Last Signal: 7/14/00, SELL
Dow: 10,806.74 OTC: 4243.02
The Ratio continued to move higher, again approaching an overbought reading above .40. So far, the lower high against the market advance is considered an overall negative divergence. The potential for a bearish reversal is growing.
TUESDAY, August 22, 2000: The rally continues to lose its momentum with out of favor “average” stock issues are performing better than the average glamour/momentum issues. We look for the end of the generally bullish seasonality at any time as the summer rally runs its course, especially as we approach September/October, the two seasonally most notoriously poor months of the year for the markets.
Lots of divergences and warnings have emerged as the upside volume continues contracting on up days. Yesterday’s volume was perhaps the lightest of the year after factoring out half days of holiday trading, and market breadth was negative for the second day in a row. A clear warning about the growing bullish expectations is seen with the Option Volatility Index (VIX) which reached an even greater extreme of bullish complacency among OEX traders yesterday, with a low of 19.41. As described on Friday, this measures the amount of option premium speculators are willing to pay for near the money OEX calls versus puts. Readings below 20 are considered an extreme level of bullish complacency that generally goes unrewarded, as it indicates prices are near their upside extreme. The last time this fell below 20 was in late December, just ahead of the early January peak as the market had trouble throughout the first month of the year.
Initial support for the Dow is up to 11,900, with key support now between 10,500 - 464 from the 7/28 low. A break of this level would signal a trend reversal that should lead to a test of critical intermediate support at the 6/30, 10,336 low. Dow resistance remains near 11,140, with 11,220 just above that before major resistance at 11,425. As stated in the past few updates, “while we still think that (much) lower prices remain ahead [as calculated in the June issue of Reality Check], they may be put off until the summer rally finally runs its course.” Any push above 11,425 would make it likely that the January high at 11,750 will be approached and tested, but we still see this as unlikely.
TREASURIES
Treasury yields continue to consolidate their recent gains ahead of today’s much awaited FOMC meeting. The consensus has been for the Fed to leave rates unchanged and issue a more neutral statement that would soothe any additional anxiety there might be, although we don’t think there is much of that left. More and more guest economists on CNBC have actually been talking about how the next move will be a rate CUT. We think this is way too premature as there are still as many signs the economy has NOT slowed much as there are that it is slowing.
While our short term trading indicators continue to look vulnerable to a setback, our longer term Dow 20 Bond Average remains firmly bullish.
As stated in recent updates, we plan to use further gains to become progressively less bullish, particularly if the yield proceeds toward our 5.50% objective, as it would complete a .618 Fibonnacci retracement of the entire rise, from the 4.69% low of September of 1998 to the 6.75% high reached this past January. If the Fed does act again on August 22 it would most definitely be perceived as the last of them and be a bullish factor. If they make statements toward remaining vigilant against the prospects for higher inflation, the markets me get cold feet. Initial support is just beneath 5.85%, with more at 6.05%. A move above this would confirm a short term bearish reversal, with next support at 6.20 - .25%, 6.32% and 6.40%. Our longer term bond indicator, the Dow 20 Bond Average remains bullish and the Treasury Department’s buyback program should remain supportive through August. Resistance is at 5.72%, 5.65% and then or targeted 5.50% level.
GOLD
The XAU & Gold have pulled back to lose some of their recent gains, as speculators can’t stand letting the price recover at all before they’re right back looking to borrow gold so they can sell more short into the market. The “potential” good thing for now is that the rise and then pullback on our 1 X 3 P&F chart would give a short term buy confirmation if it can rise above 55. With sentiment still plenty bearish, the rally can resume at any time without much surprise. A new P&F buy signal would be given with a rally through initial resistance to 56. This would provide some evidence that a bottom was in. Next resistance is at 59, then at 64, and 69. Support is at the recent 49.55 low and then at the critical bear market low reached on 8/31/98 at 48.73. We can only wait for something of analytical value to emerge.
PORTFOLIO CHANGES
Tuesday, August 22, 2000: -- Nothing Today! --
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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