DAILY TECHNICAL MARKET COMMENT

By: Larry Katz

February 2, 2001

	DJIA	S&P 500
Support	9450-9500, 9000-9050	1205-1214, 1155-1166
Resistance	11,000-11,050 11,750-11,850	1450-1455, 1550-1570
Short Term	Bear	Bear
Medium Term	Neutral	Neutral
Long Term	Bear	Bear

Indicator	02/01/2001	01/31/2001	01/30/2001	01/29/2001	01/26/2001
Breadth oscillator	+363	+361	+348	+339	+266
Volume oscillator	+133.3	+142.3	+154.6	+147	+114
A/D ratio	1.33	1.33	1.32	1.32	1.26
Three day oscillator	+412	+467	+545	+471	+155
McClellan oscillator	+67	+71	+74	+63	+41
Open 10 day Arms	1.01	1.00	.97	.98	1.00
10 Day Arms	1.01	1.01	.97	.98	1.00
CBOE P/C ratio	.53	.61	.64	.48	.59
OEX P/C ratio	1.17	1.40	2.31	.67	1.45
New highs	238*	115	113	106	78
New lows	6*	2	4	5	8

*These are preliminary numbers and will be adjusted tomorrow

The DJIA gained 96 points and the S&P added 7 points. Volume slowed from Wednesday coming in at 1.08 billion shares. The A/D line added 350 units. The new highs contracted and the new lows expanded but from a very low base. The Russell 2000 gained less than a point. The short-term is neutral but weak. The medium-term is slightly positive. The Value-line gained 3.56 points. The short-term is neutral and close to confirming a top. The medium-term is neutral. The NASDAQ Composite gained 10 points and the NASDAQ 100 added 14 points. Both lagged the DJIA badly. The short-term is now negative. The medium-term is neutral but improving and in the process of completing a bottom. The DJTA gained 20 points. The short-term is neutral. The medium-term is positive but easing. The DJUA and UTY closed lower. The short-term is neutral but close to going negative. The medium and long-term are negative.

The S&P moved below Wednesday’s low yesterday locking in the rally from January 26 as a completed wave on the daily chart. As discussed yesterday, on the daily chart it is possible to count the post January 26 advance as a fifth wave from January 8. However, the hourly chart looks a whole lot more corrective than impulsive making it hard, although not totally impossible to accept it as a fifth wave. This leaves open the possibility that this rally was an “a” wave of a larger pattern (most likely a second three from January 8 or December 21). This would allow for a move back above Wednesday’s high to complete wave “c”. A break below yesterday’s low would confirm that the January 8 and possibly the December 21 rally was behind us. The DJIA moved above Wednesday’s high and is most likely completing wave 5 from January 26 on the hourly chart. It had looked like the DJIA was tracing out a triangle on the hourly chart but the final two waves of that possible triangle are near impossible to decipher. It is still a possibility and the way the DJIA shot up late in the session did have post triangle characteristics. If this is correct than we should be very close to a confirmed reversal. The NDX moved below the low of Wednesday confirming the rally from January 26 to Wednesday as a completed wave. The NDX did slightly break support related to that rally. This does tend to favor the more negative count that the post January 26 rally was a second or more likely “b” wave from the January 24 decline but that has not been confirmed. There is a bit more room to rally as the NDX has not made it back to a .618 retracement of the decline from Wednesday’s high. As long is the NDX remains below Wednesday’s peak the bearish count will remain in force and we could be very close to entering a third of a third. A break above that high allows for higher prices and a challenge of the January 24 peak. We are very close to a resolution of the pattern. Support: S&P; 1355-1356, 1340-1342, DJIA; 10,810-10,822, 10,740-10,755, NDX; 2590-2595, 2500-2520, 2460-2475. Resistance: S&P; 1373-1374, 1382, 1395-1400, DJIA; 11,000-11,050, 11,400-11,450, NDX; 2665-2672, 2710-2717, 2785-2796.

The DJIA once gain led the way as it was far stronger than the S&P and the NYSE Composite and was the only one of the three to move well above Wednesday’s peak. The NYSE Composite was close but the S&P missed by a long shot. The averages did, however trace out minor reversal pattern as they closed higher after moving lower early in the day and also closed near the high of the day. However, this reversal was accompanied by another drop in volume, which again detracts from the positive price performance. Breadth was positive but not nearly as good as it has been lately and we saw a small drop in the new highs, which are still showing big divergences with their levels seen late last year and the first week of January.

The CBOE put to call ratio moved down sharply yesterday and was quite bearish. The OEX ratio also moved lower but was only neutral. The Rydex ratio improved slightly but is still quite negative and still close to where it was in early November. The breadth and volume oscillators are overbought and diverging. The 3-day oscillator was little changed but it too is diverging on a sell signal. The McClellan oscillator moved down but only slightly so and for the second day in a row had a net change of less than 5 points. This again suggests that a big move is close at hand. It is neutral and also diverging badly. The 10-day and open 10-day Arms are neutral but closer to oversold. The 5-day Arms is neutral and the 21-day Arms is oversold and positive. The daily range oscillators are neutral. The daily trend oscillators are neutral on the S&P and positive on the DJIA.

The market has been able to continue to move higher in the face of a weakening technical backdrop. In some cases this is a sign of strength and the continued positive breadth is also a sign of internal strength. However, we are still dealing with the same thing that has been plaguing the market for nearly two years and that is that we cannot seem to get the “old economy” and “new economy” stocks to move up together. Early in the year the NASDAQ was doing great while the DJIAS lagged and this week the shift has been back to the DJIA at the expense of technology. There are many possibilities as to why this is going on but the most important factor is that it is going on and the failure by the market to put together more than a day or two of strong broad based participation in my view remains a big negative on a longer-term basis. Technically not much has changed. Most of the momentum indicators remain overbought and are diverging. This includes the breadth and volume oscillator as well as the McClellan oscillator. While breadth has been good volume has been weak. Volume is the fuel for the market and low volume on rallies is just not good. The new highs have been doing OK but are still diverging from late December and that also tends to occur near tops. However, the biggest problem for the short-term anyway remains the sentiment backdrop. The CBOE put to call ratio basis the 10-day moving average is below where it stood in early November and the Rydex ratios have recently moved to or in some cases above their respective levels. Yesterday I mentioned the fact that Investors Intelligence was up to 61% bulls and today the American Association of Individual Investors (AAII) reported 50% bulls to only 19% bears. The short-term sell signal has not been reversed and I remain bearish. Medium-term nothing has changed. I am still of the view that this coming decline is part of a bottoming process but one that is not yet complete. Long-term I remain bearish. The bonds are neutral short and medium-term. The XAU is very close to turning bullish on the short-term but we need to see a move above 51.50 to confirm. For now I remain neutral on the short-term. Medium and long-term I am bullish and expect to see substantially higher prices

We are holding a short position in the QQQ’s from 65 5/8. They closed at 65.15. Keep the stop to 68.40. Make sure to call the early morning hotline for any changes.

Stock index futures traders are flat. Stand aside for the morning. Rydex switchers are holding a 20% Ursa and 40% Precious Metals position. Make sure to call the Noon Pacific hotline for any changes.