone with an ideal price level of 1550. On March 24 of 2000 the S&P made its all time print high of 1552.87, stopping almost perfectly at the idealized price target. The pattern from October 1998 on the S&P from day one was not impulsive leading me to conclude that minor wave 5 on this average was taking the form of a large diagonal triangle or rising wedge. Diagonal triangle’s in the wave theory are terminal moves and occur either in fifth or “c” waves. They are five-wave patterns each sub dividing in three waves and are the only fifth wave in which wave 4 or “d” can and often does overlap wave 1 or “a”. The market behavior following the completion of a diagonal triangle are unmistakable as prices fall swiftly and sometimes violently and usually end up in the vicinity of the beginning of the pattern. In the case of the S&P that would be near the 923 level which was the low on October of 1998. That also happens to be the fourth wave of previous degree, which under the wave principle is a natural support zone. The initial action of the S&P following the March 2000 top did not unfold as one would have expected if indeed a diagonal triangle was complete. Yes we did have an initial sharp break into April-May but then the S&P spent several months rallying back  towards its March peak. However, the price action since that time is most definitely characteristic of a post Diagonal triangle and what we have seen since September tends to solidify the picture. Keep in mind that as severe as the decline has been it is still best viewed as a larger degree fourth wave. We must not lose sight of the fact that we are correcting a 13-year third wave rife with excess speculation not seen since the late 1960’s. And within the context of that assessment we have not seen anything yet out of the ordinary in regards to the current decline. The current decline is alternating nicely from the wave 2 1987 crash and that alternation is adding support to the preferred wave count that the current decline is correcting the post 1987 third wave advance. Fourth waves generally retrace between .383 and 50% of the preceding third waves. A 50% retracement points to a target near 890, and that is not too far from the fourth wave of previous degree near 923. In addition, a .236 retracement using log scale gives a potential target of 975. Log scale measures moves on a percentage rather than simple arithmetic basis and is important when viewing large extended moves such as a 13-year third wave. Now we have a couple of potential targets for wave 4. So, where does that leave us within wave 4. At the March 22 low the S&P came within 40 points of a .383 retracement of the 1987-2000 rally so the upper end of our target is not far off at least on the S&P. We did come close to initial targets and Fibonacci support on March 22. However, the initial rally off of the low of March 22 was a three, and if the S&P was about to begin intermediate wave 5 we should see an impulsive move not a three. That does not mean that we cannot rally further but it does strongly suggest that intermediate wave 4 is not over. I have been counting the decline from January as a “c” wave from September, and the decline from September as a second three from March 2000. Currently I see no reason to change that count so I will stay with it. It is possible to count the decline from January as a completed five-wave pattern on March 22 but the internal action of the market action into that low was much more characteristic of third waves and frankly the daily chart along with internal Fibonacci relationships support this view. This along with the fact that the rally from March 22 to March 27 was a clean three argues strongly that the post January decline is not over. I am currently counting the action from March 22 as a fourth wave from January 31 and looking strongly at the possibility that a triangle is in play. As long as the March 27 high of 1183 is not exceeded this will remain the preferred count for the short-term. The rally from Wednesday’ low into Thursday on the hourly chart of the S&P can be counted as a five. The decline from that high is so far looking more corrective on the hourly chart and is likely a “b” wave from Wednesday. The five up and corrective decline down suggests that the S&P should move back above the April 5 high to complete wave “c” of the triangle. Once the triangle is complete the S&P should thrust down below the March 22 low to complete the five-wave decline from January and at that time it will be in a position to stage its best rally since last May. Keep in mind that triangles are difficult patterns at any time and to try to anticipate one well before they are complete is a daunting task. This is still the preferred count but it is important to stay in touch via the daily letter or hotline for any possible changes. The rally from October 1998 on the DJIA can be counted as a traditional five-wave pattern at the January 2000 peak not a diagonal triangle but the DJIA like the S&P also completed a 13 year third wave rally in 2000. The DJIA from its January 2000 peak has taken a far different path in its wave 4 than the S&P but it too is satisfying all the requirements for alternation with the 1987 wave 2 decline. The detailed count presented in the March 26 report has not changed. The decline from January 2000 into October is best counted as a flat. An X wave was completed either at the February 6 or as a triangle at the March 8 high. The decline from either of those peaks into the March 22 low was a three-wave pattern and at this point I am counting it as wave “a” of a second three from January 2000. The rally from March 22 is a lot more difficult to count than the S&P. It is possible to count a five-wave pattern from March 22 to March 27 on the hourly chart with the pattern from March 27 an irregular into the April 4 low.  However, as discussed last week, the decline into April 4 was well in excess of a .618 retracement of the possible five. Irregular corrections imply underlying strength in the direction of the primary trend and as such should not normally correct that much of the move. The other count is simply that the DJIA completed a simple corrective pattern on April 2 and that the decline into April 4 was a “b” wave. The first count suggests that the DJIA should move above the March 27 peak in a five-wave pattern to complete a zig-zag. The latter count allows for the possibility that the DJIA may be in the process of tracing out a triangle but does not rule out the possibility for a move above the April 2 peak as part of a complex double three. In either case I am counting the rally from March 22 as a “b” wave from either February 6 or March 8. The rally from April 4 would be equal to the rally from March 22 to march 27 at 10,230 and would be equal to the March 22-Apri 2 rally at 10,26l. The .618 retracement of the decline from March 8 to March 22 is 10,190 and the .618 retracement of the decline from February 6 to March 22 is 10,298. There is a lot of resistance in the 10,200-10,300 zone. I have been counting the post January 23 decline in the NDX as a fifth wave from September and had been focusing on the area near 1580-1604 as an ideal target fro that fifth wave as that was the area where waves 1 and 5 would have been near equality. In addition, there was a cluster of internal relationships pointing to that same area. That level was broken and by a wide enough margin to eliminate that count as a possibility. So, where does that leave us as far as the NDX is concerned.  There is one of two possibilities in regards to the post January decline as it relates to the post September decline. The first is that instead of it being a fifth wave it is a third of a third. The latter is that it is a “c” wave and instead of the September decline being a “c” wave from March 2000 it is a second three of a double three. The answer will lay with the monthly chart, which from September still shows no sub division’s. As soon as we get a high above a previous monthly high it will confirm that the pattern from September is complete. For April that level is 2029 and that is a long way off. The decline into last weeks low from March 27 can be counted in a number of ways. It may be only a third wave from March 23 with the late rally a fourth wave. The high on Thursday stopped right near a .383 retracement of that decline so it is possible and that would allow for a modest break of last weeks low to complete the pattern from March 23. This decline whether it began on March 23 or March 27 can be counted as either wave v from January or as wave 5 of iii. The key as it has been for several weeks is the weekly chart. A move above last weeks high would confirm that the decline from January was complete. That level this week is 1594.36. A move above Thursday’s high of 1519 would indicate that the decline from March 23 or 27 was most likely over. Support: S&P; 1113-1116, 1080-1090, DJIA; 9650-9660, 9580-9600, NDX;1410-1415, 1300-1310. Resistance: S&P; 1139-1141, 1154-1157, 1170-1173, DJIA; 9840-9850, 9990-10,010, 10,190-10,210, NDX; 1485-1490, 1548-1556. Trend changes for the next two weeks are as follows: April 10, April 12 and April 18. The latter two are very important.

Bonds

The bonds have confirmed the completion of the diagonal triangle from January 25 and the first wave down out of that pattern has completed. The peak on March 22 may have completed all of wave 5 of “c” from the September low or may have completed only wave 3 of 5. The nature and depth of the decline from the March 22 peak will be the key. I am still counting the rally from January 2000 as a “b” or second wave from October 1998. Since we then should be entering a third or “c” wave we need to begin with as five and that is why the decline from the March 22 peak is so important. If we do not get a five than we have to allow that there is still more to go in wave “b” or 2. For now we see enough to allow for some further upside over the very near-term to correct the initial decline from March 22. A move below last weeks low would confirm that wave 3 or “c” from March 22 was underway and the decline should begin to accelerate. Remember, the rally from January 25 is a diagonal triangle and a move back towards its beginning should be expected, and that is near 102. The daily range oscillators got close to oversold and are back to neutral. The daily trend oscillators are negative and short-term momentum is also negative. The weekly range oscillators have turned down from near the low end of overbought. They have locked in a number of negative divergences and are nowhere close to oversold. The weekly trend oscillators are negative and just beginning to head lower. Medium-term momentum is negative. Sentiment has improved over the past couple of weeks but is still way to high with Market Vane reporting 54% bulls and Consensus Inc at 43%. These need a lot more work. Support: 103 12/32-103-18/32, 102 10/32- 102 16/32. Resistance: 104 25/32-105, 105 22/32-106. 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.  On a very near-term basis the bonds could bounce a bit more to complete a countertrend move off of the March 22 peak. However, short and medium-term momentum remains negative and any rally from here should be viewed as counter trend. Once complete a move back below last weeks low is expected and I remain bearish for both the short and medium-term. 

XAU

It is possible to count the rally from October to February as a five-wave advance on both the daily and weekly charts. However, the monthly chart shows a clean three-wave pattern. Since I am of the view that the weekly chart takes precedence over the daily chart and the monthly chart takes precedence over the weekly chart. Given the monthly chart the pattern is not impulsive but a very clean three-wave pattern. That does not mean that the advance is not or cannot become impulsive. Last weeks low did not take out the low of February 15 and that leaves open the possibility that the decline from February 27 is a deep second wave from February 15 and that a third of a third is about to unfold. If this is the case we will know soon enough as there is very little room fro error on the downside. The other possibility and one I have been going with lately is that the decline from February 27 was (is) a “b” wave from October. Either of these counts would allow for a rally back above the February 27 peak and should allow for a five-wave pattern. The key is the February 15 low of 45.64. Short-term momentum has turned back up as have the trend oscillators. Medium-term momentum is still slightly positive but to keep it so we need to keep on moving up. Long-term momentum remains up and that is the biggest plus for a bullish resolution. Sentiment is constructive with both Market Vane and Consensus Inc reporting bulls in the low 20% zone. The February 15 low of 45.64 is important support. There is resistance at 51.75 and 53.20. The XAU is at a critical juncture. Further gains this week could turn the picture back to bullish while a move below the February low would have dire consequences. I am going to stay neutral in all time frames but that could change early this week.

Indicator review

The first week of April has picked up right where march left off. There was a lot of volatility last week as we saw a number of big price moves. The final tally left all of the major averages lower but as has been the case for most of the year the DJIA held up a lot better while technology took the worst of it. The DJIA lost less than 1% while the S&P gave up 2.75%. Even the broad based NYSE Composite was a lot weaker than the DJIA as it lost over 2%. For the year so far the S&P is down over 14%, the NYSE Composite is lower by 11.24% and the DJIA is down 9.23%. Sooner or later I suspect that a shit in relative strength lasting for more than a day or two will develop but just when that may occur is very difficult to quantify. Meanwhile, price volume relationships have been at best neutral but in reality a bit on the negative side. Volume has just not expanded on the rally days and the follow-through to strong days has been negligible. We did get a nearly 8 to 1 positive volume day on April 5 but came right back on April 6 with a 5 to 1 negative day. Breadth statistics have been inconsistent. On April 5 the day of a 400 point gain in the DJIA we had a better than 3 to 1 positive day but on Friday April 6 with the DJIA down only 126 points the A/D line gave back almost all of Thursday’s gain. The weekly A/D line is holding up OK and from October the daily A/D line is doing much better than the averages. However, the daily A/D line, while well above its October low is only one bad day away from taking out its March 22 low. The high/low statistics are neutral to slightly negative. And the high/low indicators are also neutral. The weekly numbers showed a drop in new highs and expansion in new lows but nothing excessive at this point. The weekly high/low index has turned down. The Russell 200 last week started off April on a weak note giving up over 3.5%. It is neutral short-term. The medium0term is still negative and not yet oversold. The Value-line also started off weak and in fact was down a lot more than even the S&P and NYSE Composite  as it lost 3.75% in the first week of April. What is interesting is that up until February or early March it was doing OK and keeping pace or even slightly out performing the DJIA, but since the March low it has begun to weaken a lot more and last week was the only average to actually move below the March 22 low on a print basis. This is important as the Value-line is a good proxy for the small cap arena and un-weighted average. The short-term is neutral but weak. The medium-term is bearish. The NASDAQ Composite and NASDAQ 100 were again the weakest area of the market. From their peaks around March 27they have lost 12.6% and 16.5% respectively. They are deeply oversold but that so far has not meant a thing. I am going to stay neutral on the short-term. I am also neutral on the medium-term but with a bottoming bias. The DJTA lost over3% in the first week of April. The short-term is neutral but improving. The medium-term is negative. The DJUA and UTY have moved up towards the area of the February top and important resistance. The short-term is neutral but beginning to weaken. The medium-term is negative but not far from neutral. The long-term remains negative.

Momentum 

The breadth oscillator moved up towards overbought and turned back down. It is neutral but weak. The volume oscillator did reach low overbought readings and then turned down. It is neutral and weak. The 3-day oscillator is on a sell alert status. The McClellan oscillator poked its head above zero and moved back below. This is a potentially very negative pattern and a failure to move higher early this week could be quite negative. The 10-day Arms is oversold and positive. The open 10-day Arms is borderline oversold. The 5-day Arms is oversold and positive and could remain favorable for a few more days. The 21-day Arms is oversold. The new 10-day Arms completed a sell signal on Friday. Daily range oscillators such as RSI are neutral. The daily trend oscillators are slightly positive. The weekly breadth oscillators are heading lower and only neutral. The daily range oscillators are oversold but have confirmed price. The daily trend oscillators are negative and still accelerating.

Sentiment

The sentiment composite slipped one point and at +12 is neutral. Investors Intelligence has improved from excessively negative levels but is still showing a good deal more bulls than bears. Market Vane and Consensus Inc. are at very bullish levels. The American Association of Individual Investors (AAII) has improved but the past two weeks we have seen more bulls than bears. This indicator needs more work. The NYSE members were fairly large net sellers for the latest reporting period and only for the second time this year. This indicator is still bullish. The commitment of traders report (COT) on S&P futures has improved but still shows a still very high net short position for commercial hedgers and a corresponding net long position from the small speculator. This indicator is still very negative. Corporate insiders have slowed their rate of selling a bit but the 8-week moving averages remains negative and at its worst level since May of 1998. The 10-day moving average of the CBOE put to call ratio is close to bullish while the OEX ratio is positive.  The Rydex ratio has continued to improve and for the first time in a long time Ursa has more assets than Nova. Post late 199 this indicator is bullish. However, going back before late 199 it is closer to levels seen at tops. And given the extent of the decline, especially in technology it may have to get even lower.

Summary and Conclusion

I continue to see numerous articles and discussions on how to find a market bottom. Carl Swenlin of www.decisionpoint.com put it as best as I have ever read in his report last week when he stated that “the talking heads of CNBC and there never ending search for a market bottom reminded him of taking a family drive with a number of small children in the back seat asking every five minutes are we there yet?, are we there yet?”. This is not an exact quote but it did make the point quite well in my view. The press has focused on the fact that the DJIA has not yet fallen the required 20% from its all time high in January of 2000 on a closing basis to qualify as an “official” bear market. Whew, that makes me sleep better at night and gives me a lot more confidence knowing that “officially” the DJIA is not in a bear market. However, take a look at the S&P, which at its lowest point was down over 28% or the NASDAQ, which is down over 65%. That sure does qualify as a bear market now doesn’t it?  The bottom line to all of this is simply that bear markets do not end when every one is looking for them to end. Bear markets don’t end when we see articles on how to find bottoms and we see analysts paraded out on an hourly basis telling us it’s a good time to buy for the long-term or that we are getting closer to a bottom. No, they end when no one is talking about bottoms. They end when most everyone has thrown in the towel, when we see analysts paraded out every day telling us that things are awful and they are never going to get better, when we read articles on how to make money selling stocks short in a bear market. Granted, we have made some strides in this area but clearly not enough. When I look at the sentiment indicators I do get a sense that we are getting closer to a more important medium-term low. However, the sentiment composite, which is a combination of 12 key indicators is only at a neutral 12. At the October 1998 low it reached +15 and at the 1994 low it hit +16. It is good and could support a short-term rally but it is not close yet to levels seen at good lows and the fact that the S&P has fallen considerably more currently then at either of those previous lows suggests to me that we still have our work cut out for us. On a specific basis the Investors Intelligence survey is still reporting far more bulls than bears (+10 currently). When compared to past declines of this magnitude this is not even close. The 38.3% bears is a good start but in 1998 it reached 47.5% and in 1994 it reached 59%. 1994 was a sideways market that lasted about 11 months and lost a little over 10%. That was a lot less time then the current decline and a lot less damage. I am also concerned by the American Association of Individual Investors (AAII) survey as the last two weeks have shown more bulls than bears. It is not excessive like it was in early February, but it does show how even just a minor rally brings out the bulls. This is probably due to the fact that the buy the dip mentality and the “invest for the long-term” theme is still deeply ingrained in the public. But for whatever reason, this is not good. There are some positives such as Market Vane and Consensus Inc, and some of the short-term indicators such as the put to call ratios are positive and this could support a continuation of the short-term rally over the near-term. However, even the 10-day CBOE put to call ratio while good is not close to where it was in either 1998 or 1994. Short-term there is enough on the positive side of the ledger to support the idea that the rally from March 22 is not over and a move to or marginally through the March 27 or in the case of the DJIA the April 2 peak is not out of the question, or at a minimum keep the trading range that looks to be unfolding in play. However, I do not see enough from the indicators to change from neutral. On a medium-term basis we are making progress, and enough to suggests that perhaps the worst of the decline is behind us. However, as mentioned above some key sentiment indicators need a lot more work before they can become bullish. In addition, the technical barometer is only at zero. At or near important medium-term lows we have seen it in the +4, +6 level. That is for both the inside and outside position. Moreover, the weekly trend oscillators are still pointed straight down and weekly breadth indicators remain negative and are not yet oversold. The bottom line is that while we may indeed be closer on a medium-term basis I do not think we are there and I remain neutral. Long-term I am still a bear.

The chart above is a long-term view of the 10-day CBOE put to call ratio. Note how bullish it got in late 1994 and more importantly how bullish it stayed throughout most of the 1995 rally. We did get somewhat bullish in 1998 but that quickly evaporated leading to the lowest level seen in 13 years in March of last year. While we have improved this indicator is nowhere close to levels seen at important lows.

The sentiment composite below has also improved but it too is nowhere close to where it was in 1994 or 1998 and although it is OK short-term it needs more work before a good medium-term low can be confirmed. Note also how long it stayed near bullish levels in 1994 leading up to an explosive and very sustainable rally.

The technical barometer gave a series of buy signals throughout the latter half of 1994, a very timely buy signal in July of 1996, another strong buy signal in September of 1998 and a modest signal in October of 1999. The current signal is no better than neutral and we are just coming off a series of negative readings leading into the February 6 top. The technical barometer simply does not support anything mote than a short-term rally.

The 10-day and the open 10-day Arms are positive and could support a rally., However, the new 10-day Arms developed by Peter Eliades of Stock Market Cycles has just given a sell signal. It does this when it moves below .80 and then back above .80. Although it lagged a bit in January and going into the September top it was not too far off and most of these signals have been quite timely. It just moved above .80 on Friday after moving below on Thursday.