DAILY TECHNICAL MARKET COMMENT

By: Larry Katz

March 23, 2001

*These are preliminary numbers and will be adjusted tomorrow

The DJIA lost 97 points and the S&P lost around 5 points. Volume expanded sharply reaching 1.73 billion shares. The A/D line lost 1600 units. The new highs eased and the new lows expanded sharply. The Russell 2000 lost 2.94 points but did close well off the session low. The short-term is neutral and remains very oversold. The medium-term is negative but is also approaching oversold readings. The Value-line lost 8.10 points. The short-term is neutral and remains very oversold. The medium-term is negative. The NASDAQ Composite gained 67 points and the NASDAQ 100 gained 97 points. The short-term is neutral but very close to going positive. The medium-term is neutral but also improving. The DJTA lost 46 points but did close well off its low. The short-term is neutral and deeply oversold. The medium-term is negative. The DJUA and UTY closed with very sharp losses but did manage a bit of a bounce late in the day. They remain negative in all time frames.

The S&P broke well below the 100 level, a level I deemed as important this week. The break of that level adds a lot of support to the idea that the S&P is still in its third wave from January 31. There are a number of probable starting points for wave 3. The simplest is that wave 3 began on February 27 and if that is the case it is possible that the decline from Tuesday is wave .5 of 3. There is also a distinct possibility that we are completing only wave ..5 of .3 of 3. In either case it is next to impossible to count the decline from January 31 as a five so we need to look for lower prices, but how many 4’s and 5’s are left is not clear. The decline from Tuesday on the hourly chart is also next to impossible to count as a five so we should see lower prices to complete this pattern. However it is not entirely impossible as we could count the second wave as an irregular ending on a failure with wave 1 extended. A move today above yesterday’s high of 1124.27 would confirm that decline as complete on the daily chart. So we need to focus on that area. A move below yesterday’s low of 1081 could complete the pattern and set the stage for a decent rally. The DJIA is either in a “c” wave from January 2000 or a second three is underway. There are two possible starting points for this decline and they will be discussed in the letter this weekend. The daily chart from March 8 is showing a three-wave pattern with the third wave getting underway on Tuesday. This decline is either wave 3 or wave “c” from March 8. Whether the decline from Tuesday is a “c” or third wave it needs to unfold as a five. The hourly chart from Tuesday can be counted as a five but is best counted as having completed three waves down and needing a small fourth and fifth wave to finish off the pattern. A move today above yesterday’s high of 9498 would confirm the decline from Tuesday as complete. Until then we need to look for a move below yesterday’s low to complete the pattern from Tuesday. The NDX continues to find support around the important 1600 level+/- 2%. The NDX moved above Wednesday’s high confirming the decline from Tuesday as a completed wave on the daily chart. The decline from Tuesday on the surface is corrective. That leaves us with a couple of wave counts. The first and most bullish is that this decline was wave “e” of a diagonal triangle from March 5 which could be counted as a fifth wave from January 24. It is also possible that Tuesday’s decline is wave “c” of a diagonal triangle from March 15. If correct we need to head lower almost immediately. In addition, this decline could not be counted as wave 5 from January 24 but may be counted as wave .5 of iii. The last possibility is that yesterday’s rally was a “c” wave of an irregular from Wednesday’s early low which can also be counted as having completed wave .5 of 3. The real key on the NDX, at least for this week is last weeks high of 1814 as a move above that level would confirm that the decline from January was a completed wave on the weekly chart. Support: S&P; 1105-1106, 1097-1099, 1070-1072, DJIA; 9320-9324, 9239-9248, 8954-8966, NDX; 1663-1164, 1640-1643, 1596-1608. Resistance: S&P; 1124, 1131-1133, 1142.1144, DJIA; 9498, 9669-9678, NDX;1710-1730, 1752-1758, 1814.

Instead of getting whacked in the last hour as it did both Tuesday and Wednesday, the market staged a strong rally. It did all short as both the DJIA and the S&P ended lower but both closed well off their lows and the S&P was not too far from a break even day. It is difficult to call it a key reversal day but it did look like a minor one and it was also accompanied by a sharp expansion in volume, which reached its highest level since January 3. Breadth was nearly 3 to 1 negative but did come back from a more than 5 to 1 plurality. The new highs contracted sharply and the new lows expanded sharply the latter confirming the new price low. While the listed stocks closed lower the NASDAQ averages not only closed higher but closed near their high of the day. This is a real change from what we have seen throughout most of the decline. It is too early to tell whether this was a one-day phenomena or a more important shift but it was an interesting development nonetheless.

The CBOE put to call ratio was a little disappointing as it was only neutral. The OEX ratio was also neutral. The breadth and volume oscillators moved lower and are deeply oversold. The 3-day oscillator is also very oversold but did confirm the new closing low. The McClellan oscillator also moved to new lows confirming price. The 10-day and the open 10-day Arms remain extremely oversold. The 5-day Arms is oversold but only modestly so while the 21-day Arms is deeply oversold. The new 10 Arms is improving and getting closer to bullish levels. The daily range oscillators are deeply oversold. They are still showing a very slight divergence on the S&P but have confirmed on both the DJIA and the NYSE Composite. The daily trend oscillators are negative but on the NDX are very close to going positive.

Third waves have clear and specific characteristics. During rallies they display the strongest momentum and the best internals. In essence everything is in gear. In declining third waves we see the most negative breadth, the strongest volume and momentum indicators are at their worst. Yesterday, at its worst the A/D ratio hit its most negative reading of the decline and in spite of the rally it was still one of the worst we have had this year. The new lows hit their most negative reading of the year, confirming price and most importantly, every momentum indicator I follow moved to new lows. All of this along with price itself at least in the DJIA and most likely the S&P seems to confirm the idea that we are still in a third wave. We may indeed be in the latter stages of that third wave but we clearly look to be in a third wave.  All of the key momentum indicators moved to new lows for this decline eliminating any potential divergences that had been building and confirming price. This is why I always refer to the divergences as potential until they are confirmed as real. In studying these indicators at important market lows it is safe to say that when they reach levels as extreme as they are now that lower prices are to be expected. In fact, in most cases momentum troughs of this degree are usually accompanied by not one but usually two lower lows in price with higher lows in momentum before a low of importance is completed. Thus even if we are at a momentum low, and again there is nothing that says we are the odds of this being an important price low is minimal. This seems to fit in well with the wave counts. Yesterday’s performance did have some earmarks of a reversal and the huge volume some earmarks of capitulation. We could be close to a decent rally short-term but given the overall technical backdrop that is all it will be a decent short-term rally. Medium-term we could be close to completing the most negative portion of the decline. In Elliott terms the third of the third but given the technical backdrop even if the worst is behind us it is clearly not over. I am going to remain neutral on both the short- and medium-term. Long-term I remain bearish. The bonds rallied strongly on equity weakness but again sold off late in the day and closed much closer to the lows of the day. The rising wedge diagonal triangle remains in play but these patterns are very hard to define as they are progressing. However, when they are compete they are easy to define as they y end in a bang. There is no change in position I am bearish short and medium-term. The XAU is holding above last Friday’s lo but the pattern does not look great. A move below that low of 48.45 would confirm the rally from October 2000 as a three-wave pattern. I am neutral in all time frames.

QQQ and stock index futures traders are flat. Stand aside for the morning. Rydex switchers are holding a 10% OTC position and 20% Precious Metals position. Make sure to call the Noon pacific hotline for any changes.

This is just one of many possible counts on the NDX. A move above 1814 would confirm this as the preferred count.

The hourly chart of the S&P below shows the decline from Tuesday as best being counted as a three. The alternate count discussed in the Elliott wave section is shown with wave 2 taking the form of an irregular ending on a failure.