DAILY TECHNICAL MARKET COMMENT

By: Larry Katz

March 22, 2001

*These are preliminary numbers and will be adjusted tomorrow

The DJIA lost 234 points and the S&P lost 20 points. Volume expanded over Tuesday coming in at 1.31 billion shares. The A/D line lost 1400 units. The new highs eased and the new lows expanded. The Russell 2000 lost 8.74 points. The short-term is neutral and very oversold. The medium-term is negative. The Value-line lost 21.42 points. The short-term is neutral and very oversold. The medium-term is negative. The NASDAQ Composite lost 27 points and the NASDAQ 100 lost 9 points. They closed near their lows and at new lows but did hold up a lot better than the listed stock averages. The short-term is neutral. I am going to stay neutral medium-term but the decline is clearly not over. The DJTA bucked the trend and actually closed with a very small gain. The short-term is neutral and the medium-term remains negative. The DJUA and UTY closed lower and traced out negative reversal patterns. They are negative in all time frames.

I was counting the decline from Tuesday’s high on the S&P as wave ..5 of .3 of iii from January 31. This count still looks ok but the hourly chart from Tuesday is sloppy and so far not impulsive. It is possible that the early low was the orthodox low of this wave and that the later weakness is a “b” wave of a small irregular correction. It is also possible since the pattern is showing a lot of overlaps that we are completing a small diagonal triangle from Tuesday. Either of these counts allows for a rally to get underway now and if either of these counts are correct we actually need to begin to rally now as much further weakness would likely confirm that the pattern from Tuesday was about to enter a third of a third. Moreover, much further weakness would also confirm that the S&P was not finishing off a third of a third but instead was in the early stages of a third of a third. The DJIA looks to be in the early stages of a third wave from March 8. If correct and it seems likely that it is, the decline should begin to pick up speed. I will address the bigger picture in this weeks letter over the weekend. The hourly chart from Tuesday on the NDX is very similar to the S&P. It is possible that yesterday completed a diagonal triangle from Tuesday. It is equally possible that the early low yesterday completed the orthodox low and the late weakness is a “b” wave of an irregular or as is the case with the S&P the pattern is subdividing and we are about to enter a third of a third from Tuesday. There is one other possibility for the NDX and that is the decline from Tuesday is a “c” wave of a diagonal triangle from March 15. This does work as the decline from March 15 to March 16 is also best counted as a three. If this is correct we will know in very short order as a rally should get underway now followed by another three-wave decline to a modestly lower low. Even in the best case scenario this decline would still only be wave .5 of iii from January 24 and should be followed by a move to lower lows to complete wave 5. The worst case scenario is that the NDX is still in wave .3 of iii and could begin to accelerate lower. Support: S&P; 1118-1122, 110-1105, DJIA; 9100-9120, 8900-8950, NDX; 1596-1608, 1540-1544. Resistance: S&P; 1142-1143, 1156-1158, DJIA; 9537-9540, 9583-9590, 9722-9730, NDX; 1624, 1642-1644, 1693-1700.

There were a couple of rally attempts yesterday. The first came not far from the opening and actually saw prices move back to positive before ailing and the latter came later in the day. This to saw a rally that took the DJIA and the S&P back towards the unchanged level before failing as well and sending prices below their early lows. This left another in a series of negative intra day price patterns in place, with the averages closing not far from the days low. Volume expanded on the day, and for the second day in a row. This has confirmed price but is still not close to levels that would indicate a capitulation or give up and given what the market is doing this looks to be very necessary. Breadth was again quite lopsided with the A/D line nearly 2 ½ to 1 negative. The new highs eased a bit but are still too high for a bottom while the new lows expanded on the decline again confirming price.

The CBOE put to call ratio moved up from Tuesday’s bearish level but as only slightly positive. The OEX ratio was neutral but low neutral. The breadth and volume oscillators moved lower and are extremely oversold with the volume oscillator at its most negative level in 30 plus years. The 3-day oscillator is deeply oversold but is holding above last weeks low. The McClellan oscillator is deeply oversold and very close to last weeks low. The 10-day and open 10-day Arms are extremely oversold. The 5-day Arms eased a lot but is still slightly oversold and the 21-day Arms is deeply oversold. The new 10 Arms is neutral but also improving. The daily range oscillators are oversold. They have confirmed on the DJIA but are still showing a very minor potential divergence on the S&P. The daily trend oscillators are negative.

The market continues to, in a word, trade terribly. Prices continue to close on or near their lows with a lot of weakness late in the session. This is an inherently negative pattern all into itself. Moreover, in spite of a deeply oversold condition the market continues to move lower. A number of potential bullish divergences have been blown out of the water. A failure to even remotely respond to an extreme oversold condition is telling us something. What we saw early this week as soon as we did rally was the put to call ratios dropping like a stone and the end result has been a two day loss of 48 points or 4.10% for the S&P an 473 points or 4.74% for the DJIA. Speaking of the DJIA, yesterday it moved decisively below its March and October low just above the 9650-9700 level. This in turn has completed a major negative technical pattern called a descending triangle. So far the break is only marginal and a move back above that level soon could invalidate the pattern but the implications of this break have to be respected and are ominous. The fact that this break has occurred on expanding volume tends to confirm the pattern. What we really need to be alert for is a rally back towards the breakdown point on lower volume, a pattern that would be doubly negative. The market has also failed to respond positively to positive news and continues to react negatively to negative news. This is bear market behavior in spades. Short-term indicators are deeply oversold with some like the Arms indexes at extremes. The McClellan oscillator is still showing a potential divergence but it is very minor. Most of the other indicators have confirmed price and as such I have to say one again that even if we are at a momentum low, and that has not been confirmed, a price low even if we are close rarely if ever occurs commensurate with a momentum low so lower prices are still expected. That of course is in the best-case scenario if indeed we are, as I have been suggesting, closer to a medium-term low. I have also discussed the possibility that instead of being close to finishing the post January decline we could in fact be entering the acceleration point of the decline. Given the wave structure on the DJIA in particular this is looking more and more likely but not yet confirmed. I am going to stay neutral for both the short and medium-term although it is clear that the decline is not over. Long-term I remain bearish. The bonds ended the day near flat after rallying early and left a negative pattern on the chart. I was again surprised by the late flat performance given the weakness in equities as this is counter to what we have seen of late. Perhaps the bonds know more than we do. In any case they still appear to be topping and I remain bearish both short and medium-term. The XAU is hanging in there but that is about all I can say at the current time. A move below Friday’s low of 48.45 would be negative for the short-term and eliminate any chance of the rally from October unfolding as a five. I am neutral in all time frames.

We bought the qqq’s per the early morning hotline at 40.70 and were stopped out at 39.80 for a .90 point loss. Stock index futures traders and QQQ traders stand aside for the morning. Rydex switchers are holding a 10% OTC position and 20% gold fund position. Make sure to call the Noon pacific hotline for any changes. The morning hotline will be on at 7:15 Pacific.