DAILY TECHNICAL MARKET COMMENT

By: Larry Katz

May 4, 2001

*These are preliminary numbers and will be adjusted tomorrow

The DJIA lost 80 points and the S&P lost 19 points on 1.10 billion shares. The A/D line lost 600 units. The new highs contracted sharply and the new lows expanded slightly. The Russell 2000 lost 5.99 points. The short-term is neutral but still on the overbought side. The medium-term is bullish. The Value-line lost 18.71 points. The short-term is neutral. The medium-term is bullish. The NASDAQ Composite lost 74 points and the NASDAQ 100 lost 85 points. The short-term is neutral but still on the overbought side. The medium-term is neutral but with a positive bias. The DJTA closed lower. The short-term is neutral. The medium-term is also neutral. The DJUA and UTY closed lower but well off their lows. They are negative in all time frames.

The S&P moved below Wednesday’s low confirming the rally from Tuesday as a completed wave on the daily chart. The hourly chart from Tuesday into Wednesday’s high can be counted as either a three or a five but if it is a five, wave 5 ended on a small failure. The S&P also moved below Tuesday’s low eliminating the possibility that the Tuesday-Wednesday rally is part of a larger third wave from April 25. If the rally is a five I can count is as wave 5 from April 4, which would indicate that the S&P is in the process of correcting the post April 4 but possibly the post March 22 rally. If the rally is a three we can count it as a “b” wave of an irregular from Monday. However, “b” waves are always followed by “c” waves, and “c” waves are always fives. If the rally is a three then we are also faced with what is so far a three-wave decline from Wednesday, which means that the decline is not over. Frankly I have no real high confidence count on the S&P as there are just too many variables. However, I do see the possibility that the pattern from April 4 is complete albeit ending on a very small failure and that we are in the early stages of correcting that rally. While there are a lot of viable alternatives for the sake of simplicity lest go with that count at least for now. The DJIA moved below Wednesday’s low confirming the rally from April 25 as a completed wave on the daily chart. The hourly chart from April 25 into Wednesday is clearly corrective with a number of overlaps. There are three possibilities in regards to the pattern. The first is that the five-wave pattern completed on April 26 and that the rally from that point is a “b” wave of an irregular. If so then we are in wave “c” with lower prices ahead. The second is that the entire post April 25 advance is a large diagonal triangle, completing wave 5 of iii from April 4. The latter is that the rally from early on April 26 is an extended fifth wave diagonal triangle from April 25. In both of the latter cases the “e” wave of the pattern ended on a very small failure. If either of those counts are correct we will know as early as today as both the diagonal triangle and the failure imply a weak pattern that should lead to a sharp and quick break back to the beginning of the pattern. The NDX confirmed the rally from Tuesday as a completed wave and also moved well below support related to that rally. It also looks to have confirmed the rally from April 25 as a three-wave pattern on both the daily and hourly charts. This leaves us with two wave counts. The first is that the rally from April 25 is a “b”  or X wave from April 20 and the current decline a “c” wave or the beginning of a second three. In either of these counts a move below the April 25 low should be expected to complete the pattern from April 20. The decline yesterday is so far a three-wave structure on the hourly chart and also stopped not far from a .618 retracement of the rally from April 25. This leaves us with the other possibility and that is the rally from April 25 into Wednesday was wave “a” of a second three from the April 4 low and a “c” wave is close at hand. A move below 1820-1833 zone would eliminate this count while a move above Wednesday’s high would confirm that wave “c” was underway. Support: S&P 1230-1232, 1200-1202, DJIA; 10,630-10,640, 10,450-10,470, NDX; 1820-1833, 1720-1740. Resistance: S&P; 1252-1253, 1260-1262, 1272-1275, DJIA; 10,850-10,863, 10,920-10,950, NDX; 1890-1895, 1932-1940, 1981.

The averages close lower but did bounce late in the session to close off the lows. The DJIA bounced harder and closed well off its lows and about in the middle of the days range showing some positive relative strength for the first time in a few days. The S&P did close off its low but did not bounce nearly ass hard as the DJIA and ended up much closer to the lows than the highs losing about twice as much as the DJIA on a percentage basis. We did see an easing in volume but low volume on declines is just as often bearish as it is bullish. Breadth was only modestly negative as it recovered from over 2 to 1 negative to only a 3 to 2 negative plurality. The new highs did ease after diverging for two days. The new lows did expand but only modestly so and the absolute level is still quite benign. The NASDAQ averages were hit a lot harder than the listed averages and also bounced a lot less closing much closer to their session lows reversing a couple of days of strong relative strength.

The CBOE put to call ratio moved up nicely and was back to mid neutral. The OEX ratio moved higher but only slightly so and was close to bearish. The breadth oscillator moved lower. It is neutral but still closer to overbought. The volume oscillator moved lower and is neutral although still close to overbought. The 3-day oscillator is neutral. The McClellan oscillator moved lower. It is neutral. The 10-day and open 10-day Arms moved higher. They are neutral but the open 10 is close to oversold. The 5-day Arms is neutral. The 21-day Arms is also neutral but moving towards overbought. The new 10-day Arms moved above .80 completing another sell signal. The daily range oscillators are turning down from mild overbought levels. The daily trend oscillators are neutral.

Was yesterday the beginning of a correction that is long overdue or just a very short-term reaction that will be over in a blink of an eye? At this time it is too difficult a call as the indicators continue to give off mixed signals that could support either possibility. So far the decline has not violated any real important short-term support levels although on the NDX it did come close. The wave structure is not conclusive but tends to favor further weakness notwithstanding a bounce. Momentum indicators remain mixed. Breadth related measures have corrected the overbought condition and are back to neutral albeit high neutral. In a midst of a strong medium-term up trend that is all that is required so the next couple of days could tell us a lot. The volume oscillator has corrected more but is still close to overbought. On the positive side both the 10-day and open 10-day Arms have moved up sharply and from very overbought around April 20 they are now close to oversold. On the other hand, the new 10 Arms has just yesterday given its third or fourth sell signal (one as borderline since April 5 and is completing a pattern seen in mid January stretching into early February. Short-term sentiment is mixed. The CBOE put to call ratio yesterday did move higher into a modest decline. This is a plus but the 10-day moving average while moving up a little is still close to where it was in early February. In addition, the Rydex ratio hit its worst level since the rally from late March, early April got underway, with the asset levels in both Ursa and Arktos not far from where they were in late January. In addition, the American Association of Individual Investors (AAII) reported a strong rise in bulls and drop in bears. The percentage of bulls reached 64% the highest since late July of last year and the 23% bears the lowest since mid February. The bottom line is that the short-term picture remains mixed enough to remain in the neutral camp. Medium-term it is likely that the late March-early April time frame did indeed complete a medium-term low in the NASDAQ and the S&P and that we are currently in a strong bear market rally. I am going to stay neutral but with a positive bias awaiting a better entry point. Long-term I remain bearish. The bonds had another good day allying strongly. The short-term remains bullish and further gains are expected. The medium-term is neutral.  The XAU has moved towards support near 54. The next couple of days are important. For now I will maintain my bullish position in all time frames but that could change soon.

QQQ traders are flat Make sure to call the Noon Pacific hotline for any changes. 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 se from the chart below that the hourly chary of the DJIA from the April 25 low to Wednesday’s high is clearly sloppy overlapping and corrective. The chart shows the three possible wave counts discussed in the Elliott wave section of the report. The “a” wave of the diagonal is either from the April 25 low if the whole pattern is a diagonal or began from wave 4 and is part of a fifth wave diagonal from the April 26 low. In either case, we can see the small failure for wave “e”, which implies a lot of underlying weakness.