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REALITY CHECK UPDATE
Published Every Tuesday and Friday

ARCHIVE:    APRIL 2000-SEPTEMBER 2001  

Contributed by Mitch Harris
President: Market Trend Realities,
Editor: The Reality Check Newsletter

September 17, 2001

STOCKS
REALITY RATIO: -0.419
Last Signal: 09/07/01, TRADING BUY
Dow: 9,605.85 OTC: 1687.66 

Last week s continued selling cascade quickly brought the sum of our trading indicators to its deepest oversold reading since reaching -.484 on March 23, at the last significant intermediate turning point. We THINK we are at a similar point now, but still must caution that while the line has reached its extreme, the slower moving average lines are still well above and falling. This indicates that their could be more trouble down the road, after the markets unwind their current oversold condition. While the extreme volatility of the past three weeks has whipsawed the Reality Ratio, we hope it is getting back in harmony with the markets. Yesterday s crash will serve to drive the Ratio to an even greater oversold extreme. This will help to pull down the moving averages with it and while this has been perhaps the most difficult market in a generation, we think the next big move will be to the upside. While we have been too early on expecting this and would hold off on committing new funds until we see more convincing signs of an upturn, we think it is close and will be significant. 
TUESDAY, September 18, 2001: Americans and the world had to wait almost an entire week before adding the pain of deep US market losses to our already grievous sorrow for the many losses suffered in the worst tragedy in our history. Under these extraordinary circumstances, it is of little comfort to even think about the markets, let alone what they may do next, however this is what we do and it is our way of getting back to work and normality, even as its predictability may remain aloof for the time being. We plan to go through the motions of attempting to remove emotions and so we may base our judgments on technical criteria that has been reliable in the past. Our prayers and support go out to the many who are still suffering tremendous personal losses from this tragedy. 

Amidst the market s rubble, we are hearing lots of talk about broken support levels and where the next levels will be. We suspect that "support" levels are absolutely a worthless exercise in futility at this time. The selling will either exhaust itself on its own or will find enough buyers to halt the selling, combined with the potential for short covering as the temptation to book their profits becomes overwhelming. This will establish new levels of support and at least short term resistance as prices attempt to establish some solid footing. Our guess is that this will begin shortly. 

We think it is more likely that confidence is the greater issue for the markets to establish a bottom. This can come at any time, but would certainly be bolstered with news that the US has successfully struck some sort of blow against our newly declared enemies. If there is any silver lining in the short term, it is that the markets finally have found something new to worry about that has diverted our attention away from the daily earnings warnings. Media analysts have started concentrating on talk that the markets have become "undervalued". While we strongly disagree with this based on any historical valuation method, we would welcome the world s perception that it is so. 

News aside, our sentiment and technical indicators were already at a very deeply oversold extreme, even in relative terms in a bear market, but now they are at record and multi-year extremes. The daily CBOE Put/Call Ratio was above 1 for the past two trading days. In skimming my records, the last time I found this to happen was in October of 1998, as the Dow was bottoming at 7400. The short term McClellan Oscillator ended yesterday s trading at -267. Going back to 1990, this has NEVER gone below -300, and reached -290 in August of 1998, and -285 in October of 1997, both times marking lows that have not been exceeded since. Finally, 14 Day RSI closed at a value of 15.89 yesterday. To put this into perspective, the RSI reading at the major bear market low of October 4, 1974, it reached a low of 24.54. It went below 20 on 8/31/98 (19.74); 2/9/84 (16.32); and on 9/8/81 (17.27). Yesterday s close was the most extreme reading we found going all the way back to 1970!!!! This is quite an oversold reading indeed!

In terms of our Elliott Wave Analysis, the new lows can now only be counted as something other than intermediate wave "B" declines. For the Dow, this must either be within primary degree wave "C" of larger cycle degree wave (1) down, or within the even more immediately bearish cycle degree wave (3) down. We hope we are still only completing the first wave of decline, which is supported by technically oversold extremes as illustrated above. 
The current decline began from the 5/22, 11,350 market high and has snowballed beyond what we consider a normal period for most selloffs (in terms of "time"). This too supports the case for some sort of tradable low being close at hand. At least, conditions are right for this. Initial resistance is near 9500, and then at 9870. Again, we don t hold out much for support levels, but next long term support is found near the 12/14/98, 8676 low and then near 8400. 

TREASURIES

Treasury yields continued to run in place, actually netting a slight LOSS while the equity markets were halted. The 30 year Treasury yield was quoted at 5.44% this morning, exactly where it closed on Monday, 9/10, the day before the WTC s destruction. This can hardly be seen as the destination for the flight to safety that would be expected. The question is, where is all the money going??? This wasn t helped at all by yesterday s EIGHTH rate cut made by the Federal Reserve. They moved again to help provide the needed liquidity infusion into the banking system, cutting both the Fed Funds and Discount rates by another 50 basis points each. This no longer seems beneficial to the long end of the market, as the yields do not seem to justify such a long commitment with such great uncertainty. The capital that is moving to Treasuries is finding its way primarily to the 2 year maturities and less. 

Even under the conditions of extreme market stress, the yield was not able to sustain itself below the 8/30, 5.339% low, still not netting any progress below our targeted Fibonnacci resistance at 5.363% (.786 retracement). Conditions remain right for a bearish reversal, barring the prospects for further support from flight to safety buying out of equities. Whatever happens from here, the rally is old and has already used up a great deal of its bullish currency/energy. Next short term resistance is now at Tuesday s 5.339% low, down to 5.30%. Beneath this it is at the key, 3/22/01, 5.217% low. We remain bearish against these levels. Initial support is near 5.40-.42%, with the next higher level at 5.617%. A break above this would confirm a short term bearish reversal. A break above the 7/6, 5.771% high would confirm a more substantial bearish trend reversal and indicate to us that the larger degree wave (3) bear market was underway. 

GOLD

Gold & the XAU seems to have been the greatest beneficiary of the flight of capital seeking alternatives to the equity markets of the world. Gold s hard asset status may truly be one of the world s most secure holdings if the world begins a worldwide "witch hunt" to "smoke out" these very elusive guerrilla fighters. While this has been the case, we still see technical evidence that higher prices may still not be sustained. We are preparing more on this for the September issue of Reality Check, which is due out this weekend. 

Stated a week ago Friday, some of our trading indicators had become oversold and did offer the potential for a rally to begin from those levels. Although there were extenuating reasons for the upturn, it came at the right time because virtually NO damage was done to the market during the recent consolidation as prices held up well above the support at 52. We are raising our initial support to the 9/6, 54.48 low, with more critical short term support still near 52. Beneath this, longer term support remains at the 2/14, 45.64 low and then at the 7/14/00, 41.61 all time low. Prices reached a high of 58.96 yesterday, but fell back after challenging resistance from the recent 5/17, 58.44 high. To confirm the longer term bullish case, a breakout above the key, 6/14, 60.39 high, and then at the 5/18, 66.54 high is still necessary. A clear breakout above 60 would be very bullish because it would also break above the long term downtrend line drawn from the 2/7/96, 155.60 high. 

While spot gold surged to a high just below $293, the XAU could not find enough buying support to exceed our cited initial resistance. For (cash) gold itself, Higher resistance is pegged between $292.50 - $294, then $302 and $310 per ounce. Support now begins near $282 - 78, then near $272. 
 

PORTFOLIO CHANGES

Tuesday, September 18, 2001: -- NONE TODAY -- [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
(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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Last modified: September 18, 2001

Published By Tulips and Bears LLC