DAILY TECHNICAL MARKET COMMENT

By: Larry Katz

May 7, 2001

*These are preliminary numbers and will be adjusted tomorrow

The DJIA gained 155 points and the S&P 18 points on 1.07 billion shares. The A/D line added about 1000 units. The new highs and the new lows expanded. The Russell 2000 gained 7.24 points. The short-term is neutral and getting overbought. The medium-term is bullish. The Value-line gained 17.16 points. The short-term is neutral and getting overbought. The medium-term is neutral. The NASDAQ Composite gained 45 points and the NASDAQ 1000 added 46 points. The short-term is neutral but looks close to a correction. The medium-term is neutral but with a positive bias. A decline could turn it positive. The DJIA closed with modest gains. The short and medium-term are neutral. The DJUA and UTY closed with higher. They may bounce a bit more but are negative in all time frames. 

There are still a couple of possibilities for the S&P regarding the pattern from April 30 to Friday’s low. As we discussed in Friday’s report it is possible to count the rally from May 1 to May 2 as a five if wave 5 of that pattern ended on a failure. That rally could also be counted as wave 5 from April 4. This would also leave a three-wave decline in place from the May 2 low. The other possibility, and one that I am favoring is that the rally from Tuesday to Wednesday was a three. That would make it possible to count the decline from May 2 into Friday’s low as a five and also as a “c” wave of an irregular from Monday. This seems a much more reasonable count and should lead to a move above the April 30 high. This rally could be counted as wave 5 from April 4 and any new high would meet the minimum expectation for that count. However, Friday’s low stopped right at a .618 retracement of the rally from April 25 to April 30 leaving open the possibility that Friday’s low completed not wave iv from April 4 but only a small second wave from April 25. If that is correct we could be entering a third of a third acceleration. The DJIA moved strongly through last weeks high. The DJIA is either in wave 5 from April 4 or a third wave from April 25 or basically in the same position as the S&P. However, it is possible that the S&P did complete its fifth wave last week and the rally Friday is a “b” wave of a flat on the S&P and on the DJIA it was all of wave 5. If this is the case we should begin to move lower almost immediately today and back below Friday’s low at a minimum. The rally from April 25 to Wednesday has been confirmed as a completed wave and a three-wave structure on the daily and hourly chart. This rally is either a “b” or X wave from April 20 or the first wave of a second three from April 4. If the former than a move back below the April 20 low should be seen to complete the correction from April 20. The hourly chart of the NDX from Wednesday into Friday’s low can be counted as a very clean five-wave pattern on the hourly chart adding some support to the possibility that the decline into Friday was the first wave down of a larger pattern. The key is last weeks high of 1980.13, which cannot be exceeded if that is the correct count. A move through that point would confirm that a “c” wave from April 25 was underway. Support: S&P: 1253-1254, 1244-1246, 1230-1232, DJIA: 10,840-10,847, 10,775-10,785, 10,630-10,640, NDX; 1884-1887, 1854-1859, 1720-1740. Resistance: S&P: 1272-1275, 1291-1295, DJIA; 11,000-11,030, 11,2220-11,240, NDX 1980, 2047-2055.

The market reversed p early losses and closed Friday with strong gains. In the process the DJIA and the S&P also traced out positive outside days (higher high, lower low) and closed near the high of the day. The NYSE Composite and the S&P failed but are very close on a closing basis . Breadth was solid at slightly better than 2 to 1 positive, however, volume contracted sharply into the rally dropping to its lowest one day total in nearly two weeks. The new highs expanded over Thursday but are well below what we saw earlier last week ands about half of the peak reading seen on April 27. The NASDAQ averages rallied but lagged pretty badly and are well below their peak of last Wednesday.

The CBOE put to call ratio eased and was neutral but was still relatively high. The OEX ratio moved higher and was at bullish levels. The breadth oscillator is overbought but did confirm the DJIA. The volume oscillator is overbought but is also diverging. The 3-day oscillator is close to overbought and showing a potential minor divergence. The McClellan oscillator is overbought and also diverging. The 10-day and open 10-day Arms moved a bit lower. They are neutral but the open 10 is still closer to oversold. The 5-day Arms is neutral. The 21-day Arms is neutral but approaching overbought. The new 10-day Arms is negative. The daily range oscillators are near overbought and developing potential negative divergences. The daily trend oscillators are neutral.     

The market staged an impressive reversal on Friday following a modest negative reversal on Thursday that carried the averages back towards their highs recorded earlier in the week. The rally has put the market at an interesting and potentially important juncture. The DJIA made new closing and print highs on Friday. Those new highs have yet to be confirmed by the S&P nor the NASDAQ averages. In addition, the rally was accompanied by a marked contraction in volume. In addition, the new highs are well below peak levels seen on April 27.  The CBOE put to call ratio on Friday was encouraging from a bullish perspective as it did not drop much in spite of the rally and was at a neutral level. The Rydex ratio also improved but only modestly so and is still on the negative side of the equation for the short-term.  Most of the momentum indicators are back to overbought levels. The breadth oscillator did confirm the high in the DJIA but both the volume oscillator and the McClellan oscillator did not. The 10-day and open 10-day Arms are neutral but high neutral and this could be a short-term plus. However, the new 10-day Arms is back to overbought and remains a big negative. Given the position of the indicators and wave structure the market is at a very important juncture for the short-term.  From an Elliott perspective we are either finishing off a fifth wave from April 4 or are about to enter a third wave from April 25, which in turn could actually usher in a modest acceleration of the rally. We are also at an important juncture both internally and from also from the indicators. Internally we are facing a building divergence from the new highs. This almost always precedes a top of some degree. In addition, price volume relationships have weakened, especially on Friday as volume contracted sharply on the rally. The position of the indicators will tell us a lot in the coming days. If this rally is indeed a fifth wave the divergences that are right now only potential divergences will remain divergences and be confirmed as real. If, on the other hand, the rally is to extend most of these potential divergences will be reversed as they are not that far away from doing so as it is. The bottom line is that the market is either at or close to a short-term top or about to confirm that the rally is entering another short-term acceleration or extension. As it stands for the short-term I have no preference at this time and I will remain neutral. It is my view that the March-April time frame did indeed mark a medium-term low for both the NDX and the S&P, and that these averages are currently in the midst of a strong bear market rally. The DJIA may actually move to new all time highs but in what would have to be viewed as a fifth wave and one that when finished would be terminal. I am going to maintain a neutral view on the medium-term awaiting a more optimal entry point. That said we may either miss the move or have to chase it but that is the risk I am willing to take in light of the fact that I still view the rally as a bear market move. Long-term I remain bearish. The Bonds started out higher but closed lower tracing out a small reversal from just above the .383 retracement of the decline from March 22 to April 30. I have mentioned this sporadically in previous reports about the fact that bonds and stocks have moved in opposite directions since mid 1998. Friday was another example of that as the bonds were strong early in the day while stocks were lower. When stock began to hold and rally the bonds came under pressure and closed lower. Moreover, bonds peaked on March 22 and stocks bottomed on March 23. Bonds also bottomed on April 30, last Monday just as stocks began to correct. The short-term remains bullish and following a minor correction I expect the rally to continue. The medium-term remains neutral. The XAU is at a very important point. The rally from April 3 has not yet penetrated the March 9 peak and is so far a three-wave rally. The rally from April 18 into Thursday’s high is a clean five-wave pattern. It is either wave 3 of ii from April 3 or a “c” wave from that same low. Last week’s low was 54.32. A move below that point would turn the weekly chart down confirming the rally from April 3 as a three-wave pattern. Momentum remains positive in all time frames although it is slipping on the short-term. I am going to remain bullish in all time frames but that could change as early as today.

QQQ traders are flat. Make sure to call the early morning hotline for any trades. Rydex switchers are holding a 20% Precious metals and 10% OTC position. Make sure to call the Noon pacific hotline for any changes. The early morning hotline will be on at 7:15 AM Pacific time.