DAILY TECHNICAL MARKET COMMENT

By: Larry Katz

May 2, 2001

*These are preliminary numbers and will be adjusted tomorrow

The DJIA gained 163 points and the S&P added 17 points on volume of 1.15 billion shares. The A/D line added about 700 units. The new highs contracted while the new lows were flat. The Russell 2000 gained 5.14 points recouping all of Monday’s losses. The short-term is neutral and getting a little overbought but does look higher. The medium-term is neutral. The Value-line gained 13.98 points and closed at new post March highs. The short-term is neutral and getting overbought but is acting OK and looks to have more to go. A challenge of the all time high seems a good shot. The medium-term is neutral but also improving. The NASDAQ Composite gained 52 points and the NASDAQ 100 added 64 points. I am moving back to neutral on the short-term. The medium-term is neutral but with a positive bias. The DJTA closed with a small loss. The short-term is neutral. The medium-term is neutral but close to turning down. The DJUA and UTY closed with minor losses The short-term is neutral but close to turning down. The medium-term is neutral and the long-term is bearish.

The S&P moved below Monday’s low confirming the rally from last Wednesday as a completed wave on the daily and chart and as shown yesterday a five on the hourly chart. I was counting that rally as wave .5 of iii from April 4, and based on Fibonacci relationships that is still the best count, at least at this time. The rally yesterday has not yet moved above the peak of wave iii and is so far a three-wave pattern on the hourly chart. As such we can count this rally as a “b” wave from Monday and as part of wave iv from April 4. A move above Monday’s high would likely confirm wave v as being in progress but it is also possible that we are about to enter a third wave from April 25. This would question the preferred wave count and set up for the possibility that the entire post April 4 advance was entering its acceleration phase. While the S&P moved below Monday’s low the DJIA did not and that keeps the daily chart from April 25 positive. The DJIA moved right up to Monday’s peak but did not move above it and so far the rally from Tuesday’s low is a three-wave pattern on the hourly chart. This leaves open the possibility that yesterday’s rally was a “b” wave from Monday but further strength today would invalidate that count and allow that the rally from April 25 was extending. The pattern from April 25 on the hourly chart is a complete mess at least into Monday’s high and is next to impossible to count as impulsive. As mentioned yesterday, it is possible to count a five as complete on April 26 with the rally into Monday a “b” wave of an irregular. Yesterday’s low did not come close to what can be counted as wave “b” so if hat count is correct we ended the “c’ wave on a failure. A failure implies strong underlying strength as does an irregular so if this is correct we could very well be entering a third of a third on the DJIA with an acceleration of the rally dead ahead. The NDX moved below Monday’s low confirming the rally from last week as a completed wave on the daily chart and as a clean double three on the hourly chart. The late rally yesterday took the NDX above Monday’s peak. It is possible to see a triple three develop and the rally so far is a three. However, we are very close to the April 20 peak and a move through that level would invalidate that as a possibility. If this were to occur we would still be faced with a number of possibilities but the most likely scenario would be that the next wave up from April 4 was underway.  As I said yesterday, the next couple of days will be very important to the wave count. Support: S&P; 1256-1259, 1250-1252, 1238-1240, DJIA; 10,844-10,858, 10,780-10,794, 10,731. NDX; 1875-1885, 1855-1862, 1810-1820. Resistance: S&P; 1272-1275, 1300-1304, DJIA; 10,900-10,925, 11,000-11,050, NDX; 1924-1935, 1981.

The market did an about face reversing Monday’s reversal closing sharply higher The DJIA had a very high level inside day (higher low, lower high) as it come within a few points of both Monday’s high and low. But did close very close to the sessions high The S&P made a lower low but did rally strongly late in the day and also closed near is high. The key here is late in the day as the market was came on strong in the last hour. Volume slowed but only slightly from what we saw on Monday. Breadth was decent, not great but decent. We did see a sharp drop in the new highs. This is a warning sign but it was a reversal day of sorts. It will be more important to se what they do today as they and breadth for that matter can lag on reversal days. The NASDAQ averages traced out positive outside days (lower low, higher high) and closed near the highs.

The CBOE put to call ratio moved higher and was neutral. The OEX ratio also moved higher and was bullish. The breadth oscillator was flat and remains overbought. The volume oscillator is overbought. The 3-day oscillator is overbought but still above +600. It is diverging but being over +600 is also showing some underlying strength. The McClellan oscillator moved higher. It is overbought but also confirming. The 10-day and open 10-day Arms are neutral but the open 10 is closer to overbought. The 5-day Arms is back to overbought and is negative. The 21-day Arms is neutral but closer to oversold. The new 10-day Arms is below .80 and close to giving another sell signal. The daily range oscillators are close to overbought.  The daily trend oscillators are positive but weakening.

I could certainly make some bones about yesterday’s rally. Breadth was only modestly positive the new highs contracted sharply and volume contracted. The DJIA moved right up to Monday’s peak but did not push through and the S&P while confirming on a closing basis also did not get back to Monday’s peak. These are all genuine concerns, However, the averages in spite of it all held together, bent but did not break and when the dust had settled had recovered all or nearly all of Monday’s losses. The rise in the put to call ratios yesterday in spite of the rally is a short-term plus. On the other hand, the Rydex ratios are weakening substantially with the assets in the bearish funds near their levels seen in late January. Most of the momentum indicators are overbought. The breadth related measures have confirmed the new highs while the volume oscillators are diverging. The market, however, has been able to so far anyhow shrug this off and keep on moving higher. There are two schools of thought on this sort of behavior. One believes that it is very bullish as it implies strong underlying strength. I have seen just this sort of behavior in the early and middle stages of a strong medium-term advance. The other school says that it may be short-term positive but it is not going to last. In my view a lot will depend on how well the indicators do over the next few days. While we do have some potential problems developing there has been enough positive momentum and enough indicators have confirmed to give he benefit of the doubt to higher prices over the short-term. Officially I am going to remain neutral but with a positive bias. I do see the bullish case medium-term and it looks more and more likely that the March-April low did indeed complete a medium-term bottom on the S&P.  There is a possibility that the market can just keep on going and if so we will miss it. However, there is just as good a possibility that the rally is getting near its end and a correction around the corner. For now I am going to remain neutral on the medium-term and await a more optimal entry point. However, further strength over the next few days could force us to pay up. Long-term my view has not changed and I am approaching the rally in the S&P as a bear market advance and I remain bearish. The bonds had a decent day. The short-term continues to improve but not enough yet to change from neutral. The medium-term remains bearish. The XAU had a strong day making new rally highs and is close to challenging its March 9 peak. I remain bullish in all time frames.

QQQ traders covered the short position per the Noon hotline for a loss of .50 points. Stand aside for the morning but make sure to call the early morning hotline.  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.       

 We can see a clean five-wave rally on the DJIA into the first peak last Thursday. The pattern from then has been very sloppy with a number of overlaps. The a-b-c shown with c ending early yesterday is the pattern discussed in the Elliott section above. If correct it implies a lot of underlying strength. If we fail here we have a very sloppy pattern from last weeks low.

You can see a clean corrective rally on the NDX from last weeks low into Monday’s high. The rally from yesterday’s low may be a third three or as shown by the alternate count a “c” wave from April 26. A move above the April 20 high of 1981 would have much more bullish implications.