DAILY TECHNICAL MARKET COMMENT

By: Larry Katz

March 20, 2001

*These are preliminary numbers and will be adjusted tomorrow

The DJIA gained 135 points and the S&P was up by 20 points. Volume slowed considerably from Friday’s level coming in at a very weak 1.1 billion shares. The A/D line added 800 units. The new highs expanded a bit and the new lows eased slightly. The Russell 2000 gained 9.47 points. The short-term is neutral but could rally further as it remains very oversold. The medium-term remains negative. The Value-line gained 24 points. The short-term is neutral but should rally a bit more to relieve the oversold condition. The medium-term remains negative. The NASDAQ Composite gained 60 points and the NASDAQ 100 added just over 80 points. The short-term is neutral but improving. The medium-term is negative but looks to be closing in on a bottom.  The DJTA gained 50 points. The short-term is neutral. The medium-term is negative. The DJUA and UTY closed with modest losses. They remain negative in all time frames.

The S&P moved slightly below Friday’s low but that decline was needed to complete a five-wave sequence from last Thursday. This five can also be counted as a fifth wave from March 6 (March 8). This will be confirmed today if the S&P can move above Monday’s high of 1173.50 as that would lock in the decline as a completed wave on the daily chart. As discussed yesterday, I am counting the post March decline as wave .3 of 3 from January 24 and any rally from here should be viewed as being directly related to this decline and as a small fourth wave from February 15. There are two alternate counts. The first is that the post March decline is wave .5 of iii from January 31. under this count the current rally is wave iv from January 31. The other count is that the decline from March is he beginning of a third wave from January and the current rally only a small second wave. Both are viable but both are currently alternate counts. And even in the best case scenario the decline from January is not complete. The DJIA can be counted as having completed five-waves down from March 8 on the hourly chart with the fifth wave unfolding as a small diagonal triangle. The DJIA did not move above Friday’s high keeping the daily chart down. Until it confirms it will be possible to see the decline extend. A move above Monday’s high of 9992 would confirm and allow for the rally to extend. Where the decline from March 8 fits in the bigger picture is still not clear so we will patiently wait until something happens to clear this up. The NDX did not move below Friday’s low but did move above Friday’s high. That locked in the decline from Thursday as a completed wave on the daily chart. The failure by the NDX to move below Friday’s low puts the short-term count to a test. The decline from Thursday on the hourly chart is hard to count as a five unless of course the mid day low yesterday was a small fifth wave failure. If not then we are faced with a three-wave decline from Thursday, which would best be counted as a “b” wave of an irregular from March 12 and if that is the case then a “c” wave rally back above Thursday’s high should unfold to complete the pattern. Here in lies the problem as a move above Thursday’s high would turn the weekly chart positive and confirm that the entire post January decline was complete. Since it is near impossible to count the decline from January 24 as a five on the daily chart this would seem to be a very remote possibility unless of course the January decline was not wave 5 from September but instead part of a larger third wave. That said I am going to go with the idea that yesterday did end the pattern on a very small failure and that the current rally is a fourth wave of some degree on the NDX. A move above 1814 would change the entire complexion of the counts for the NDX. Support: S&P; 1162-1163, 1155-1157, 1140-1144, DJIA; 9915, 9864-9871, 9770-9790. NDX; 1693-1694, 1667-1672, 1600-1620. Resistance: S&P; 1192-1193, 1207-1209, 1228, DJIA; 9992, 10,200-10,220, NDX; 1760-1770, 1807-1813.

After some modest early weakness the market was able to right itself and rallied strongly yesterday. It did sell off slightly into the close but nonetheless most of the averages closed near the high of the day. The averages did trace out modest reversal patterns, however, the session was accompanied by a marked slowdown in volume reaching its lowest level since March 9. Breadth was fairly decent with the A/D line at a slightly better than 3 to 2 plurality. As decent as that was it was not nearly commensurate with the gain in the averages. We did get a modest expansion in the new highs and in spite of the lower low in the S&P we also saw a slight easing in the new lows. This, on the surface anyway is a short-term plus.

The CBOE put to call ratio moved down sharply and was quite bearish. The OEX ratio also moved lower and was below 1.00. The breadth oscillator moved higher. It is neutral but close to oversold. The volume oscillator moved higher but remains oversold. The 3-day oscillator is neutral but the rally alert signal following Friday’s close was correct. The McClellan oscillator moved higher. It is oversold but well off its low. The 10-day and open 10-day Arms remain deeply oversold especially the simple 10. The 5-day Arms is easing a bit but is still very oversold. The 21-day Arms is oversold but the new 10-arms is still on a sell signal. The daily range oscillator are oversold but are showing positive divergences on the S&P and NDX. They did confirm on the DJIA. The daily trend oscillators are negative.

As impressive as yesterday’s rally looked on the surface it was in my view nothing more than a reaction to a deeply oversold condition and not the start of anything serious to the upside. Yes, sometimes good rallies do start out in this fashion but there are a number of factors that lead me to believe that it is not the beginning of anything sustainable to the upside even on a short-term basis. For one thing the wave structure and Elliott counts argue that, at least as far as the S&P and NASDAQ are concerned the rally is nothing more than a small fourth wave that should be followed by at least one more lower low and perhaps a few. However, what was really disturbing yesterday was the extremely sharp drop in the CBOE put to call ratio, which moved to not only negative but near excessive levels. After what the market has been through the past couple of weeks on would have thought that any initial rally would have been met with at least a small degree of skepticism. That was clearly not the case yesterday. There may have been some undoing of distortions created from triple witching but not at the levels we saw yesterday. On Friday most all of the key momentum indicators that I report on daily confirmed price and moved to extreme levels of oversold. Even if Friday was in fact a momentum low it is rare to see price and momentum peak or trough together. What we usually get is a momentum low a rally and a lower low in price on an easing in momentum. This is how it usually is especially when the indicators get as oversold as they just have and I don’t expect it to be any different this time either. This  also fits in well with the wave counts suggesting that the current rally is a small fourth wave. Over the very short-term the rally may continue a bit longer. That would certainly help to relieve the oversold condition further and could also set the stage for possible bullish divergences with new price lows. However, the hourly indicators are already overbought and the put to call ratio yesterday suggests to me that while the rally could extend a bit more it is not going to run away and that the bulk of the gains are most likely behind us. My preferred scenario is that we are closer to the end of the post January decline the market has not eliminated the possibility that the decline may indeed begin to accelerate. Aqain, this is not my favored outcome but even in the best case a new low or perhaps a couple of new lows will be needed in the coming days and weeks before the post January decline is complete and for now I remain neutral on the medium-term. The long-term remains bearish. The bonds sharply lower on Friday. They have either completed or are very close to completing a diagonal triangle or rising wedge from January 25. I remain bearish in all time frames. The XAU did rally as it need to in order to keep open the possibility that the decline from last week is a second wave from February 15. There is little room for error and it must keep on rallying as a move below Friday’s low and especially below 46 would confirm the rally from October as corrective. I am neutral on both the short and medium-term and remain bullish on the long-term.

QQQ and stock index futures traders are flat.  We moved to a 10% position in the Rydex OTC fund per the afternoon hotline. We are holding a 40% Precious Metals and 10% OTC position in the Rydex funds. Make sure to call the Noon pacific hotline for any changes. The morning hotline will be on at 7:15 Pacific, 10:15 Eastern.

The daily chart of the NDX shows two possible wave counts. The first shows that three waves from January 23 or complete and the current rally is wave 4. The one labeled alt shows that the post February 26 decline completed only wave .3 of iii leaving a number of 4’s and 5’s left to unwind