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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

October 23, 2001

STOCKS
REALITY RATIO: +0.129
Last Signal: 10/19/01, TRADING SELL
Dow: 9,204.11 OTC: 1671.30 

The Reality Ratio turned down slightly, but enough to caution for a possible short term pullback/consolidation, as we had been discussing in last week s update and in the October 20 issue of Reality Check. Even so, the markets have been behaving very well and like they want to move higher. This is a healthy sign, whether or not we see lower prices first. It is possible that the short, shallow decline we saw last week was the entire consolidation we had thought was just beginning. New recovery highs would pre-empt the trading sell signal and tell us to expect further gains were yet ahead. 
TUESDAY, October 23, 2001: The equity markets powered strongly higher yesterday, as the pre-option expiration consolidation last week may prove to have been very short lived. In spite of a modest downturn in our Reality Ratio, we remain overall bullish in the short term, allowing for further time for the market to take pause over the gains it has already made recently. We see too many constructive signs and the markets are entering their most bullish period of seasonality for the year for us to worry too much. Each days news events are more than ample to knock the markets lower, but that has so far not been enough for a more serious setback that we think may be lurking. While we have no idea whether their will be some new event to divert our attention away from trading, this remains one of the main uncertainties. Investors seem resolved over the fact that the economy and corporate earnings are not going to be supportive in the near future. 

Again, the rally that seemed to have taken pause last week seems to have resumed in the past two days as options expiration passed. The Dow rocketed another 173 points yesterday, to close at 9377.03. The OTC Composite closed at 1708.09. To confirm the resumption of the short term uptrend, the Dow needs to close above last Wednesday s 9489.33 high, and the OTC needs to close above the 1754 intraday high. It took little time at all to bring some of the over-extended trading indicators we had cautioned about back down to at least more neutral levels, from which they ve turned higher again. The extreme overbought readings some of them had posted was a sign that extended highs were possible. This may prove to be the case, especially as our longer term charts remain all in all, very constructive. Our long term, (50 X 150) P&F Chart is pushing against the downtrend line drawn from its 11350 high. A push above 9500 would break above this and off strong prospects for higher prices. This would put our Ratio Indicator back on its trading buy. 

While we ve been concentrating on the positives, we must remind that we ARE on a short term sell signal and this has not changed yet. This still keeps the potential for lower prices relatively high. We aren t attempting to talk out of both sides of our mouth, but must point out the potential we see on both sides of the market in the near term. As stated on Friday, whatever the near term outcome, "the 

odds favor higher prices into the end of the year." The case for lower prices still has potential as the majority of mutual funds end their fiscal year on October 31, and have until then to take any last minute tax losses. 

Short term support is at Friday s low, near 9100, 8950, ant then at more meaningful levels near the 9/26 high at 8618, with more 8472. A drop below this would indicate a deeper decline was under way, likely to at least test the 8235.81 closing low, and potentially to new lows and a minor 5th wave of decline. Lower support remains at 8062, and then near 7750, 74-7500 and 7000. Resistance is at last Wednesday s 9489 high. Longer term, there is more near 9650-80 which is also near the downtrend line drawn from the August downside pivot point, near 10,200. Above this is resistance near the psychologically important 10,000 level, which is also near the downtrend line drawn from the May high. 

TREASURIES

Treasury yields continue to make little progress in either direction as uncertainty remains high between running for cover or chasing the equity markets higher. We STRONGLY believe Treasuries are in the process of building a major double top (double YIELD bottom) and are poised to push yields higher. Perhaps this will be as the economy shows signs of recovery and investors realize they had bought into unsustainably low rates, as our government goes quickly back to their habitual deficit spending and the nine YTD rate cuts by the Fed begin to ignite higher inflation that would come along with the recovery.

The rally s recent "higher low" failed to push below the 3/01, 5.217% low, lending support to the case for a minor 5th wave failure. This 10/3, 5.274% low is now one more layer of resistance in front of the key 5.217% level from 3/22/01. A push above yesterday s 5.428% opening high would be a caution for the bulls, with minor support near 5.50%. A push above the 9/21, 5.633% high provides a clear level of key support to keep the overall bullish trend in tact. Ultimately, ANY push above this will confirm a major trend reversal. Higher support remains near 5.80%, the 5/15, 5.901% high, and then near 6.00 - 6.025%. 

GOLD

Gold & the XAU continued sharply lower to close at $275.80 yesterday. It is quickly closing in on our next level of Fibonnacci support, at the .618, $274.60 retracement level. This was from roughly $262 to $295. The stop/loss selling after the break of the $282 support level has continued. Stochastics, RSI, and other trading indicators are becoming more deeply oversold and warn bears that the next trading low could be made at any time. However, the trend remains firmly bearish for now. Resistance now begins at the $282 broken support with more near $287, $290 and $295. Lower support is near $272 and then at $266.

The XAU has dropped back to support just beneath the 52 level. A break of 50 on our longer term P&F chart would confirm its High Pole at the Bearish Resistance Line (HPBr) formation that has been in place since June. Perhaps more than anything else, this has kept us on the side of caution. To bullishly resolve this pattern, it currently needs to move to 62 without first falling below 50. Frankly, the odds have not favored a bullish outcome since June. XAU support at the 9/6, 54.48 low gave way last Wednesday with follow through selling also breaching critical short term support at 52, before bouncing on Friday. Lower support is at the 2/14, 45.64 low and then at the 7/14/00, 41.61 all time low. Again, 60.44 is key intermediate term resistance. A push above this would still be very bullish as it would also break above the long term downtrend line drawn from the 2/7/96, 155.60 high. Above this, the XAU will still have to contend with another substantial technical barrier and bearish chart formation at the 5/18, 66.54 high (long term P&F formation, High Pole at the Bearish Resistance Line) before the long term trend can be confirmed bullish. 
 

PORTFOLIO CHANGES

Tuesday, October 23, 2001: While we really like the odds for higher prices, we are hesitant to add to our positions until there is a more meaningful pullback. Some of the issues we are considering include Target Stores (TGT), Charles sch (SCH), Microsoft (MSFT), American Power Conversion (APCC), Pogo Producers (PPP), Ensco Int. (ESV), Novellus Sys s (NVLS), and Speedway Motorsports (TRK). While all of these can be bought right away, we are hoping to add to our shopping cart into weakness. [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: December 02, 2001

Published By Tulips and Bears LLC