DAILY TECHNICAL MARKET COMMENT

By: Larry Katz

March 27, 2001

*These are preliminary numbers and will be adjusted tomorrow

The DJIA gained 183 points and the S&P added about 13 points. Volume contracted sharply from Friday’s total coming in at a very low 1.11 billion shares. The A/D line added about 900 units. The new highs expanded a bit over Friday and the new lows eased. The Russell 2000 gained 4.11 points. It closed about in the middle of the days range. The short-term is neutral but could bounce a bit more. The medium-term is negative. The Value-line gained 12.55 points. It too closed near the middle of the days range. The short-term is neutral but looks to have more to go on this rally. The medium-term is negative. The NASDAQ Composite lost 10 points and the NASDAQ 100 lost 28 points. The short-term is neutral but improving. The medium-term is neutral but also improving. The DJTA gained an impressive 82 points. The short-term is neutral but is still oversold and could rally further. The medium-term is negative but improving. The DJUA and UTY closed with very strong gains. I am going to move to neutral on the short-term. The medium and long-term remain bearish.

The rally from last Thursday’s low on the S&P is so far a three-wave pattern on the hourly chart. A move above yesterday’s high of 1160.02 could turn the pattern into a five depending on what the S&P does following that move. A move below yesterday’s low of 1139.83 prior to a move above that high leaves us with a confirmed three-wave pattern as that would turn the daily chart down. I am still of the view that the  rally from last weeks low is a fourth wave from the January peak. Whether it is wave iv from January or only wave .4 of iii is not clear. However, as pointed out in the letter yesterday it is possible to count the pattern from January as a five on the daily chart. While that is not my preferred count it is still a possibility and one that has to be respected. The hourly chart of the DJIA shows a three-wave pattern into yesterday’s high. A move above yesterday’s high of 9724.87 could turn the pattern into a five. A move below yesterday’s low of 9509 would confirm the rally as a completed wave on the daily chart. The DJIA has remained below last Tuesday’ high but has carried far enough to almost eliminate the possibility that it is a fourth wave from March 8. I say almost because it is possible that the rally is wave “a” of a large triangle. However, it is more likely that the rally is either a second wave from last weeks peak or a larger “b” wave from March 8. The NDX held above Friday’s low keeping the daily chart from Thursday somewhat positive. A move today below yesterday’s low of 1667.80 would turn the daily chart down and confirm the rally as a three. If we hold that low it will be possible to count the NDX from Friday’s high as being in a fourth wave triangle and that would allow for the rally to unfold as a five. A move this week above last weeks high of 1755 would turn the weekly chart positive and confirm that the post January decline was complete. Until that occurs we have to allow for at least one if not two 4’s and 5’s to the downside to complete the decline from January. My focus will remain on the weekly chart. Support: S&P 1143-1145, 1139, 1109-1112, DJIA; 9585-9592, 9510, 9340-9356, NDX; 1167, 1645-1648, 1582-1600. Resistance: S&P 1174-1179, 1199-1200, DJIA; 9775-9788, 10,190-10,210, NDX, 1755, 1863-1870.

The DJIA and the S&P made their high in the first couple of hours of trading and spent the remainder of the session going sideways. The DJIA had a decent rally into the close and ended not too far from the days high but the S&P lagged badly and closed just slightly north of the mid-range point. Breadth as relatively decent but not nearly as strong as a 180 point gain in the DJIA. We did get a modest expansion in the new highs, however, volume slowed dramatically and was barely above one-billion shares. Contracting volume as the market rallies is a big negative. The NASDAQ averages after leading last Thursday have spent the past two days doing very little as the DJIA has moved higher

The CBOE put to call ratio moved up a bit from Friday but was still quite low and negative. The OEX ratio moved higher and was positive. The breadth and volume oscillators moved higher. They are still oversold but at a more reasonable level. The 3-day oscillator moved higher and is neutral. However, another strong day today could turn it short-term positive. The McClellan oscillator has relieved its recent oversold condition. It is neutral but still below zero. The 10-day and open 10-day Arms moved sharply lower. They are still oversold but not excessively so and the open 10 is not far from neutral. The 5-day Arms is neutral but close to negative. The 21-day Arms is oversold. The new 10-day Arms is neutral but closer to positive. The daily range oscillators are turning up from oversold but are still weak. The daily trend oscillators are negative but close to positive on the NASDAQ.

The rally over the past two days, well three if we count the move from Thursday’s low has been quite dramatic in terms of points. The DJIA from its low to yesterday’s high has rallied over 600 points or 6.6%. The S&P has been even stronger as it has gained 79 points or over 7%. While we are still oversold on any number of indicators the rally has served to move those indicators from extreme readings to a more normal oversold reading. While the rally is indeed impressive it is not in my view anything more than a very sharp reaction to a very oversold condition. Remember, the further you stretch a rubber band the further it will snap back. Since we are still oversold I can see the rally carrying on a bit more as that condition relieves itself further. However, if that is the case it will most likely evolve as a two-step or three wave affair with the first wave or step close to over. There were a number of things about yesterday’s action that I did not like that leads me to that conclusion. First and foremost, yesterday was the second day of higher prices accompanied by a contraction in volume. This is a very negative pattern and usually does not last for more than three-days before a decline of some sort unfolds. Secondly, yesterday was the second day of sharply lower put to call ratios. The fact that this is occurring only after two days of rally suggest that the usually wrong options traders are afraid of missing the rally. In light of how far the market has moved to the downside, one would expect to see some degree of disbelief in the rally not an immediate acceptance of it. As such it is my view that this phase of the rally is most likely behind us. On a medium-term basis it is likely that we are getting closer to a good bottom.  However, there are a number of factors that lead me to believe that we are not there. First, as I have been pointing out over the past several days, the low last week was fully confirmed by all of the key momentum indicators and other factors such as the new lows. The momentum indicators reached levels that in almost every case historically have required at least one and in some cases two lower lows in price on an easing in downside momentum before a medium-term bottom was complete. So, even if last week did mark a momentum low, and that is not yet confirmed the odds of that also marking a price low are near zero not impossible but close enough. Secondly, there are just too many stories in the press both on TV and in certain financial dailies focusing on how to find bottoms. As much as the technical picture has improved it would be rare for the market to bottom when there is so much talk about how to find one. It would be one thing if we had just had a minor 7-10 percent correction but the NASDAQ has just had its worst decline in its 30-year history and the S&P is biggest percentage decline in 13 plus years. This was not your ordinary run of the mill decline. No we’ll find a bottom when they all stop looking for one and instead run articles on how stocks are never going to go up again or how to make money selling stocks short in a bear market. As mentioned earlier I see the possibility that the rally from last week could extend a bit more but do not see it as anything more than a strong reaction to a deeply oversold condition and I remain neutral on the short-term. Medium-term we may be getting closer but we are not there and I remain neutral here as well. The long-term remains bearish. The bonds confirmed the break from the rising wedge on Friday was the real thing. Hourly indicators are oversold so a strong bounce may be close. However, the short and medium-term picture remains bearish. The XAU broke last weeks low but instead of falling sharply reversed course and closed near the days high. The patterns are not clear but so far the XAU has not eliminated the possibility that the decline from February 27 is a deep second wave from February 15. It is close though and for now I am going to remain neutral in all time frames.

Stock index futures traders are flat. Stand aside for the morning. QQQ traders are flat. For today the strategy is the same, take a 50% long position using a buy stop of 48.85 with a stop if elected of 39.44. Rydex switchers are holding a 20% Precious metals and 10% OTC position. Make sure to call the Noon Pacific hotline for any changes. The morning hotline will be on at 7:15 AM Pacific time.