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REALITY
CHECK UPDATE
Published Every Tuesday
and Friday |
| ARCHIVE:
APRIL
2000-MAY
2001 |
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Contributed by
Mitch Harris
President: Market
Trend Realities,
Editor: The Reality Check
Newsletter |
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June 22, 2001 |
| STOCKS |
| REALITY RATIO: -0.194
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Last Signal: 04/20/01, TRADING SELL
Dow: 10,579.85 OTC: 2163.18
The Reality Ratio fell back below the neutral line into the red for the first time since early April, as prices peaked on the Fed s last interest rate cut, but have been very slow to work lower, as no one seems to be in a hurry to sell into strength, with perhaps the one significant exception of America s corporate insider s who have shrewdly taken advantage of the market rally to dump loads of their stock. In itself, this is a huge lack of confidence that we have started a new bull market. The ratio itself has come down to the oversold side of neutral, but the moving averages do not appear to have come down enough to support a renewed strong uptrend, making it likely that a bounce here will continue to find more sellers.
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FRIDAY, June 22, 2001: The markets have turned higher this week after last week s option expiration related selling pressure ran its course. Many areas have been improving, but technology, and telecom and semi-conductors in particular have not been part of it. This may be a partial explanation for why the breadth of the upturn has been relatively flat over the past few days. We think that as thick as the pessimism is for the techs, we suggest remaining alert for trading opportunities in this area, as making the majority wrong here would be bullish for tech stocks, whether these companies have seen the worst of their business conditions or not!
The rally was at least partially sparked by the narrowing trade gap and the Philly Fed survey that indicated that while the weak economy persists, manufacturing is slowing at a "slower pace". Of course this came with the Fed s lip servers telling the market s that the worst of it is behind us. We think that for whatever the reasons, there is a better than average chance that the recent correction has ended, leaving us at the threshold of the summer rally that we began discussing a week or so ago.
Our concern that our optimism is pre-mature is because the Elliott Wave pattern only shows "3" minor waves of correction and still allows for another decline. Also, If the correction takes on more complexity, this may ultimately end up as a larger "A" wave decline, with a wave "B" rally and "C" wave decline still ahead. Also, the correction has still not taken back too much in relation to the huge, 2200+ point rally from the 3/22, 9106 low to the 5/22, 11,350 high. There will ALWAYS be something to worry about, as it is the nature of the beast. On the side of our optimism, the selloff has been in 3 very clear minor waves, typically a simple corrective pattern within an ongoing larger bullish trend. As stated on Tuesday, "while the markets may still not yet be out of the woods beyond the need for a short term bounce, it has been weathering the negative "pre-announcement" season relatively well, and the bottom line is that we think further gains lie ahead, at least until we can assess the value of the next rally within the context of our overall wave analysis." This week s rally has come on expanding volume which is considered a very bullish sign. The breadth (daily A/D Line) has not been as impressive, but we think this is clearly because the market s are rallying without much help from the heavily weighted tech areas, mentioned above. An upturn from this group would add dramatically to the strength of the market s internals. It is perhaps our main concern, as our 10 day A/D Line Indicator recently turned bearish and has yet to be reversed.
Against the bullish view, we are using the lower level of key support near the 10,448, 4/24 low as a "must hold" level. We don t expect a close below this in the event of continued selling, but it is where we have placed our trading parameters on the downside. Initial resistance is near 10,835 and then at 11,180. Stiff longer term Dow resistance remains at the 5/22, 11,350 high to the 4/00, 11,425 top. A push above this would confirm the beginning of the next leg of advance and greatly increase the odds that the 11,750 high will be tested. Our downside targets have satisfied the minimum "c" wave requirement for the correction to end, again, if this is a simple correction to unwind the market s recent overbought condition. A close above 11,000 would be a very constructive sign, especially if the volume remains impressive as it has been this week.
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TREASURIES
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Treasury yields have managed to find renewed buying interest in the past few days, continuing to push back against our cited resistance near 5.62%. At yesterday s low, it reached very close to 5.60% but couldn t hold it, closing at 5.63%. Penetration of this level would indicate a move to test the next lower level, near 5.56% (the Fibonnacci 50% retracement level), 5.50 - .45% and then at the original 5.40% breakout point, with the Fib. .786 resistance at 5.363%). Retracing to this level had already fulfilled the .382 Fibonnacci retracement from the 5.217%, 4/22 low to the 5/15, 5.90% high. A further upturn here would provide greater evidence that minor wave "2" within the larger, wave (3) bear market was beginning. Ultimately, this would be confirmed with a push above the 5.90% high. Our trading indicators (RSI & Stochastics) have yet to confirm the rally to the current yield lows, showing bearish divergences.
The bear market rally still appears to quickly be running its course. Next week s FOMC meeting is expected to generate at least one last 25 basis point rate cut, and we think the markets will then be forced to reconsider its optimism, as the Fed s rate cutting is perceived to be near its conclusion. The counter trend rally may be providing the "selling" opportunity for the bears that we had been expecting. We remain confident that the yield is ultimately heading (much) higher, within larger degree wave (3) that began from the 4/22, 5.217% low. We do not think the yield should drop back below the 5.40% breakout point. A push above 5.90% would confirm that the bear market has resumed, making higher support at the 5.975-6.025% the next upside target. Short term resistance is near 5.74% and 5.85%. Contrary to the belief of the majority, we think it likely that the yield is ultimately headed ABOVE the 6.75%, 1/00 high. |
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GOLD
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Gold & the XAU: The XAU finally broke its support at the 56 level that we ve been discussing for week s, confirming a sell signal on our shorter term P&F chart, and also a bearish "High Pole at the Bearish Resistance" formation on our longer term chart. The stocks have been acting much worse than the metal itself, and this is a warning for the bulls as the stocks generally lead the way. Another sign of caution is that our XAU/gold ratio gave a sell signal on its Point & Figure chart (P&F) on Monday and this too has worked consistently well as an early warning indicator for us.
A move above 67 on the XAU would renew the long term uptrend, but for our shorter term chart, a move back above 61 would indicate that a challenge of the higher level was forthcoming. Again, a push above this would renew the bullish trend, and also increase the odds that the bottom is in after all. In this event our analysis would shift to the more bullish wave interpretation, where the higher high would be counted as the minor fifth wave within a larger degree wave (1) rally. This seems unlikely in the short term, now that the bearish trend has been confirmed. Lower support below the key 56 level is at the 2/14, 45.64 low and then at the even more critical 7/14/00, 41.61 low. The silver lining remains the same. If our longer term analysis is correct, we will ultimately clear the way for smooth sailing to higher (and potentially much higher) prices! In contrast to the poor longer term risk/reward we see for bonds, we see the exact opposite here! Not even a new low will change this!
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PORTFOLIO CHANGES |
| Friday, June 22, 2001: We haven t done it yet, but are planning to add Compaq Computer (CPQ) to our long positions on any further weakness. It is DEEPLY oversold, and shows several bullish momentum divergences as the price made new lows. We think it is very cheap and well positioned for recovery when technology turns up, especially after announcing this week that they have become the dominant provider of hand held computers, the most booming part of the computer industry. CPQ closed at 13.49 yesterday. We much rather own this below 15 than many smaller companies that are priced the same. |
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
(513) 421-8737,
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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