*These are preliminary numbers and will be adjusted tomorrow The DJIA lost 91 points Friday and the S&P gave up 25 points. Volume expanded reaching 1.24 billion shares. The A/D line lost 800 units. The new highs eased and the new lows expanded a bit. The Russell 2000 lost 9.57 points. I am going to move back to negative on the short-term. Medium-term I remain slightly positive. The Value-line lost 20.50 points. I am negative short-term and still slightly positive on the medium-term. The NASDAQ Composite lost 127 points and the NASDAQ 100 lost 158 points. They closed not far from the session low. I am going to stay neutral on both the short and medium-term as the indicators and wave structure are not clear. The DJTA lost 47 points. The short-term remains negative while the medium-term is neutral. The DJUA and UTY closed higher. The short-term is neutral and right near strong resistance. The medium and long-term remain negative. The S&P on Friday moved below
that important support in the 1300-1303 area and by a wide enough margin to be of
importance. The hourly chart from Thursday into Friday’s low can be counted as a
five, and that allows for a bounce at any time. There are, however, any number of
possibilities in regards to just where in the post January decline. I can make the case
that the pattern from February 13 is a third three from January 31 but there is no real
Fibonacci relationship to the other possible three’s. It is also possible that the
decline is only the “a” wave of a larger a-b-c or in the most negative case the
S&P is still tracing out a number of 1’s and 2’s with a third of a third
still to unfold. In any of the above cases a rally is possible, how it unfolds could give us a good clue as to the
wave counts. The DJIA broke the previous weeks low turning the weekly chart down and
confirming the post January 12 rally as complete. This in turn invalidated any possibility
that the post February 6 pattern was a fourth wave triangle from January 12. The October
18 to November 6 rally on the DJIA can be counted as a five on the daily chart. Everything
from that high, both up and down are three-wave patterns. This includes the fact that the
DJIA has made two very minor moves above the November 6 high. As such I have been able to
narrow the pattern down to one of two possibilities. The first is that the November 30 or
December 21 double bottom low was wave “a” of a larger correction and that the
rallies from that level are part of a complex “b”
wave of a slight irregular. The latter is that the November 30 or December 21 low marked a
“b” wave from October 18 and the pattern from that low is a “c” wave
diagonal triangle. If the first count is correct we should be in the early stages of a
“c” wave decline below the November-December double bottom. If the latter is
correct we need to see one more modest new high before a sharp decline back to at least
the double bottom low but this count would also indicate that the rally from October 18
was over and was also a three. The next day or three looks important and very interesting.
The NDX unlike the S&P did not violate last weeks low on Friday but it did come close.
As is the case with the S&P the pattern is not clear and where the decline from
Thursday fits within the post January 24 pattern is not clear as yet. The hourly chart
from Thursday does not look impulsive, at least not yet, and that leaves open the
possibility that the decline was a “b” wave from Wednesday. This would allow for
a rally back above Thursday’s high to complete a flat from Wednesday. However, there
are so many possibilities that I feel it best to see further price action, which should
help to narrow down the numerous possibilities that are currently in place. Support:
S&P; 1283-1287, 1250-1254, DJIA; 10,680-10,690, 10,530-10,544, NDX; 2160-2170,
2080-2093. Resistance: S&P; 1308-1309, 1317-1319, DJIA; 10,840-10,846, 10,900-10,915,
NDX; 2276-2283, 2330-2340. There is one trend change this week due Thursday-Friday. The market opened lower and remained
negative throughout the session Friday. The DJIA and the S&P moved below
Wednesday’s low, and reversing all of the Wednesday-Thursday rally. The NASDSAQ
averages did hold above Wednesday’s low but not by a lot. However, both the NDSX and
Composite gapped lower on Friday and this left both with a very negative pattern in place
called an Island Reversal, which began with Thursday mornings gap higher opening and
Thursday’s poor close. The fact that the averages did rally a bit late on the day and
closed off their lows could be viewed as a minor positive but the fact that Friday was
options expiration could have caused some distortions in the price activity so I take it
with a grain of salt especially in light of the negative chart patterns. The negative
price action Friday was also accompanied by a modest but not excessive expansion in
volume. Some of this could also be due to options activity but it does tend to confirm
price but it is nowhere near levels that could be construed as climactic. Breadth too was
negative with the A/D line recording its worst one-day reading in nearly two months. The
new highs eased but are still way too high to mark a bottom, which is usually accompanied
by a sharp drop in new highs that would indicate that investors are finally capitulating.
The new lows, meanwhile did expand and confirmed the new lows in price. The CBOE put to call ratio moved up
sharply on Friday. Some of this could be directly related to options expiration but how
much is not clear. The OEX ratio also moved higher but was no better than neutral. The
Rydex ratios weakened or were flat and are only neutral. They have a long way to go before
reaching levels seen at good trading lows. The breadth and volume oscillators continue to
move lower. They are neutral but the volume oscillator is closer to oversold. The 3-day
oscillator moved lower but is not yet oversold and remains negative. The McClellan
oscillator also moved lower. It is closer to oversold but still not there and it too is
negative. The 10-day and open 10-day Arms remain oversold and positive. The 5-day Arms is
neutral as is the 21-day Arms, but the latter is close to oversold. The daily range
oscillators are neutral but weak and still have a way to go before becoming oversold.
Moreover, they have confirmed the new closing low on Friday. The daily trend oscillators
remain negative on all three averages. The price action Friday was very
negative with the NASDAQ averages leaving very negative patterns in place. At the same
time, neither the NDX or the Composite moved below Wednesday’s low while both the
DJIA and the S&P did, setting up a possible bullish divergence. However, the negative
price action and poor tape is an overriding factor and in spite of the late bounce Friday
the averages closed poorly. Other than the Arms indexes, which remain oversold and
positive, the majority of the momentum indicators, while improving are not yet bullish and
for the most part only neutral. Moreover they have all confirmed the new post January lows
in both the DJIA and the S&P. The McClellan oscillator has also just moved below zero
only a week ago after spending nearly two months above zero. This looks more like the
beginning of a long overdue correction in this indicator that will ultimately bring the
summation index back to a more sustainable level. The short-term sentiment indicators have
improved, especially the CBOE put to call ratio. However, the CBOE put to call ratio was
most likely distorted due to Friday’s options expiration and that in turn should
correct early this week. Meanwhile, the Rydex ratios are only neutral and have a long way
to go before reaching levels consistent with good trading lows. Moreover, the VIX
(volatility Index) has not improved much at all and is closer to levels seen near tops and
a long way from levels seen near good lows. The bottom line is that while I see the
possibility of rallies and one could get underway now, I do not see the ingredients in
place for a sustained advance but only short-lived ones. It will take a lot more than what
we have seen so far to set the stage for a sustained meaningful advance. This does not
necessarily mean that the averages have to fall apart from here, although that is a
possibility but it does suggest that further weakness is the most likely event and that in
my view the upside is most likely limited over the near-term. Friday’s failure and weak close makes it
tempting to move back to negative on the short and medium-term but for now I am going to
maintain my neutral view and see what today brings. Long-term I remain bearish. The bonds
had a good rally Friday as expected on Thursday as the short-term indicators were deeply
oversold. I am going to remain neutral on the short-term and bearish on the medium-term.
The XAU had a strong session Friday and broke out of a declining wedge from the January 22
peak while holding near important support. The pattern looks to have completed the
correction from late December but we do need to see some follow-through early this week to
confirm. While I may be jumping the gun I am going to move back to bullish from neutral on
the short-term and I remain bullish both for the medium and long-term. We bought a 50% long position in the
QQQ’s on the opening Friday per the letter at 55.50 and sold the position for a .60
point loss. 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.
From the
late December peak the XAU shows a clear three wave corrective decline. The “c”
wave of that decline has taken the shape of a declining wedge or diagonal triangle with
Friday’s rally pushed the XAU well above the trend line is strong evidence that the
pattern is complete. The chart
below shows the two wave counts on the DJIA from the October low discussed in the Elliott
section of the letter
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