BI-WEEKLY MARKET RECAP and TECHNICAL PERSPECTIVE

By: Larry Katz

April 30, 2001

Capsule

Some of the more sensitive short-term indicators have confirmed the latest rally and support the idea that the post April 4 rally has some further upside potential. However, the majority of the shorter-term indicators are overbought and beginning to diverge suggesting that while the rally has some unfinished business on the upside it is in its latter stages. The bonds remain under pressure but some short-term sentiment indicators are approaching levels that could see them set up for a decent rally soon. The XAU is fast approaching some important medium-term resistance. How it reacts to that resistance will be important but for now  all time frames remain bullish.

Elliott Wave and Fibonacci

I have been approaching the S&P with the idea that the October 1998 to March (September) 2000 rally was minor wave 5 from 1987, which in turn completed intermediate wave 3 from the August 1982 low. There of course a number of alternate wave counts, however, the Fibonacci relationships both internally and externally support this count, and when it comes down to the count it is my belief that it is these Fibonacci relationships that are the determining factor. A breakdown of the pattern from 1987 as is follows; wave 1 of minor degree October (December) 1987 to July 1990, wave 2 of minor degree July of 1990 to October of 1990 wave 3 of minor degree October of 1990 to July of 1998, wave 4 of minor degree July 1998 to October 1998 and wave 5 of minor degree October 1998 to March (September) of 2000. Although I do little work in time it is interesting to note that wave 1 lasted 33 months, wave 3 was clearly extended and lasted nearly 8 years. If wave 5 peaked in March it lasted 17 months or about 50% of wave 1 and if it peaked in September it lasted 35 months or just slightly exceeding wave 1 in length. More importantly are the Fibonacci relationships within the pattern. Wave 3 for example was 2.618 the length of wave 1 at 1196 and the actual peak of wave 3 in July 1998 was 1190. For the record, all price projections of this magnitude throughout today’s letter are based on a logarithmic scale. Logarithmic scale measures relationships on a percentage basis rather than a simple arithmetic basis and for patterns of the duration we are looking it I find it to be a much more accurate picture. As for the Fibonaccii relationships with the post 1998 rally we did have a target based on a number of factors between 1527 and 1575 with an idealized price target of 1550 (the full report written in early January of 1999 is available on the web site). This target was hit almost perfectly in March of last year. The alternate count I have discussed over the past several months allow for the orthodox top of the post 1998 advance to have been completed at the September high. This did miss the idealized target of 1550 but at 1527 it was not too far off and did actually reach the lower target band. In either case, both Fibonacci price and time relationships support strongly the idea that a 13 year intermediate wave 3 rally in the S&P did in fact complete in 2000. I have been counting the rally on the DJIA from the September (October) 1998 low as a five wave pattern unto itself and also as minor wave 5 from October (December) 1987. When I wrote the report in early 199 on the S&P I also ran the numbers on the DJIA. What I found in regards to the DJIA was not nearly as compelling as the numbers on the S&P so at that time I set them aside. I have been not only at odds but also at times very frustrated with the extreme non-correlation between the DJIA and the S&P going back to early 2000. This led me to go back and have another look at the longer-term Fibonacci price relationships as it relates to the DJIA. And what I found is quite interesting and also leaves open the possibility that the January 2000 peak on the DJIA completed only minor wave 3 from 1987. The rally from the October 1990 low is still the beginning of wave 3 from 1987. However, instead of wave 3 ending in 1998 as the S&P did, the October 1997 to July 1998 rally is only wave 1 of a larger five-wave pattern. Wave I of 3 began at the October 1990 low and ended in early February 1994. A 1.618 multiple of that rally added to the 1994 low yields a target of 8365. the actual high in August of 1997 was 8298. The rally from October of 1997 to January 2000 would have been equal to wave 1 (October 1990-February 1994) at 11,860. The actual high of that move was 11,750. So far we have two price projections that come with in 1% or less of perfection. In addition, the entire post 1990 advance would be 2.618 the length of the 1987-1990 advance at 11,945. This is less than 200 points from the January 2000 peak and less than 2%. A 2% margin of error on a move of that magnitude is quite reasonable. These price relationships are based on logarithmic scale just like the S&P. In breaking down the pattern from October 1997 we find that wave 3 (October 1998 to August of 1999 would have been 1.618 the length of wave 1 (October 1997-July 1998 at 11270. With the actual price high of 11,365 we again are off by less than 1%. Wave 5 from October of 1999 to January of 2000 would have been .618 wave 1 at 11,454. The actual high was 11,750. This is a bit more than we have seen so far but it is still not out of the area of acceptable margin of error. These relationships are not based on logarithmic scale but on simple arithmetic scale. The bottom line is that as far as the S&P is concerned the long-term count and Fibonacci relationships supporting that count remain in place and it is clear that the March (September) 2000 peak completed the entire five wave pattern from October (December) 1987. As for the DJIA, while there is an acceptable wave count that does in fact support the idea that the post 1998 advance was indeed wave 5 from 1987, Fibonacci relationships within the pattern as well as external lend a lot of support to the idea that January 2000 completed only wave 3 of minor degree with the DJIA needing to complete one more modest new high to finish off the entire post 1987 advance. Could we actually see the DJIA make new highs while the S&P fails? Of course we could, we saw the S&P make new highs in March of 2000 while the DJIA failed and from that time the DJIA has held up considerably better than the S&P. In fact at Friday’s close the DJIA is 940 points below its January 2000 high or less than 9%. If the DJIA were to move to nee highs and the S&P rally the equivalent amount on a percentage basis it would move to the 1360-1380 area. That is far below the peak of March 2000 of 1550 and coincidently that is also the area of a .618 retracement of the decline from March 0f 2000 to March of this year. There are also two Fibonacci price relationships that point to a possible target for the DJIA in the 12,400-12,600 area. First off, intermediate wave 3 from 1987 would be 2.618 the length of wave 1 (1982-19870 at 12,651. Secondly, minor wave 5, which if correct began on March 23 would be 50% of wave 1 (October 1987-July 1990) at 12,428. Both of these figures are based on Logarithmic relationships. A move to that level from here would be a gain of 15.6%. If the S&P were to advance an equal percentage that would put it near the 1440 level. That would break the .618 retracement of the decline from March 2000 put it would also fall well below its wave 5 peak. From the March 22 low it is possible to count the rally into March 27 n the DJIA as a five with the pattern from March 27 to April 4 tracing out an irregular. Thus it is possible on the DJIA that the post April 4 advance is a third wave from March 22. However, the rally from March 22 to March 27 on the S&P was clearly corrective with the hourly chart tracing out a text-book zig zag. Thus while it is possible to count the post April 4 advance on the S&P as a still developing five, it can only be counted as a “c” wave. This solidifies my view that even if March 22 did in fact mark a medium-term low in the S&P it is best viewed as only wave “a” of a larger pattern and those lows should be broken once wave “b” runs its course.  Short-term the rally has continued with the S&P moving right up to its April 19 peak. The rally from last weeks low is cannot yet be counted as a five wave pattern on the hourly chart but can be counted as wave .5 of iii from April 4 so we should see a bit more upside to complete the pattern. The DJIA hourly chart from last weeks low is showing a similar pattern as the S&P. The rally from last weeks low is best counted as wave .5 of iii from April 4. Given the preferred count we are likely close to completing the bulk of the post April 4 low but still need to finish off a small fourth and fifth wave once the rally from last week runs its course. The long-term picture on the NASDAQ is not as easy to work with. The NASDAQ only came into existence in 1971 so we do not have a lot of the historic data that we have on the DJIA or the S&P. The NDX data is even less with my data-base going back only to 1998. The nature of the move from late 1999 into the March 2000 top, however, was indicative of a major fifth blow off not unlike what we saw in Japan in 1989 and possibly what we saw in the DJIA in 1929. The decline from its peak has not yet matched what we saw in 1929-1932 but has rivaled what we saw from Japan. The bottom line here is that it is very likely that we have completed a major five-wave advance in the NASDAQ, which could take years to rebuild. Short-term the NDX made a peak on April 20 from the April 4 low in what is best counted as a three-wave pattern. The decline from April 20 to last weeks low on Wednesday can be counted as a five-wave pattern. Furthermore, the rally from Wednesday to Thursday was confirmed as a three on the hourly chart adding further support to the idea that the decline from April 20 to last weeks low was only the first wave of a larger pattern. Whether the rally into Friday was it or the rally from Wednesday was only wave “a” of a larger corrective pattern is not clear. I am tending to favor the latter and as such a move back above Thursday’s high is possible to complete the pattern from Wednesday before wave “c” or 3 from April 20 gets underway. However, a move below of 1743 would not only break important support but also confirm that the next wave down was in progress. Support: S&P: 1235-1236, 1222-1224, 1200-1203, DJIA; 10,665-10,670, 10580-10,589, 10,380-10,400, NDX;1740-1746, 1640-1650, 1590-1600. Resistance: S&P; 1253-1255, 1260-1262, 1270-1275, DJIA: 10,820-10,845, 10890-10,910 NDX; 1855-1860, 1890-1900. Trend changes for the next two weeks are as follows. April 30, May 2*, May 7**,   May 9. *. *denotes potentially important dates.

Bonds

The rally from January 2000 on the bonds is clearly corrective basis daily weekly and monthly charts. The decline from October of 1998 to January of 2000 was a clean five-wave pattern on the daily, weekly and most importantly monthly charts. If the March 22 high completed wave 2 or “b” from October 1998 then it is mandatory that the decline get started as an impulsive five-wave pattern. If we do not get a five-wave structure that will imply one of two things. The first is that the March 22 peak did not complete the pattern from January 2000 or that the decline from October 1`998 is not a five. However, it is as clean a five as I have seen so that leaves open one last possibility and that is the pattern from January 2000 is in the early stages of a very large “b” wave triangle and once complete a thrust to new lows below the January 2000 low will be seen. So far the decline from March 22 is not and cannot be counted as a five-wave pattern on the daily chart at least as measured by the recent price low. There is a possibility that a five-wave decline was completed at the April 16 low and from there the bonds are tracing out an irregular correction. However, the bonds on Friday closed very close to what can be counted as the “b” wave of that pattern and a break of that low would invalidate that particular count. It looks likely that if a five is to develop on the daily chart we have more to go and are likely still in wave 3 of the pattern. From A Fibonacci perspective the bonds are at an important level as the recent low is near a .383 retracement of the entire post January 2000 rally and also right near a 50% retracement of the rally from May 2000. The bonds have already broken the .618 retracement of the rally from September so the low around the 100 level is quite important. A break of that level would not only break important support but would likely confirm that wave 3 from March was still in progress and allow for a five wave pattern to unfold from that high. The daily range oscillators are oversold and are beginning to set up possible bullish divergences. However, those divergences are only potential ones and further weakness would blow them out of the water. The daily trend oscillators are still negative but showing some signs of stabilizing. The weekly range oscillators are still headed lower and have not come close to oversold levels. The weekly trend oscillators are negative and accelerating. Short-term momentum is beginning to stabilize but is still negative while medium-term momentum is negative. Market Vane at 47% bulls was unchanged and remains neutral. Consensus Inc moved to 29% bulls from 30%. It is positive. The commitment of traders report has also improved with the commercials now showing a modest net long position. Support: 98 25/32, 97 30/32-98 06/32 and 95 26/32 +/- 24/32. Resistance:100 24/32-101, 103-103 10/32. Please note that price levels are based on a constant bond chart and not any one futures contract. The constant bond contract is running about 7/32 below the nearby futures (June). The bond market is at a very important juncture for the short-term. Sentiment is improving but not yet positive Short-term momentum remains under pressure but is showing some improvement while medium and long-term momentum is negative. Short-term there is just too much noise and I remain neutral for now. Medium-term I remain bearish.

XAU

The XAU did exactly what it had to do in order to keep the pattern from the April 3 low positive. The XAU broke through important near-term resistance and is in a position to challenge the March 9  high. Just above that high, which was 57.42 is important medium-term resistance in the 60-62 zone. How the XAU does at that level will be important to the bigger picture. There is support between 53-54 that needs to hold if the pattern from April 3 is to evolve as impulsive   Short medium and long-term momentum remain positive and the price patterns seem to be developing as they should to keep the pattern bullish. I am going to remain bullish in all time frames.

Indicator review

The rally continued last week with the DJIA, S&P and NYSE Composite all recording solid if not spectacular gains. With one trading day left in April it is safe to say that the month will end with solid gains. The DJIA so far is up over 930 points or 9.4% and the S&P has added 93 points or 8%. This has reversed two months of sharp losses with the DJIA now showing a very modest gain for the year of 23 points. The S&P is still down 67 points or over 5% and the NYSE Composite is off by 19 points or near 3%. Price volume relationships were decent last week but nothing great and are neutral. However, Friday did see a sharp drop in volume so we need to watch carefully this coming week. Breadth was decent last week with both the daily and weekly A/D lines showing respectable gains. Again they were nothing spectacular but they were good and did keep pace with the averages. The high/low statistics were also good. The daily new highs expanded and confirmed price after setting off negative divergences the prior week. The weekly new highs also expanded and confirmed on a short-term basis. The high low indicators are also positive. The Russell 2000 had a solid week gaining over 3.7% and for the month of April it is up over 7.3% lagging the DJIA but a respectable performance nonetheless. Short-term is getting overbought and I am neutral. The medium-term is neutral but also improving. The Value-line gained just over 2% last week and for April it is ahead by nearly 10% keeping pace with the DJIA. The short-term is overbought and neutral. The medium-term is neutral but close to turning positive. The NASDAQ Composite lost 87 points or 4% last week while the NDX gave up 123 points or 6.3%. For April they are still sharply ahead by 12.7% and 15% respectively and that has helped to reduce the loss for the year to 16% and 22.6% respectively. However, last weeks action was to put it mildly a big disappointment. I had thought that the strong performance earlier in the month was a sign that we were finally seeing a shift in relative strength but last week has questioned that view. The short-term is neutral but close to negative. The medium-term is neutral. The DJTA ended the week about flat but did rally strongly late in the week. For the month of April the DJTA is up about 91 points or 3.3% and that has helped to pare the yearly losses to 84 points or 2.86%. The short-term is neutral. The medium-term is neutral but beginning to slip. The DJUA and UTY closed higher last week but did slip a bit on Friday. The short-term and medium-term are neutral. Long-term I remain bearish as they look to be close to completing important tops.

Momentum

The breadth oscillator is close to overbought and beginning to develop negative divergences. The volume oscillator is overbought and also beginning to develop negative divergences. The 3-day oscillator is overbought but well above +600 and that is short-term positive. The McClellan oscillator is overbought but has confirmed the price highs. The 10-day Arms is neutral but just coming off overbought readings. The open 10-day Arms is neutral but very close to overbought. The 5-day Arms and the 21-day Arms is neutral. The new 10-day Arms is negative and on the verge of issuing another in a series of sell signals. The daily range oscillators are close to overbought. The daily trend oscillators are positive but are slipping and are close to turning down on the NASDAQ averages. The weekly breadth oscillators are neutral. The weekly range oscillators are neutral. The weekly trend oscillators are turning positive. The technical barometer did show a bit of improvement last week in both positions. However, it is going to take a lot just to turn it neutral. While it is designed as an early warning indicator looking out two to four months on occasion, the message is very clear as it has given off its most negative signal to date.

Sentiment 

The sentiment composite was unchanged and at +10 is neutral.  Investors Intelligence was about flat with the bulls slightly outnumbering the bears. The bearish percentage has improved but is only neutral. Market Vane and Consensus Inc. reported modest increases in the bullish percentage. The 4-week moving averages are still positive but are easing. The American Association of Individual Investors (AAII) reported net bulls at +16. The indicator is neutral but slipping. The latest commitment of traders report (COT) showed a modest increase in the net short- position by commercial hedgers and a still healthy and negative net long position on the part of the small speculator. NYSE members remain firmly on the buy-side and this key indicator of smart money is bullish. Corporate insiders remain heavy net sellers and this indicator is bearish. The CBOE put to call ratio basis the 10-day moving average moved lower and is bearish. The OEX ratio moved in the opposite direction and moved to bullish levels. The Rydex ratio is neutral based last year’s levels. However, if go back to pre 2000 levels it is actually closer to bearish. Meanwhile, the level of assets in the bearish funds, Arktos and Ursa remain near historic lows with Ursa at its ninth lowest level ever. 

Summary and Conclusion

The short-term technical picture of the market is mixed. A few indicators have broken out and although overbought they did confirm price and that is a bullish development. The McClellan oscillator is one of those indicators as it moved above its April 18 peak. It is not yet close to levels that could be even remotely viewed as a medium-term initiation signal but it is at least confirming. We also saw a nice breakout on the 3-day oscillator. It is overbought but overbought enough to imply higher prices over the near-term. Other indicators are not in such good shape. The breadth oscillator is close to overbought but also diverging as it remains below its April 19 peak. It is not that far away though and a decent breadth day Monday could put it above the April 19 peak. However, it is still not close to thrust type readings and given the take-away figures this coming week, unless we get a huge surge in breadth the odds of that occurring are extremely low. The fact that it is staying at or near overbought levels is a short-term plus as it implies that there is some strength in the market but it is not close to levels that would indicate a medium-term initiation such as we saw in October of 1998. Sentiment is also mixed. Market Vane and Consensus Inc have weakened but are still in fairly decent shape. The Investors Intelligence survey has also improved of late. However, the bulls still out number the bears and have done so for an unprecedented 120 straight weeks. Meanwhile, the American Association of Individual Investors (AAII) has reported, fro the second week in a row, a rise in the net bulls. It is not excessive but it is a sign of just how quickly the public is willing to jump back on board.  The short-term picture is a bit cloudy with some indicators positive while others are either neutral or on the negative side of the equation. However, there is enough on the positive side to support the idea that the rally from April 4 is not yet complete. At the same time I see enough to suggest that the bulk of the rally is behind us and that is enough to maintain a neutral position on the short-term. It seems that the most likely scenario is that March 22 did indeed mark a medium-term low in the S&P and a solid bear market rally is in progress. We are most likely in the latter stages of the first wave of that rally or in Elliott terms near the end of wave “a” of a larger a-b-c pattern. There is always the possibility that the rally may just keep on going and staying in the neutral camp we could just miss it. If we get a correction like I think we should and the technical condition of the market warrants a medium-term bullish signal could be issued. However, that is a risk I am willing to take as the long-term backdrop remains firmly in the bearish camp.

QQQ traders are flat stand aside for the morning.  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 time.       

The DJIA monthly chart above shows the completed five-wave advance from 1987 as well as the new count discussed in the Elliott Wave section of the letter. This is a monthly chart on log scale.

The chart below is a weekly chart showing a more detailed look at the pattern from the October 1997 low. Wave 4 in this count is an irregular and that alternates nicely from the steep decline of 1998’s wave 2.

The McClellan oscillator has broken out above the April 19 peak and confirmed price. It is not close to levels suggestive of medium-term strength but this is a short-term positive development.

In contrast, the breadth oscillator below has not moved above its April 18 peak setting up potentially negative divergences.