BI-WEEKLY MARKET RECAP and
TECHNICAL PERSPECTIVE
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By: Larry Katz
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July
9, 2001
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Capsule Short-term momentum is only neutral. Sentiment has improved but only ever so slightly and remains more on the negative side of the equation. While we have moved in the right direction there is still more work to be done before sustainable rally even for the short-term can unfold. Any rally from here should be viewed as a reaction and not the beginning of a move back towards the May highs. In a nut shell it looks as though the market has further unfinished business on the downside. The bonds are back under pressure and it is likely that the next leg of the post March decline is underway. The XAU broke important support related to the post April 3 rally. We may bounce but the decline does not look complete and further weakness is expected. Elliott Wave and Fibonacci The rally from the March low to the May 22 high on the
S&P was, as discussed in the last report, confirmed as a three-wave
pattern on the daily and weekly charts. Where this rally fits within the post
September 2000 decline is still not clear. Moreover, we cannot yet be sure
whether the rally is (was) correcting the entire post September decline or
just the decline from November 10. Fibonacci
retracements and multiples are, in our opinion, the key to the patterns
and their relationships to what they are correcting. However, in this case
they are not much help as the May 22 peak was within 1% of a .618 retracement
of the post November 10 decline and a 50% retracement of the entire decline
from the September peak. We have been counting the post September 2000
decline as a double three with the second three beginning in November and
ending in March. This decline incidentally was within 6 S&P points of
being 1.618 the length of the first three (September-October). We have also
been counting the rally from the March low as an a wave of a larger AB-C.
As such that would label the post May 22 decline as a b wave with a c
wave to follow. However, it is entirely possible that the May 22 peak
completed either a b wave from November or possibly an X wave. If the
former than the S&P would be heading into a c wave from November. If
the latter, then the S&P would be in the early stages of a third three
from September. There is also the possibility that the May 22 peak completed
a b or X wave from the September 2000 peak and that we are going into a c
wave from that peak instead of the November peak. In either of these cases the S&P would be expected to break
the March low and possibly severely so. If on the other hand this decline is
a b wave from March, then we should be finding support soon. However, in
our view the most important point of all is that the rally from March is a
corrective three-wave pattern and whether it is only the a wave of a larger
pattern or not it is clear that it is only a bear market rally and not, and
we repeat not the beginning of a new bull market. That brings us to the
short-term. Friday the S&P moved below the June 15 low and also below the
50% retracement of the rally from March to May. The current decline is either
a c wave from May 22 or possibly a third of a third from the same high.
Fibonacci relationships with the May 22-June 15 decline point to lower prices
and the hourly chart while close cannot yet be counted as a five. How far we
fall will be the key. There is support at the .618 reteacement of the post
March rally at 1170-1175. That by the way is also where wave c from last
weeks high would be .618 the length of wave a However, equality with wave
a (May22-June 15) points to a potential target of 1126. That is about as
far as the market should go if indeed the post May 22 decline is a b wave.
The DJIA like the S&P rallied in three-waves from the March low to the
May high. We had thought it possible that the March low in the DJIA completed
only wave 4 from 1987 and gave the benefit of the doubt that the rally from
March was part of a fifth wave from 1987. There are two ways that this is
still possible. The first is that the May 22 peak completed the a wave of a
diagonal triangle, and the latter is if the post January 2000 pattern is
unfolding as a triangle itself. If the former is correct we should be close
to completing wave b. If the latter is correct we are in wave c. However,
it is important to point out that a satisfactory five-wave pattern from 1987
can be counted as complete at the January 2000 peak. Given that count it is
also very possible that the rally into May completed wave b or X from
January 2000 with the current decline the beginning of wave c a second
three. Again, we will rely on Fibonacci relationships as well as wave
structure to help us. From a wave structure perspective it is possible that
the decline from last week is a fifth wave from May 22. We have discussed
this possibility before and it is clearly possible. If this is confirmed it
would be a convincing argument that May 22 completed either a b or X wave
and that a move below the March low was unfolding now. From a Fibonacci
perspective the low on Friday stopped right at a 50% retracement of the rally from March to May, however, we
have to allow for a break of the .618 retracement near 9950 before we can
fully lean in favor of a more important top. Meanwhile, if indeed the decline
from last week is a fifth wave from May 22 it would be equal to wave 1 near
10,120. This would break the 50% retracement but not the .618 retracement. The hourly chart from
last week does not look complete if indeed it is a fifth wave or any sort of
five so we should expect to see some further weakness. A break much below
10,100 would likely invalidate the possibility that the decline is a fifth
wave leaving open the possibility that it is either a c wave or a third of
a third. The NDX did not yet break its June low but did come close. However,
the fact that it did not break the low leaves open the possibility that it is
a b wave of a flat. However, we think that is the least likely count but
even so, the rally from June 20 to last week was clearly corrective and even
if the NDX were to move back above that high we would view it as a c wave
from June 20 and as such we would still expect to see the June 20 low broken.
Right now we are inclined to view the pattern from May 22 as corrective with
the current decline a c wave from May 22. The alternate count is that the
decline from last week is a b wave of a larger b wave and will be
followed by a c wave back below the June 20 a wave low. The other
possibility is that the NDX is in the early stages of a third of a third from
May 22 with May 22 marking a fourth wave from March of 2000. A .618
retracement of the April 4-May 22 rally is 1620. The decline from last weeks
peak will be .618 the decline from May 22 to June 209 at 1608 so that is a
very important level. A serious break of that area of support would tilt the
odds in favor of a more serious decline unfolding but would not necessarily
confirm that the decline from May 22 is not a b wave from April. It would,
however, move that count more to the forefront. Support: S&P;
1170-1175,1126-1130, DJIA; 10.200-10,220,10100,10,120, NDX; 1600-1624, 1560-1570. Resistance: S&P; 1208-1210,
1218-1221, DJIA; 10,320-10,328, 10,390-10,404, NDX; 1735-1740, 1780-1788.
Trend changes for the next two two-weeks are as follows; July 11-12*, July
18, July 20*. * denotes important. Bonds The bonds as we had expected rallied back towards the May 4 peak but did not quite make it above that peak. The subsequent decline from that high has traced out a five-wave drop into Fridays low. While it is possible that this five is a c wave of an irregular correction from May 17 it is just as likely hat it is the firs wave down of a larger pattern and possibly the initiation of the next large wave down from the March peak. The fact that we have a five does allow for a rally and in fact we should get one to seal in that five as a confirmed pattern. The nature of any rally will tell us whether the five is the first wave of a larger pattern or a c wave of an irregular but in either case the rally from May 17 is corrective and that further solidifies our long-term view that the March peak was important. The daily range oscillators are neutral but weak. The daily trend oscillators are turning negative and short-term momentum is negative. The weekly range oscillators are neutral but also weak. The weekly trend oscillators are neutral but close to turning negative. Medium-term momentum is neutral but close to turning negative. Long-term momentum remains bearish. Market Vane and Consensus Inc. were little changed and at 42% and 43% bulls respectively they are neutral. Support: 99 10/32-99 13/32, 98-98 10/32. Resistance: 100 20/32-100 23/32, 101 10/32-101 14/32. Please note that the above price projections are based on a constant bond chart and not any particular futures chart. Currently, the constant chart is lagging the September futures by about 8/32. Short-term and medium-term momentum is neutral but weak. We may rally from here over the near-term but it looks likely that any rally will fail. We are going to remain neutral on the short and medium-term but with a negative bias. A switch to negative could occur at any time so please stay in touch with the daily updates. Long-term we remain negative. XAU The XAU has not
yet moved below the April 3 low but moved low enough to suggests that the
decline from May 17 is correcting more than just the post April rally but the
entire pattern from October of last year. If that is correct then we are also
looking at a three-wave pattern and not the start of a new bull market. That
does not mean we have to move to new lows now, as it is possible that the
rally to May was only an a wave of a larger pattern but it does not rule
that possibility out either. Support: 49.70-50, 43-44. Resistance:
54.80-55.80, 57.20-57.80, 61-62.Short-term momentum is getting oversold but
has not turned up and medium-term momentum is neutral to weak. We remain
neutral on the short and medium-term. Long-term we believe that this market
is completing an important long-term bottom but it now looks likely that a
modest new low will be necessary before that process is complete. We are now
neutral on the long-term. Indicator review
July came
in as June went out with prices moving lower. Even the favorable seasonal period
did not help with last week the first week of July witnessing broad based
selling culminating in a very negative Friday. The DJIA, S&P and NYSE
Composite all moved below their mid-June lows and did so by a very side
margin leaving no doubt as to the break. The S&P also looks to have
broken the second neck-line of a more complex head and shoulders pattern
dating back to the mid April time frame. On the plus side it did fill the gap
from mid April. The NYSE Composite does not have a head and shoulders pattern
in place but did close well below its now declining 200-day moving average.
The DJIA also moved below its 200-day moving average but unlike the NYSE
Composite its 200-day line is still flat. Volume has been relatively weak and
price/volume relationships are neutral to negative. A lot has been said
lately of the low volumes on declining days. We unlike most do not view this
as bullish but instead find it a negative as it implies that there is no
urgency behind the selling. In some respects we can view this as a sign of
complacency. Breadth has been holding up well with both the daily and weekly
A/D lines still close to their highs. This may very well be a plus but it
could also be a hook that keeps a lot of analysts bullish and possibly on the
wrong side of the market. We will
respect it but will not rely as heavily on it as we would in other times
primarily because we are still in a bear market. The new highs on a daily
basis are beginning to weaken and we have also seen a nice expansion in the
new lows. The latter has confirmed price on a short-term basis. The weekly
statistics showed a drop in both new highs and new lows but it was a
shortened weak so what we see this coming week will be a lot more important.
The Russell 2000 moved below the June 26 low but only by a very small margin.
This was enough, however to turn the short-term to negative. The medium-term
is weakening but not yet negative so we will stay neutral with a negative
bias. The Value-line has so far held the June low. The short-term is neutral
but very close to turning negative. The medium-term is in the same position.
We are neutral but close to turning negative. The NASDAQ Composite and the
NASDAQ 100 lost a good deal of ground but have so far held above their June
low. They are, however, very close to breaking those lows. We are going to
remain neutral on both the short and medium-term but with a more negative
bias. The DJTA is neutral short-term but that position is weakening. The
medium-term remains negative. The DJUA and UTY looks to have completed a
short-term bottom and could rally. We are neutral short-term and bearish
medium and long-term. Momentum The breadth oscillator is neutral but did get
close to overbought last week. The volume oscillator is slightly oversold
after flirting with overbought levels. The 3-day oscillator is close to
oversold but also showing a potential bullish divergence as it is above its
June 14 low while threw averages are lower. The McClellan oscillator is
neutral but below zero. However, it too is showing a potential bullish
divergence. The 10-day and open10-day Arms moved higher and remain very
oversold. The 5-day Arms is slightly oversold and the 21-day Arms is very
oversold. The new 10-day Arms has issued a sell signal as of Friday as it
moved back above .80. The last signal it gave was on MAY 30 and prices did
move lower. The daily range oscillators are neutral but weak. The daily
turned oscillators have turned slightly negative. The weekly breadth
oscillators are neutral. The weekly range oscillators are neutral but weak.
The weekly trend oscillators are negative on the DJIA and close but not yet
there on the S&P. Sentiment The sentiment composite has improved but at +7 is
still slightly negative. Investors Intelligence reported a modest rise in
bulls and a sharp drop in bears, with the latter at its lowest level in
nearly 2-years and at levels seen at a number of important tops. We have seen
some improvement in both Market Vane and Consensus Inc, but these indicators
based on their 4-week moving averages are only neutral. Meanwhile, the
American Association of Individual Investors (AAII) reported net bulls rising
to a negative +22 with the number of bears under 20%. This important measure
of public sentiment remains negative. NYSE Members continue to be net buyers
and this key measure of smart money is bullish. On the other side of the
coin, corporate insiders remain heavy sellers of their stock and this measure
of smart money remains negative. The commitment of traders report was not
available this week but the latest report showed a huge net short position
for the commercial hedgers and net long position from the small speculators.
This indicator remains very negative. The CBOE put to call ratio, basis the
10-day moving average is borderline negative and needs to improve a whole lot
more. The same is true of the OEX ratio. The Rydex ratio has improved but is
only neutral to slightly negative. We have also seen some improvement in the
asset levels of Ursa and Arktos but neither is close to bullish levels. More
importantly in our view is that both had just recently moved to levels seen
at both the January-February and May 22 tops. They need a lot more work. The
volatility indexes have improved but are only neutral to slightly negative.
They have a lot of work ahead to become even slightly positive. Summary and Conclusion Two weeks ago we stated the following One of the
most important functions of a correction is to correct the excesses that
built up in the previous rally. our reply to that statement on June 25 was
that so far we had failed and our comment two weeks later is the same. In
fact a number of important sentiment indicators were more negative at the
peak of late June then they were at the peaks in May or early June, and that
in spite of the fact that the averages remain well below where they were in
late May and early June. So with the risk of sounding like a broken record
the market has not accomplished what it is supposed to do and that is correct
the excesses that built up in the previous rally. More to the point, in spite
of last weeks break below the June low in both the DJIA and the S&P a
number of sentiment measures are actually in worse shape then they were at
the mid June low. One prime example of this is the VIX or volatility index.
At the June 15 low it had spiked above 28 while Friday it remained below 25.
Now 25 is not as bearish as say 20 which it came close to early last week but
it surely is not close to 28, which marked only a short-term low but only a
short-term low. The VXN and QQV have also improved but are still quite
bearish. They are nowhere close to where they were at the June 15 low and in
fact are still below their levels seen at the May 22 top. Market Vane and
Consensus Inc have improved and are neutral but that is it neutral. and given
the fact that at the May peak the 4-week moving average from Consensus was
higher than it was at the September top we should see more. Meanwhile, the
bearish percentage from Investors Intelligence has move down sharply reaching
levels last seen nearly 2-years ago in late July 1999. And at 25.5% it is
perilously close to the lowest level in the past 8 years seen in April of
1998 at 24.2%. This is just not consistent with bottoms ands in fact is close
to levels seen at or very near important tops. Most of our momentum
indicators are neutral but they are weak. The one big exception remains the
Arms indexes, which are moving higher and are gain deeply oversold. In fact
they have remained oversold throughout most of the post May 22 decline first
moving to that point on May 30. So frankly, the market is in a similar
position as it has been since early June with sentiment indicators on the
negative side of the equation while the Arms indexes in particular are
oversold and bullish. The main difference is that in spite of the continued
bullish readings from the Arms price itself is significantly lower now then
it was in early June when the Arms indexes first moved to oversold levels.
Once again we will say that we are somewhat surprised by the extent of the
decline given the position of the Arms indexes throughout the decline. If we
had it to do all over again we would still be surprised but there is a real
important message in all of this. If the market does not react positively to
what is normally a positive development then it is clear that the market is
changing. What we have seen is a failure by the market to respond favorably
to bullish development indicating further conformation that we are indeed
still in the throes of a longer-term bear market. Does that mean we ignore
these indicators? Clearly not, they are very important indicators to say the
least. However, what we have to realize is that in bear markets indicators do
not work as they did in bull markets. One potentially bullish development is
that nearly all of our momentum indicators are showing potential bullish
divergences as the DJIA and the S&P have moved to new lows while most of
these indicators have not. These include our breadth and volume oscillators
as well as the McClellan oscillator. However, as we have stressed for what
seems like forever, these are only potential divergences and until they are
confirmed as real hey will remain only potential divergences until they are
confirmed. The bottom line is that in reality nothing has changed expect for
the fact that the averages are lower and closer to breaking important support
levels. We can see a rally unfolding at any time but given the position of
the sentiment indicators we still do not think it will be anything sustainable
for more than the very short-term. Frankly if not for the Arms indexes we
probably would have been a lot more negative but given where they are and the
fact that we are close to support we are going to remain neutral on both the
short and medium-term. Long-term we remain very negative and expect to see the lows made in March-April
will be taken out and possibly severely so. SPY traders sold the 50% position per the early
morning hotline for a .30 point loss. Stand aside and QQQ traders do likewise
on Monday. Rydex switchers exited both the Nova and OTC positions per
instructions on the Noon pacific hotline Friday. Our loss on the 10% position
in OTC was 7.58% and on the 30% Nova position 5.85%. We are still holding a
20% Precious metals position. The morning hotline will be on at 7:15 AM
pacific. The chart below is an updated version of the one we showed in the last issue. The complex head and shoulders top on the S&P has been completed with the head of the larger pattern itself a head and shoulders.
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