Last Signal: 01/12/01, TRADING SELL
Dow: 10,525.38 OTC: 2626.50
The ratio turned down to the neutral line, which was enough for a minimally lower low, confirming our sell signal from 1/12, while the markets have been mixed. We continue to expect another more convincing market decline that will leave little doubt that we are still deeply entrenched by the bear.
FRIDAY, February 23, 2001: What a week a difference makes!!&OR&What a difference a week makes! Either way, the markets let us know what they REALLY think after last week s option expiration and the release of this week s startlingly high inflation reports. Even the Governments "skew-masters" haven t figured out how prices could have actually climbed, with all their "adjusting" and the economy s sustained downturn. It is pretty much in line with what we had presented in the December Issue of Reality Check, when we asked, "will inflation slow with it(the economy)?", answering, "not necessarily". Also from December s commentary, "perhaps we should be careful what we wish for and hope they DON T feel the need to urgently cut rates, since it may not be the simple solution that so many are relying on!" This was referring to our fear that if the Fed were to start cutting rates, that it would be a sign of their deep concern and sudden panic. Keep it in mind that this was published on December 16, before their abrupt and unprecedented switch from a tight policy bias to one toward easing, by-passing neutral. This showed that we were indeed prepared for what is now becoming all the talk about "stagflation", where prices are rising even as the economy is in a solid decline.
So far this week, the Dow has resumed its plunge, losing roughly 275 points from last Friday s close. The OTC Composite has taken even more of the damage, losing 180 points, reaching the lowest point since 3/99. For this average at least, the bear market remains CONFIRMED! Again, the decline was accelerated on the inflation news, with January PPI up 1.1%, the sharpest one month gain in over a decade, and the CPI gain of +.6%. both were much higher than economists could see and perhaps the worst omen possible for the Fed and the markets - higher prices and economic weakness.
Technically, many short term indicators are already oversold, and allow for a bounce. The question will then be whether or not the rally can reassert itself, or the selling lead by the NASDAQ to new lows is followed by the other averages. Our Short Interest Indicator turned up, just ahead of the current downturn. We take this as a sign that short sellers have started to re-establish new short positions, a bad sign since it is FAR from excessive. We are also seeing warnings from the Dow Utility Average, which is on a bearish high pole and in particular, our 10 day A/D Line trend indicator quickly turned bearish after some 50 days bullish. This was its longest bullish run since the A/D Line Peaked in 4/98. Indicators like Daily Stochastics are just now getting to oversold territory, but RSI still has room to fall. We think that in the near term, the BEST case scenario is to use rallies for selling and preparing for lower lows.
The Dow broke initial support at 10,722, quickly falling further to an intraday 10,372 low yesterday, below our cited critical level at 10,500 - 470 before coming back to close at 10,526. A close below this would increase the likelihood that prices were on their way to a new low below the 10/19, 9654 level. Resistance is now at broken 10,700 support, then at 10,800, 10,940 and 11,028. The Nasdaq appears to be heading for a test of the 2000 level, mentioned on Tuesday as lower support.
TREASURIES
Treasury yields pushed higher to close at 5.525% yesterday, pushing to the second highest level of February. Follow through from here would provide confirmation that at least the short term trend for long term rates is UP, perhaps as part of the initial upturn within primary degree wave (3), as we have previously suggested. A rise above 5.65% is needed to break the one year plus downtrend line that has defined the entire rally from the 1/00, 6.75% high (on the inverted yield chart). This would also confirm the end of the 12 month plus Treasury rally at a minimum. A push below the January, 5.35% low is needed to postpone this as what we believe to be its inevitability, but this is becoming less likely.
A move above 5.70% would also confirm that the trend is turning bearish (higher yields) on our short term P&F chart, so as we ve been stating for a while already, our reading on the market dictates caution. Our parameters remain set. Higher support is at 5.65%, 5.725%, 5.85%, 5.925%.& 6.00-6.05%. A move below 5.35% would make lower resistance at 5.25%, 5.175% and then 5.00% the next barriers. Even if this were to happen, we believe that contrary to popular opinion, bonds offer a poor overall risk/reward. This is why we remain BEARISH, even against lower yields, and apparently, it is not in itself relevant to what the Fed may do next.
GOLD
Gold & the XAU manage to hold near their recent lows, with the strong potential to attempt a resumption of the rally that had stalled out near 53 on the XAU and $268 per ounce for the metal. We haven t seen much else to report so we re leaving up some of Tuesday s comments.
We do think that if a trading rally is about to take place, it needs to begin almost right away. Major support is just beneath Thursday s low at the 8/99, $252 per ounce low, and a bit lower, to the 10/00, 41.64 low. While prices keep falling under the guise of forward selling manipulations, conditions that call for a strong bullish reversal continue to grow to levels that have always lead to very powerful bullish reversals in the past. Sentiment remains very low and short selling activity is pushing back towards old extremes of "wrong way" speculation, both should lead to powerful short covering to begin the rally. We have also received information in recent weeks that there have been three major trading firms that have been taking delivery as they close out some of their very heavy short interest. This indicates that they not only think the downside has been fully exploited, but that they think a very powerful rally will begin. We have had confirmation that Goldman Sachs is one of these firms, but have not yet heard about the other two. When we know, you ll know!
XAU resistance remains at the elusive 53-4 level and 55-6 level of resistance above that. Higher resistance is at 59, 64, and 69. Support is at 44, the 41.64 low and then 37-40. We still believe that any lower prices will be relatively short lived.
PORTFOLIO CHANGES
Tuesday, February 20, 2001: We still suggest Pennzoil (PZL) for our Income Portfolio, but are raising our buy price from 11.75 to 12 1/2. We advise accumulating this if it dips. We re-added to our shorts, Coca Cola Femsa (KOF) at 21.125, Smith International (SII) 78 �, with a stop at 85, as we think oil service stocks remain vulnerable with the recently lower energy prices, and Novellus Systems (NVLS) 45 with a 50 stop. This is on a high pole at the bearish resistance line (HPBr) and here too, it looks to us like the chip equipment makers are ready to turn lower again. [Part of our offensive is to have a good defense! That means limiting losses and protecting gains]!
Article contributed by Mitch Harris: President, Market Trend Realities & Editor,
The Reality Check Newsletter, and reprinted here with permission.
Market Trend Realities (MTR) is a Registered Investment Advisory which manages personal, corporate, Trust, and retirement accounts on a fee only basis. Several low cost, flexible management fee arrangements are available. Investment Advisor, Mitch Harris has studied the Point & Figure Charting Method under the direct supervision of Michael Burke, Editor of the prestigious Investors Intelligence research organization. Management is based on a unique combination of technical analysis methods and tools which include, The Point & Figure charting method, Elliott Wave Analysis & techniques, industry group analysis, cycle analysis, Relative Strength Analysis, Stochastics, and investor sentiment studies. MTR offers a very uniquely structured managed mutual fund program using the RYDEX family of mutual funds, which offer outperformance potential whether equity markets are rising OR falling! Inquiries are welcome by calling us at
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Fax: (513) 421-8733 , or by email at: mtr@fuse.net .
MTR also publishes a monthly investment newsletter called "Reality Check", which offers technical commentary on the stock & bond markets, the Dollar Index, gold & gold stocks (XAU), Treasury yields, utilities, investor sentiment, and Federal Reserve policy. It also offers stock trading recommendations each month with price targets, stop loss points and insider activity. There are 4 trading portfolios, including a short selling account (we are very proud that our short sale recommendations have averaged 12.5% "compounded" during the roaring bull market of the last 5 years). Short term market commentaries are updated on Tuesday and Friday mornings, along with portfolio changes on this web page. They are also emailed for free to anyone who provides us with their email address. The regular subscription rate is $200 (US) per year. Samples are available upon request. MTR will be happy to send information on any of the above mentioned services. Please email us your home or business address along with your daytime phone number and specify your interest(s).
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