DAILY TECHNICAL MARKET COMMENT

By: Larry Katz

October 22, 2001

The Doctor expects that I can begin publishing no later than 3 weeks after the surgery. We will put out a special E-mail to let you know when the reports have resumed. I do want to thank all of you who sent E-mails of encouragement, it really does mean a great deal to me.

In this report we are just going to go over our views of where we think we are in the market in all time frames.

We will start with the long-term and in that respect we have no doubts that the market remains well within the confines of a bear market. We have seen some improvement from a few of the long-term indicators but most remain nowhere close to levels seen at bear market lows. The Investors Intelligence survey is a prime example and one we have discussed over and over again. However, we believe it is important enough to repeat on a regular basis. More importantly in our view is the attitude of the street. We have seen just too many strategists and market analysts proclaiming both the number of bargains and as such buying opportunities that abound in the current market place as well as a chorus of those proclaiming that the bear market is over. A number are looking for a re-test as they were following the March-April low but very few are still of the mind that the bear market is still in progress. We have never seen a major bear market end this well advertised and basis the major averages, we have just experienced the biggest percentage decline since 1987. Compare this to 1994 when the market went sideways in a 10% range that produced huge positive sentiment readings to now with the S&P down over 35% from its high to its low and the NASDAQ close to 70%. Well frankly there is no comparison and that is where the long-term problem lies. That, and of course the momentum picture. Remember, at the September 21 low all of our momentum indicators confirmed the new lows in price with a number such as the McClellan oscillator reaching record levels of oversold. There has not since at least 1970 been an important price low commensurate with a momentum low anytime the S&P has declined by 15% or more. And we certainly do not expect this time to be different. However, the time between the momentum low and final price low can very from as short as three weeks in 1980 to as long as eleven months in 1973-1974. So just because we do not have a new low sooner does not mean that we will not get one. In fact our wave count would have that new low labeled as a “c” wave and it could in fact be quite strong.

This brings us to the medium-term. The rally from September 1 has been quite solid and has produced some positive momentum readings with both our breath and volume oscillators reaching modest thrust type readings. This of course was not confirmed by the McClellan oscillator as it only moved to the mid 100’s and real long-term kick off moves usually see the oscillator move into the low 200’s. Even so, there was enough positive momentum generated to imply at least short-term but more likely medium-term strength and we fully expect to see the mid October highs taken out in what will either be a “c” wave or a second three from the September 21 low. We think at this time that the market can actually hold up and rally longer than most would expect, perhaps into December or even early January and that the “c” wave from May will get underway and bottom coincident with the 4-year cycle due next year. While the momentum picture for the medium-term looks OK and is supportive of higher prices, the sentiment picture is giving off real mixed results.

Indicators like the CBOE put to call ratio and the Rydex ratios are quite positive but are viewed as shorter-term sentiment measures. Investors Intelligence, which we’ve already discussed is still on the negative side of the equation while both Consensus Inc, and Market Vane have moved from bullish to neutral. What is really troubling and a big problem is the American Association of Individual Investors (AAII) survey, which last week had reported the most negative bull/bear spread since late May with 60% bulls. It is obvious that the public has bought the rally almost totally.

Short-term the picture is a bit murky. However, we do believe that the top seen on October 17 did indeed mark the completion of the initial rally from the September 21 low and that we are in the process of correcting that move now. We also think that Friday marked the initial phase or wave of that decline and a brief counter trend rally is underway now. The decline can be counted as five waves down on the hourly chart and that alone does allow for a rally. We also had a nice spike on the put to call ratios and the Rydex ratio also improved. Some of this could very well be due to Friday’s options expiration but certainly not all of it. Most of the momentum indicators have moved to neutral and this too could support a bounce for a few days. A move above last weeks high could invalidate our position but there are also a number of alternate possibilities that could support it further depending on the nature and quality of any new rally high. At this point, however, we do not think that this will occur at this time and that the post October 17 correction is not complete.  

Support S&P; 1044-1046, 1025-1028, 1003-1008, DJIA; 8945-8952, 8780-8792, 8600-8620, NDX; 1293-1300, 1270-1274, 1230-1238. Resistance: S&P; 1078-1080, 1090-1093, DJIA; 9235-9245, 9330-9344, NDX; 1355-1358, 1390-1395.

We have trend changes for the next three weeks as follows: October 24*, November 2-4**, November 11*, November 22-24**

In sum we believe that the market has entered its first real correction since September 21 but that this correction is only short-term and related to the post September 21 advance and is likely part of a still incomplete medium-term rally. The medium-term rally should be viewed as part of a still on going and incomplete bear market and once complete we should see a move below the September 21 low.

We have moved to neutral on both the short and medium-term. Part of this is due to the fact that we will not be around to monitor the market so we fell this is the place to be. Long-term we remain bearish and do not expect that to change in three weeks.

We have moved to neutral on the bonds and given the indicators we would maintain that view in any case.

We still expect to see the XAU move below the July 2 low and perhaps challenge the April low near the 46 level. However, we have moved to neutral on both the short and medium-term due to the fact that we will not be available to monitor the progress of the XAU.

Once again I would personally like to thank our subscribers for their very positive and supportive response to my coming surgery and look forward to being back with you as soon as the Doctor allows.