DAILY TECHNICAL MARKET COMMENT

By: Larry Katz

May 11, 2001

*These are preliminary numbers and will be adjusted tomorrow

The DJIA gained 43 points and the S&P was flat on volume of 1.04 billion shares. The A/D line added about 600 units. The new highs expanded and the new lows eased. The Russell 2000 gained .40 points but closed near the low of the day. The short-term is neutral but looks close to a correction. The medium-term is bullish. The Value-line gained 2.28 points but closed near the low of the day. The short-term is neutral but looks close to beginning a correction. The medium-term is positive. The NASDAQ Composite lost 28 points and the NASDAQ 100 lost 38 points. The short-term has turned negative and lower prices are expected. The medium-term is neutral but could turn positive on weakness. The DJTA closed higher. The short-term is neutral but looks higher. The medium-term is neutral but could turn positive on further strength. The DJUA and UTY closed about unchanged. They are negative in all time frames.

The S&P rallied up towards Monday’s high but did not move above it. Thus it is possible that what we saw yesterday was wave “d” of the possible triangle from the April 30 high discussed in yesterday’s report. If correct than what we saw late yesterday would be all or most of the ‘e” wave.  If correct we should be close to a short but sharp thrust to new post May 2 high to complete wave 5 from the April 4 low. This count will remain valid as long as Wednesday’s low of 1247.83 functions. A break of that low would also violate important short-term support related to the post May 4 rally and also the rising trend line from the April 25 and May 4 low. The DJIA hourly chart from Wednesday’s low into yesterday’s high is so far a clear three-wave pattern leaving open the possibility that it is a “b” wave of a flat from Monday’s high. If correct a move back below Wednesday’s low should be seen soon to complete the pattern from Monday. There are also a number of other possibilities with one being that Wednesday completed wave 2 from May 4 and the DJIA is entering wave 3 of v from April 4. Another possibility is that the rally yesterday was a “d” wave of a fourth wave triangle from May 2 with wave “e” near completion now. Wave “b” of this triangle did move into new high ground on Monday but that is OK under the wave principle. In either of those two counts the DJIA should see new highs to complete the rally from April 4. The NDX moved below support related to the rally from last Friday into Monday’s high. This decline also broke the rising trend line connecting the April 25 and May 4 low and looks to have confirmed that the next wave down from at least the May 2 but possibly the April 20 peak is underway. A move below the May 4 low is the minimum expectation but it is more likely that a move below the April 25 low is in the cards. This should complete the post April 20 correction. There are a couple of possible counts going back to April 20, which will be addressed in the bi-weekly letter this weekend.

Support: S&P 1243-1245, 1230-1232, DJIA; 10,775-10,785, 10,630-10,640, NDX; 1810 1720-1740, 1585-1605. Resistance: S&P: 1262-1264, 1272-1275, 1291-1295, DJIA;, 11,000-11,030, 11,220-11,240, NDX 1870-1872, 1893-1895, 1920-1940.

The DJIA managed to close higher showing positive relative strength and benefiting from weakness in technology. The S&P gave it all back and closed near its low while the NASDAQ averages closed in negative territory and also on their lows. Volume on the NYSE was about unchanged from Wednesday and weak. Breadth on the other hand was decent at about 3 to 2 positive far out pacing the averages. We did get another nice expansion in the new highs but they did not yet exceed their April 27 peak so they are continuing to diverge. The new lows contracted and remain a non-event.

The CBOE put to call ratio was neutral. The OEX ratio moved higher and was bullish. The breadth oscillator moved lower but is still border-line overbought. The volume oscillator also moved lower but remains overbought. The 3-day oscillator moved higher and is neutral. The McClellan oscillator moved higher and is close to overbought. The 10-day and open 10-day Arms moved higher. They are borderline oversold and slightly bullish. The 5-day Arms is neutral. The 21-day Arms is neutral but closer to overbought. The new 10-day Arms is negative. The daily range oscillators are beginning to roll over from near overbought and are slightly negative. The daily trend oscillators are close to turning down on the DJIA and have marginally done so on the S&P and the NDX.

The market opened sharply higher reaching its peak early in the session but spent the majority of the day drifting lower. The failure to follow-through on the early strength and the poor close left a slightly negative looking pattern on the chart. The DJIA and the S&P did hold well above Wednesday’s low and important near-term support but the NASDAQ averages broke below their rising trend lines and important near-term support and looks considerably weaker. The technical picture of the market remains mixed. The CBOE put to call ratio has showed little change the past few days and is about neutral. The Rydex ratio on the other hand remains negative for the short-term with the assets on both Ursa and Arktos still near historical low levels. Yesterday the American Association of Individual Investors reported 53% bulls and only 18% bears. The bulls did ease but so to did the bears coming in at the lowest total since February 9 and the second lowest level of the year. The momentum picture remains mixed. We did see some improvement in the 10-day and open 10-day Arms with both near oversold levels. This could provide some support over the near-term. The breadth and volume oscillators are beginning to ease but are still overbought and as such remain on the negative side of the ledger. The McClellan oscillator is beginning to weaken and does have a small negative divergence in place but has yet to break down and confirm. The McClellan oscillator on the NASDAQ has broken down and is on a confirmed sell signal. However, I have to be honest in as much as I have not worked with it very long and I have been somewhat skeptical of its signals, but it does seem to have more potential than I had originally thought. I am moving to bearish on the short-term for the NDX as it looks to have confirmed that a top is in place. As far as the S&P and the DJIA nothing has changed. It still looks as though they are in the latter stages of a topping pattern and that a decline is close. However, there is enough from the technical indicators and the wave structure to allow for further rally attempts and even a modest new high. I am going to remain neutral for both these averages short-term with the idea that we are close to a top. I am neutral on the medium-term with the idea that a short-term decline could set up for a good medium-term entry point. Long-term I remain bearish. The bonds were hit hard and have slightly broken short-term support levels. This could be very short-lived but I am going to move back to neutral on the short-term I am going to stay neutral on the medium-term but a poor close today could turn that back to negative. The XAU held up quite well yesterday coming back from a weak opening to close with a modest gain. We still have important resistance in the 61-61.50 area to overcome but the indicators remain positive and I remain bullish in all time frames.

QQQ traders moved to a 50% short position per the Noon Pacific hotline at 46.20. They closed at 45.77. Lower the stop to 48.20 and make sure to call the early morning hotline for any changes. Rydex switchers added a 10% position in the Precious Metals fund. We 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 a 7:15 AM pacific.       

The chart below shows the possible triangle on the S&P. A move below Wednesdays low at wave c would invalidate that count. As long as that level holds it will be possible to see the sharp quick move to new highs to complete the rally from April 4     

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