BI-WEEKLY MARKET RECAP and TECHNICAL PERSPECTIVE

By: Larry Katz

May 14, 2001

Capsule

A short-term top looks to be close to complete and a correction of the March-April rally is in progress. Once the correction runs its course a continuation of the medium-term bear market rally should resume with a move back above the late April early May high expected. The key, however, is that it is a bear market rally and not the beginning of a new bull market. The bonds look to have entered wave 3 from the late March peak and an acceleration of the decline may be close at hand. The XAU broke out above the early March high and has moved into the area of key medium-term resistance. A brief sideways consolidation is possible but the path of lest resistance is higher. 

Elliott Wave and Fibonacci.

The S&P can be counted as having completed a satisfactory five-wave advance from the April 4 low on either May 2 or May 7. The alternate possibility is that the S&P is still in a fourth wave from April 30. This would allow for one more modest new high to complete the pattern from April 4. The key is the weekly chart. A move below last weeks low of 1240.79 would turn the weekly chart down and confirm the rally from April 4 as complete. Given the position of the weekly chart the only possibility I see for the S&P to still be in wave 4 is if it is in a triangle, and if Friday completed wave “c” of that pattern. I am counting the April 4 rally as a “c” wave from March 22 and not as a third wave. The simple reason for that is the rally from March 22 to March 27 on the hourly chart is a clean three-wave pattern that is next to impossible to count as anything but corrective. My preferred count is that the rally from the March 22 low is an “a” wave of a larger corrective pattern. As such I am approaching the expected decline as being directly related to this rally and as either a “b” or X wave. Once complete wave “c” should unfold and carry the S&P to a new post March 22 peak. However, we are faced with what is so far a three-wave rally that has carried the S&P right into a .618 retracement of the decline from the January peak into the low of March 22. I have been counting the decline from January 31 as either a “c” wave from the September 1 peak or as a “c” wave from November 6 peak. If the former than we have a simple a-b-c from September and if the latter than the best count from September is that the pattern was a double three. The fact that the rally is a three and has also stopped right at a .618 retracement of the post January decline leaves open the possibility that the rally is either a second wave from January and that the S&P is about to enter a third wave to the downside (a more detailed discussion of this count can be read in the April 23 report). This is not my preferred count but one that is nonetheless quite possible and needs to be presented. The DJIA can be counted as having completed a five-wave rally from April 4 at the May 7 peak. It is possible that what I am counting as wave 5 May 4-May-7) is part of a more complex fourth wave from either April 30 or May 2. It is also possible that wave 5 from May 4 is sub dividing, and that what we saw last week was only wave .2 of wave 5. Unlike the S&P, which did break well enough below the .618 retracement of the rally from May 4 to May 7 the DJIA held that level on Friday. The weekly chart from April 4 remains positive on the DJIA and that remains the key. A move below last weeks low of 10,779 would turn the weekly chart down and confirm that the rally from April 4 was complete.  Unlike the S&P, the rally from March 22 to March 27 on the DJIA can be counted as a five on the hourly chart. If so then the March 22 to April 4 pattern was an irregular. The fact that the April 2 to April 4 decline was a clean five on the hourly chart adds some support to that count as it can be counted as a “c” wave from March 27. As such it is possible that the DJIA is in an impulse move from March that could lead to a new high (A complete discussion of this count can be found on the April 30 report). That said the post April 4 rally may be a third wave from March 22 or possibly only wave 1 of 3. The short-term is not clear but we are close to confirming that the post April 4 rally is complete. Once confirmed the stage should be set for the correction to begin in earnest. The nature and depth of that decline and will be the key for the medium-term.  The rally from April 4 to April 20 on the NDX can be counted as a five-wave pattern on the hourly and daily chart but under that count wave 4 was an irregular and wave was very extended. In fact at the April 20 peak wave five traveled exactly the same distance as waves 1-3 inclusive. This does not invalidate that possibility that the rally was indeed a five but it also leaves open the possibility that what maybe counted as wave 5 is in actuality a “c” wave of a simple three-wave corrective pattern. From that high the NDX has been in a corrective pattern. There are a number of possibilities in regards to the count from April 20. The decline from April 20 to April 25 can be counted as a five. The rally from April 25 to May 2 moved to within a point or so of the April 20 high but did not move above it and so it is possible that the rally was a very deep second wave. In addition, the decline from May 2 to May 4 can also be counted as a five on the hourly chart. The rally from that low to May 7 was also corrective and that leaves open the possibility that the NDX is currently in the early stages of a third wave from May 4, which in turn could be counted as either a third or “c” wave from April 20. However, the pattern from last weeks high so far at least does not look impulsive. It could still evolve as such but that would require the NDX to begin to accelerate to the downside fairly quickly. Moreover, and in my view most importantly, the rally from April 25 to May 2 was a clean corrective pattern on the hourly chart and impossible to count as impulsive. That leaves us with one of two counts. The first is that the rally from April 4 ended on April 20 and everything from that point is correction of that move. This is my preferred count and should lead to a move back below the April 25 low. The alternate count is that the decline into April 25 completed an X wave from April 4, the rally from April 25 to May 2 is wave “a” of a larger a-b-c from April 25 and the pattern from May 2 is a “b” wave from April 25. This should lead to a move above the April 20 peak to complete either a second three from April 4 or wave “a” of a second three. As long as the NDX remains below the April 20 high of 1981.90 we have to favor a move back below the April 25 low of 1743.45 to complete wave “b” from April 4. Meanwhile the monthly chart from last September has not yet moved above a previous months high and remains down. The rally from April 4 has also stopped between a .383 and 50% retracement of the decline from January to April 4 and that leaves open the possibility that the rally from April 4 is only related to the post January 24 decline and the NDX could be setting up for a move back below the April low. This is not the preferred count at this time but it is possible and one that we need to be at least cognizant of. The NDX did move slightly below the May 2 low. The pattern from the May 2 low has been mostly corrective and that leaves open the possibility that what we saw on Friday was a “b” wave of a larger “b” wave triangle from April 25.  This would call for more of a trading range over the next several days between the April 25 low and May 2 high prior to a thrust below the April 25 low. This count would fit in well if indeed the S&P was also in a triangle and the DJIA was going to subdivide further in wave 5 from April 4. Support: S&P 1230-1232, 1200-1203, 1175-1182, DJIA; `0375-10,390, 10,180-10,200, NDX: 1720-1740, 1590-1608. Resistance: S&P; 1258.1260, 1270-1275, 1295-1300, DJIA; 10,910-10,920, 11,000-11,025, 11,200-11,250, NDX; 1915-1920, 1982, 2047-2052. Trend changes for the next two weeks are as follows: May 14-15, May 20, May 22-23. all three look important.

Bonds 

While it is not clear whether the March 22 peak did in fact complete all of wave “b” or 2 from October 1998 it is clear that the rally from January 2000 is corrective. And that follows what can be easily counted as a five-wave decline into the January 2000 low. The decline from the March 22 high is beginning to take on impulsive qualities and the sharp break last week may very well be the beginning of a third wave from March 22.  There is room for a bounce but if indeed the bonds are entering a third wave the bounce should be short-lived and the decline should resume with a vengeance. Fro now I am going with that as my preferred count. The alternate count as discussed in the April 30 report is that the bonds are tracing out a very large “b” wave triangle from January 2000 with the current decline wave “b” of that triangle. This would allow for the bonds to hold up for quite a while longer but the end result will be the same with a move below the January 2000 low. The next important level of support is near the 98 level. That level represents the .618 retracement of the rally from May of 2000 to March 22 and also the 50% retracement of the rally from the January 2000 low. In addition, the decline from last weeks high will be .618 the March 22 to April 30 decline at that same level. The daily range oscillators have turned down from low neutral and are negative. The daily trend oscillators have also turned down and short-term momentum has turned negative. The weekly range oscillators are headed lower and not yet oversold. The weekly trend oscillators are negative and accelerating. Medium-term momentum is negative. Short-term sentiment is mixed with Market Vane neutral at 45% bulls and Consensus Inc slightly positive at 30% bulls. Support: 98- 98 7/32, 95 10/32-95 24/32. Resistance: 100 4/32-100/10/32, 101 8/32-101 14/32. Short-term momentum has turned back down and medium-term momentum is negative. Sentiment is improving but not there. The wave structure shows the possibility that the bonds are in the early stages of a third wave acceleration from the March 22 high. I am moving back to bearish both short and medium-term.

XAU

The XAU moved strongly through the March 9 peak. The pattern from the March 27 low cannot yet be counted as impulsive with the rally late last week either part of a still developing third wave or wave 5 of iii from April 3. This rally (post April 3) is either all or part of a “c” wave from October of last year or the beginning of a third of a third from October of last year. If it is a “c” wave it cannot be counted as complete as we do not have a five-wave pattern in place.  The other possibility under this count is that April 3 completed an X wave and the XAU is in a second three from October. If so it is possible that we have completed wave “a” of that second three but the overall pattern is not over and higher prices are expected. If we are in the early stages of a third wave we could be close to an acceleration to the upside. There is important medium-term resistance in the 61.50-62.00 zone. That is not only the .383 retracement of the decline from September 1999 to October 2000 but is also where the rally from April 3 would be equal to the October 2000-March 9 rally, A move through that level would allow for a sharp rise with no real resistance evident until the low 70 area. Momentum across the board is positive but is getting a little overbought on a short-term basis. Some modest weakness or sideways action is not out of the question over the very near-term but given the price structure and the indicators higher prices are expected. I moved back to bullish late last week in all time frames and remain so at this time.

Indicator review

Half of the month of May is behind us. We have seen a lot of price swings but very little progress. The DJIA benefiting from weakness in technology is up about 80 points while both the S&P and NYSE Composite are showing slight losses. The bulls can claim that the market has so far done an exceptional job of holding onto most of the gains seen in April and that we have so fart is nothing more than a high level consolidation. The bears can point to the fact that the market has been in a churning mode as we have seen a lot of volatility and price swings with no net progress. Price/ volume relationships have been neutral with volume over the past two weeks contracting sharply from levels seen in April. This can be viewed as part of a consolidation but also reflects a lack of conviction as volume has also slowed on the up sessions. Breadth has been a bit stronger than the S&P and about in line with the DJIA as both the daily and weekly A/D lines have gained some ground in May. The gains have not been strong but they are positive. The daily new highs have also been strong but the absolute level did peak in late April and failed to confirm the new highs in early May. The new lows have been weak and not a problem. The weekly new highs have also expanded and the new lows have contracted. They are in a slightly favorable position. Then Russell 2000 is up less than 2 points so far in May but it is up. The short-term is neutral but overbought and on the verge of confirming a correction. The medium-term is positive. The Value-line is up about 1.5% in May it did record a new closing high but although coming close did not get through its print high of January 31. The short-term is neutral but overbought and could be close to a correction. The medium-term is positive. The NASDAQ Composite is down by less than ½%s and the NDX is down by about 2%. This is not bad considering the huge gains they recorded in May. However, they have turned negative short-term. Medium-term they are neutral. The DJTA has gained 56 points or nearly 2% for May. The short-term is neutral. The medium-term is neutral. The DJTA and UTY look to have completed an important top. They are negative in all time frames.

Momentum

The breadth and volume oscillators have moved back to neutral from overbought. The former did confirm the latest series of new highs in early May while the latter failed to do so. The 3-day oscillator is neutral but also on a sell alert. The McClellan oscillator is also neutral. It never did reach thrust levels having peaked at a modest overbought reading of 150 on May 1. The 10-day and open 10-day Arms have moved higher and are back to oversold levels. The 5-day Arms is neutral to slightly oversold. The 21-day Arms is neutral but closer to overbought. The new 10-day Arms is close to issuing another in a series of sell signals going back to early April but has not done so as yet. The daily range oscillators are beginning to turn down from mediocre overbought readings. They did confirm on the NYSE Composite but left minor negative divergences in place on the DJIA, S&P and the NASDAQ averages. The daily trend oscillators have just turned down on the DJIA, S&P and NDX. The weekly breadth oscillators are neutral but at the same time not showing much in the way of any strength either. They did get oversold in late March but not deeply so and not as oversold as one would have expected to see given the extent of the decline into the March low. The weekly range oscillators are neutral but a weak neutral. They are however, rising from deep oversold levels. The weekly trend oscillators are positive. The technical barometer has improved but not significantly. Short-term it is improving but needs more work. Long-term it is extremely negative.

Sentiment

The sentiment composite eased one point to a still neutral +9. Investors Intelligence reported a sharp rise in bulls and modest drop in bears. The bull/bear ratio is not real negative but it is also not very good either. We are now facing a record 122 straight weeks. Market Vane has moved up a bit but is still only neutral and low neutral at that. Consensus Inc, however, has reported over 50% bulls for two weeks running. Although not close to excessive it is nonetheless negative at least for the short-term. In addition, the American Association of Individual Investors (AAII) has reported a sharp rise in the bulls and sharp drop in the bears. The bull/bear ratio did ease a bit last week but was still quite high reaching levels seen in early February. Two weeks ago the bullish percentage hit its highest level since July of 2000 while the bearish percent has dropped to its lowest level since mid February. NYSE members remain net buyers although the pace of the buying has eased. This indicator remains very positive. The insider sell/buy ratio remains high. the 8-week moving average has slipped a bit and is back to neutral although it is still very close to bearish. This indicator did reach its most negative level since May of 1998. This preceded the top of 1998 by z couple of months. The commitment of traders report (COT) is still showing a huge net short- position by commercial hedgers in the S&P ands the small speculators are still net bullish, This indicator is negative. The CBOE put to call ratio basis the 10-day moving average is slightly on the bearish side. The OEX ratio is bullish. The Rydex ratio eased a bit late last week but did reach negative levels at least on a short-term basis. In fact, it just reached levels that prior to early 2000 were seen at important tops. In addition, the asset levels in both Ursa and Arktos came very close to where they were at the January top and so far have shown little improvement.

Summary and Conclusion

The bottom is in! The bottom is in! That phrase is being heard on a daily basis by more and more analysts and the chorus is getting louder and louder. What strikes me as most interesting about this is that most of the proponents are the ones that never saw the big decline coming, at lest they never said it in public. Isn’t it amazing how all these so called experts can call a bottom after having ailed to recognize a top or to even acknowledge, until after the fact of course, that the market was going lower. Now, these same pundits are telling all who will listen that it is safe to go back in the water. Isn’t it funny though that these same “experts” never got anyone out of the water even when it was loaded with sharks. It seems that nearly every newsletter I read and nearly every one I speak too are looking for the rally to continue. Even the most bearish long-term analysts are viewing the March-April low as a medium-term bottom. Even some of the perma-bears expect to see the rally continue and are viewing any short-term weakness that may unfold from here as only a short-term development. I am in that camp as well and that is bothering me a bit. What very few are expecting, myself included, is that the averages move to new post April lows right now. That last week was more than a short-term top if that, and that the bear is about to resume now. This of course would surprise the majority even the bears. This is just food for thought but lest keep in the back of our minds that the market will do whatever it has to do to fool the majority. Our short-term indicators, for the most part have turned down and most are either on sell signals or are very close. The daily trend oscillators have also turned down and are now negative. There are occasions when the averages will rally a bit or just hold up following an initial signal as they have one final lunge. With the 10-day and open 10-day Arms back to oversold levels this may be the case this time as well. However, the best I see on a short-term basis fore both the DJIA and the S&P is a continued sideways pattern and maybe a modest new high. However, with the majority of the short-term indicators just beginning to turn down and most are negative. Short-term sentiment indicators are also negative and some of the medium-term sentiment indicators are also negative. It is possible that all we get for this coming decline is a sideways market. This tends to occur in strong medium-term up-trends and usually following a strong thrust signal from the momentum indicators. That did not occur this time around as most all of the momentum measures made it to only modest overbought readings. The McClellan oscillator for example only made it to +150, where as following the October 1998 low it moved to +254. Now that is an overbought reading and it occurred less than 10-days from the price low of October 8. That is what a thrust is all about. Even in late December the oscillator moved to +187. That was a sign of strength. The +150 level while overbought is only that overbought but nothing exceptional. In fact, there have been five readings since January of 2000 near the +150 level on the McClellan oscillator including the current one. The previous four occurred at or very close to short-term tops. The position of the Arms indexes may keep the market from any real deep decline over the near-term at least until it is relieved somewhat. However, most of the other indicators are negative and we look to be on the verge of a fairly decent correction. I moved to bearish on the NDX late last week but will remain neutral on the S&P and the DJIA for now with the idea that they are completing a top. It is my view, along with what seems like the entire investment community, that the March-April time frame did indeed mark a low. My view, however, is that it is only a medium-term low in a still on going and very much alive long-term bear market, at least as far as the S&P and the NDX is concerned. As for the DJIA I did make a case in the last report (April 30) for new highs to complete its post 1987 rally. For now it is my view, crowd notwithstanding, that any short-term decline could help to strengthen the medium-term picture and allow for the bear market rally to continue. However, the key here is that we are still very much in a bear market longer-term and in the case of the DJIA if the bullish scenario does play out the final stages of a longer-term topping process. In bear markets to chase strength is a mistake as surprises will often occur to the downside. If the short-term decline unfolds as expected it could very well afford us a good entry point on the long-side for a continuation of the medium-term advance. For now, however, I am going to remain neutral on the medium-term and still very bearish longer-term.

QQQ traders are holding a 50% short position from 46.20. They closed Friday at 45.55. Keep your stop at 48.20 and make sure to call the early morning hotline for any changes. Rydex switchers are holding a 20% Precious Metals and 10% OTC position. Make sure to call the Noon Pacific hotline for any changes.

The arrows on the chart mark points where the McClellan oscillator moved to +150 or so, but not much higher. This usually occurred near short-term tops although in June of last year all we got was a sideways correction. The two points marked a and b are areas where the oscillator moved above +150 Point a was a +175 and point b a plus 187. Although they were not close to Thrust readings such as October 1998 they did get high enough to suggest some minor strength.

There have been six previous readings since November of 1999 where the 13 period RSI has moved to the high 60’s low 70 area. Only one of those times, point a, did we not get a decent short-term decline. Currently we also have a minor negative divergence in place

The chart above shows the two possible wave counts on the S&P from April 4. The first shows a completed five-wave pattern at the May 2 high. The one labeled alt shows the possible fourth wave triangle from April 30. Wave “a” of the triangle was in irregular.  A break of last weeks low of 1240-79 would turn the weekly chart down and confirm that the rally from April 4 was complete. As long as the S&P holds above that level the triangle will remain a viable alternate count.

The hourly chart of the S&P from March 22 to March 27 below is a clean three-wave pattern with waves “a” and “c” nearly perfectly equal in length.  

The chart above is a longer-term view of the Rydex ratio. The current reading is consistent with a number of important tops prior to last year such as July 1998 and August 1997. In fact; last weeks reading was well above levels seen at both of those tops. Note also how low the ratio moved to at the 1997 and 1998 low. It was not even close to those levels in late March.

The level of assets in both Ursa and Arktos came very close to where they were in late January and remain very low. The Arktos chart is very interesting. At the April low the level of assets in Arktos had moved back to where they were in March of 2000. In other words after a near 70% drop in price the assets in a fund that can bet on the downside was exactly where it stood at the peak. The Ursa chart shows a similar pattern.