BI-WEEKLY MARKET RECAP and
TECHNICAL PERSPECTIVE
|
|||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
By: Larry Katz
|
July
23, 2001
|
||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Capsule Short-term indicators are mixed but a resolution could
come sometime this coming week. The medium-term picture is beginning to slip
and further strength could turn the medium-term negative. Long-tern we remain
in the throes of a bear market that has a lot further to run. The bonds are
still in a bullish mode for the short and medium-term but are getting
overbought and also approaching important resistance. The XAU could rally a
bit more and is improving but not enough yet to move from neutral. Elliott Wave and Fibonacci On July 11 the S&P moved into the window of the .618 retracement of the March-May rally and did so in what is best counted as a corrective decline. The rally from that low to the July 16 peak traced Out
a very neat five-wave pattern on the hourly chart and at that time had us
thinking that we were possibly in the early stages of a “c” wave from the
March low. The subsequent rally from July 17 moved above the July 16 high but
did so in what is clearly a corrective pattern on the hourly chart. That left
open the possibility that the post July 17 advance was a “b” wave of an
irregular correction from July 16 and as such should be followed by a “c”
wave back below the July 17 low. This is still a possibility but so far the
S&P has not yet moved below the July 17 low and more importantly, the
decline from Thursday’s high is so far not unfolding in impulsive fashion. A
move above last weeks high of 1225 would likely invalidate the possibility
that the post July 17 rally was a “b” wave of an irregular and at the same
time invalidate the possibility that the post July 11 rally was a “c” wave
from March 22. This, however, would not necessarily imply that the rally into
May was it as it is possible that the July 11 low was an X wave and that the
post March rally could unfold as a double three as opposed to a simple A-B-C.
Since the first wave up in the second three can as easily be a three as a
five this is a possibility. As such we really do need to focus on the July 11
low as a break of that level would argue that the post May decline is not
over. This too would not totally invalidate the possibility that the post
March advance was behind us but would allow for that to become more of a
reality. While there remains a number of uncertainties in the wave counts
from the March low there is one thing that is certain, and that is the fact
that the rally is corrective and not the beginning of a new impulse wave to
the upside. This further reinforces our long-term view that intermediate wave
4, which began either in March or September of last year is still in force.
We are counting the decline from March or September as wave “a” and the
current rally wave “b”. Our current expectations are that the March low will
be ultimately broken in either a “c” wave or as a second three and a move to
our long-standing target near 900 is still the best expectation However, there are a number of variances
in regards to the count and the fact that it is a fourth wave does allow for
the possibility that the entire structure will unfold as a triangle. In the
case of a triangle then there is a possibility that the March lows will in
fact hold as they may have ended the “a” wave of the pattern. This is not
what we expect but it is something we certainly cannot rule out. The
short-term picture is just not clear but as discussed above it should make
itself clear in the not too distant future. For now we need to focus in last
weeks high and low. While we have a satisfactory five-wave advance complete
at the January 2000 peak from the 19897 low we did in the April 30 report
make a case for the possibility that the January 2000 peak completed only
wave 3 with the March low wave 4. This left open the possibility for a new
high in the DJIA to complete its intermediate wave 3 rally from 1987. While
it is indeed possible to count the rally from March to May as a five on the
daily chart and as such wave 1 of wave 5 the weekly chart tells a totally
different story as it is clearly a three. Thus we are faced with a real
problem in counting the waves as a rally cannot be both a five and a three.
In our experience the weekly chart takes precedence over the daily chart and
the daily chart takes precedence over the hourly chart. In our view only one
of the charts is correct and given the fact that the weekly chart shows a
clear three-wave pattern it is our view that the rally is a three and as such
corrective. As such the only way that the post March rally can unfold as wave
5 from 1987 is if it develops as a diagonal triangle. This is not out of the
question, however at this point we are inclined to go with the idea that the
March low completed only the “a’ wave of wave 4 from 1982 and that the rally
into May was a “b” wave. Since the DJIA is in a fourth wave it is possible
that the entire post January 2000 structure unfolds as a triangle such as we
discussed for the S&P. For the record, it is also possible to count the
decline from May 22 into the July 11 low as a five on the daily chart. This
sure could support the idea that wave “c” from January 2000 is just getting
underway. However, as is the case with the rally from March to May, the
weekly chart from May 22 is as clean a three as we have seen. That does not
mean that the pattern may not ye unfold as a five as it is possible that the
pattern from June 25 is a fourth wave and unfolding as an irregular on the
daily chart, In fact a move now below the July 11 low would leave a possible
five in place on the weekly chart. As was the case with the S&P, the
rally from July 11 to July 16 on the hourly chart did unfold as a five but
the subsequent action since then has left a corrective looking pattern in its
wake. The rally from July 17 may be a “b” wave of an irregular from July 16
but a move above last weeks high would invalidate that pattern and confirm
that the rally from July 11 was corrective. A move back below the July 17 low
could be a more bullish development as it may be counted as a “c” wave of an
irregular following a five. Next week should hopefully clear up some of the
short-term noise. It is still very possible that the NDX is in a fourth wave
from the March 2000 peak. The one saving grace so far is the fact that the
decline from May 22 into the July 11 low was a clear three-wave pattern and
that makes it near impossible to count as even part of a fifth wave. It is
not impossible as it is not out of the question that this fifth wave could
unfold as a diagonal but it is very, very unlikely. However, we cannot rule
out the possibility that the NDX is in some sort of a fourth wave triangle.
Moreover, the rally into May did not even come close to a .383 retracement of
what can be counted as wave 3. So even if the NDX were to rally back above
the May high this possibility would remain very real. The July 11 low stopped
right at the .618 retracement of the April-may rally and as mentioned was
corrective. The rally into the July 13 peak can be counted as a five. If
indeed the July 11-July 13 rally is a five it is likely the first wave of a
larger pattern and as such the July 11 low should hold. However it is
possible that the five into July 13 is either not a five or a “c” wave of an
irregular from July 6 not unlike the DJIA. The problem is that the pattern
from the July 13 peak have been sloppy and difficult to count. There are any
number of possible wave counts. We can make a case that we are close to
completing a correction of the July 11-July 13 advance that will move deep
into the rally. This
would, however set the stage for a move back above the July 13 peak. We can
also very easily count a five-wave decline from July 13 to July 17 on the
hourly chart and from there an irregular correction into the peak of late
last week. If that is correct we are either in a third or a “c” wave from
July 13. If it is a “c” wave then it is completing a “b” wave or second wave
from July 11 and should not exceed the July 11 low. If it is a third wave
then the July 11-July 13 rally is a “c’” wave from July 6. Right now there
are just too many possibilities but we suspect that the pattern will clear
itself up in soon. Support: S&P; 1204-1205, 1194-1196, 1184-1188, DJIA;
10,500-10,515, 10,394-10,409, 10,295-10,310, NDX; 1640-1645, 1600-1610.
Resistance: S&P; 1225, 1257-1262, DJIA; 10,777-10,792, 10,890-10,910,
NDX; 1740-1744, 1788-1790, 1847-1858. Trend changes for the next two weeks
are as follows: July 23, July 25*, July 30, May 4**. *denotes important. Bonds The bonds did as we suspected they might, move above the June 25 high. No matter how you slice it the rally from May 17 to June 25 is corrective so we are of the view that the rally from July 6 is either a “c” wave or part of a second three from May 18 and as such the entire post May 18 advance is a corrective wave related to the March-May decline. The daily range oscillators are close to overbought and also showing a minor divergence. The daily trend oscillators are positive and short-term momentum is still OK. The weekly range oscillators are neutral. The weekly trend oscillators are positive and weekly momentum is also positive. Market Vane and Consensus Inc. have moved higher but at 51% and 39% bulls respectively they are only neutral and are supportive of higher prices. Support: 101 27/32 +/- 4/32, 100 31/32 +/- 7/32, 100 3/32 +/- 10/32. Resistance: 103 23/32 +/- 13/32, 104 20/32 +/-16/32. Please note that the above prices are based on a constant bond chart and not any one particular futures contract. Currently, the constant chart is running about 13/32 below the nearly futures (September). Short and medium term momentum is positive and sentiment is not negative. We are stretched a bit over the near term so we could get a bit of a correction but the rally from mid May looks to have more to go and we remain bullish on the short and medium-term. Long-term we remain bearish XAU The decline
from May 18 to July 20 is so far a three-wave pattern on the daily and weekly
charts. The decline did break the .618 retracement of the rally from April
but not by too much so it is possible that this decline is a small second
wave in a continuing series of 1’s and 2’s from the October 2000 low.
However, if that is the case we need to hold the July low as a break below
that low would leave a possible five-wave decline in place from May and would
also break the .618 retracement of the entire post October advance. Meanwhile
the rally from the July 20 low can be counted as a five on the daily chart.
It is not a great pattern but it is possible. If confirmed, as such it would
mean that at a minimum we should see higher prices. At this point though it is
too early to tell whether this potential five is the first wave of a new
impulse wave or only an “a” wave of a possible zig-zag. As it stands the XAU
has not even retraced .618 of the June 14 decline let alone even 50% of the
post May 18 decline. Support: 53-53.50, 50-51. Resistance 57-57.50, 61-61.30
Short-term momentum remains positive and that does support the idea that the
rally is not over. However, medium-term momentum remains down. We suspect
that the rally is not yet over but for now we are going to maintain our
neutral across the board rating. Indicator review
The averages moved higher the past two weeks but
for the month so far the results are mixed. The DJIA is showing a modest
74-point gain while both the S&P and the NYSE Composite are still in the
red. Chart wise not much has changed.
The DJIA is still floating above and below its relatively flat 200-day moving
average. The NYSE Composite is below its 200-day line, which is beginning to
roll over and show a pronounced downtrend. The S&P is well below its
200-day line and the downtrend has been in place for quite sometime.
Two-weeks ago it had looked as though the S&P had completed a complex
head and shoulders pattern. However, the break of the neckline was
accompanied by a contraction not expansion in trading volume, which is not
consistent with this pattern. While the rally from the July 11 low seems to
have found resistance near the neck-line and a snap-back to the neck line is
consistent with this pattern, the rally has also been accompanied by a modest
volume expansion, and that is not consistent with a head and shoulders
pattern either. Speaking of volume, we have seen some increased volume of
late and we also saw some improvements in the price/volume relationships as
up until late last week volume has been expanding on rallies. Breadth over
the past couple weeks has been mixed with the daily A/D line following the
broad list lower while the weekly A/D line has moved ever so slightly higher.
High low statistics have also been mixed with both the new highs and new lows
expanding. This was particularly evident last week from the weekly
statistics. The high/ low indicators are showing negative patterns. The
Russell 2000 has been essentially flat the past two weeks and remains in the
red by about 4% for July. The short-term is neutral but improving. The
medium-term is neutral but close to going negative. The Value-line has gained
about 1% over the past two weeks but it is still off by 2.5% for the month of
July. The short-term is neutral but with a positive bias. The medium-term is
neutral but could turn negative soon. The NASDAQ Composite is flat the past
two weeks and down about 6% for July. The NASDAQ 100 is off about 1 ½ % for
the past two weeks and close to 8% for the month of July so far. They had
started the month out showing some pretty good relative strength versus the
DJIA but that has been reversed in spades. Our short-term work is neutral on
the NASDAQ averages. We are also neutral on a medium-term basis but the
medium-term is also beginning to weaken and could turn negative on short-term
strength. The DJTA has been a stand out performer the past two weeks as it is
up close to 7% and for the month so far at least it is higher by over 4%
making it the best performing major market index. Short-term it is very
overbought but looks to have a bit more in it so we will remain bullish for
now. We are going to remain neutral on the medium-term but still with a
positive bias. The DJUA and UTY have come under considerable pressure. The
short-term is bearish as is the medium and long-term. This area should be
avoided. Momentum The breadth and volume oscillators are neutral. The latter did, however turn up from near oversold levels. The 3-day oscillator is also neutral and over the past week has had very little movement. The McClellan oscillator is also neutral and still slightly below zero. The 10-day and open 10-day Arms has eased especially the past few days. They are back to neutral levels after being oversold for the better part of 7 weeks. The 5-day Arms is neutral but closer to oversold. The 21-day Arms is oversold but beginning to weaken. The new 10-day Arms is neutral. The daily range oscillators are neutral but did move close to oversold levels in mid July. The daily trend oscillators are positive. The weekly breadth oscillators are at neutral levels but are also in a downward trend. The daily range oscillators are neutral but low neutral. The weekly trend oscillators are negative on the DJIA and close to negative on the S&P. The technical barometer has slipped the past two weeks with the inside score still neutral but weak and the outside position modestly bearish. Sentiment The sentiment composite has not changed and at +7
is still on the negative side of the equation. Investors Intelligence has
seen the percentage of bulls move up sharply the past two weeks and has seen
a commensurate drop in bears. The bull/bear ratio is the worst since mid
February and the percentage of bears the lowest since April of 1998. Market
Vane and Consensus Inc have improved but neither are yet back to bullish
levels as measured by their 4-week moving averages. The American Association
of Individual Investors (AAII), which was somewhat positive two weeks ago has
slipped back to very negative with the percentage of bears rivaling the level
seen in early February. NYSE members remain firmly on the buy side, which is
a big plus. However, this is more than offset by the still very negative
readings from the commitment of traders report that shows commercial hedgers
still very much net short and small speculators very much net long. In
addition, corporate insiders remain deeply on the sell side with the 8-week
moving average of the sell/buy ratio near 8-year highs. The CBOE put to call
ratio has improved, with the 10-day moving average above where it was in late
June. The OEX ratio has also improved but is still only neutral. The Rydex
ratios are OK but that is about it. I would rate them as neutral to slightly
weak but not negative. However, in late June the asset levels in both Ursa
and Arktos moved below where they had been in either late May or late
January. They have improved but not enough to be regarded as bullish. The
volatility indexes also improved and did in mid July reach levels seen at the
mid June low. However, they have already begun to slip on only a mediocre
rally and are only neutral at best. Summary and conclusion First off, we are pleased to announce that the most recent issue of Timer Digest has Market Summary and Forecast ranked number 9 in long-term stock market timing over the past two years. With that in mind why not start with the long-term and why we remain bearish. While the DJIA did hold above a 20% decline that conventional wisdom marks as confirming a bear market, the S&P fell over 28% and the NASDAQ averages over 60% into their lows. Thus we had the biggest decline on a percentage basis since 1987 but it lasted well in excess of a year. This is the longest bear market since perhaps 1982 but possibly as far back as 1973-1974 in terms of time. Some sentiment indicators did reach extremes such as Market Vane and Consensus Inc., but numerous others such as Investors Intelligence never came close and recently this survey along with the American Association of Individual Investors (AAII) are close to extremes on the other end. The Investors Intelligence survey has reported more bulls than bears for a record 144 straight weeks. Last week we had the highest number of bulls since early February and the lowest number of bears since the internal market peak in April 1998. Now granted, its OK to see sentiment like this during rising markets but the fact is that the market is not rising lately and in fact it has been in a declining phase for over nearly 2 months. Contrast the current numbers with what we saw at the end of 1994 when the bearish percentage rose to nearly 60%, And that occurred in a market that stayed in a 10% range basis the DJIA and the S&P over a 10 month period, That was the sort of pessimism that is needed at important lows. There are a number of other factors as well such as the fact that corporate insiders are selling at their highest pace since 1993 and early 1998. Both of those preceded tops such as early 1994 and summer 1998. Compare that to the low sell/buy ratio seen in the 1994-1995 low and also during the late 1998 bottoming process. Investor expectations remain far too high and every time the market rallies a bit they jump all over it as the fear of missing the next bull market far outweighs the fear of losses. At important market lows the scene is littered with pessimism. No one believes in stocks anymore and rallies are greeted with huge degrees of skepticism, not optimism. There is rampant disbelief, how else can the market climb that proverbial “Wall of Worry”. One last point and one we find quite interesting is the fact that so many so called experts are calling a market bottom. These are the same experts that failed to see the top. Not only did they fail to see the top mind you, they failed to see the decline all the way down staying bullish until the end. Then after the big hit they have the audacity to come out and say that the bear market is over and it is time to buy stocks again. We are going to have to see a heck of a lot more in the way of capitulation over the coming months if indeed we are going to get the set up needed to produce both a bottom of importance and that proverbial “Wall of Worry” that will allow a new bull market to get underway. This could be accomplished by going sideways in a big trading range frustrating bulls and bears alike but given what we are seeing so far it will more likely come on a decisive break of the March/April low. Remember the three phases of a bear market. The first phase is disbelief and that is what we have just witnessed. The second phase is recognition and that we have not seen yet and the third and final phase is capitulation. We do not see enough to suggest that it is close to over. Short-term we are getting mixed signals. Some short-term sentiment indicators such as the CBOE put to call ratio are at levels supportive of a rally and the Rydex ratios are OK. Momentum is OK and we have locked in some bullish divergences as the July 11 price low was not confirmed by most of our important momentum measures as they held above their June 15 low. However, the rally off the July 11 low, while starting out OK has not lived up to what one would have expected following the July 11 bullish set up. This includes wave formation as well as the fact that most of the indicators while moving up have done little in the way of generating any real positive momentum. The McClellan oscillator has remained below zero. It is, however, close to breaking out and a good day on Monday could very well do the trick but a bad day on Monday could turn it down from below zero and set up another failure. Meanwhile, the Arms indexes have begun to weaken with both the 10day and open 10-day moving back to neutral. Granted, they are at high neutral but the open 10 is now at its lowest level since late May. To be fair, the bulk of the April May rally really did not get started until mid April when the open 10 moved to around the same level as it currently stands. The difference, however, is that in mid April when the open 10 was moving back to towards neutral, the averages were in strong up trends and currently they are at best sideways. The bottom line for the short-term is that we have a really mixed bag of indicators with some bullish and others more bearish. This coming week could tell the tale but for now we are going to stay in the neutral camp. On a medium-term basis we see a similar backdrop and in our view we could on further strength short-term actually get a sell signal. Remember the –10 reading from the technical barometer back in April. Well that indicator is designed as a forward looking indicator of between 2 to 5 months. We are in that window now. For now we are going to stay neutral on the medium-term with the idea that further rally over the next few weeks could turn the medium-term negative. Long-term we remain firmly bearish. QQQ and SPY traders are flat. Stand aside for the
morning but make sure to call the early morning hotline for any changes. Rydex switchers are
holding a 20% position in the Precious Metals Funds. Make sure to call the
Noon Pacific hotline for any changes. The morning hotline will be on at 7:15
Pacific. |
|||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
|
|
|||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
