(4-2-04)  Over the last two weeks, we observed   two important developments; in  the week ending on 3-26-04  we witnessed the formation of several steep positive divergences between price and most of our indicators, such as the McClellan Oscillators, the Thrust Oscillators, the Buy/Sell Equilibrium Indexes, the Quantifiers,  and the SI25s.  Therefore, we pointed out that if the "character" of the market was still bullish,  the indices ought to be able to respond positively to these divergences, by halting their decline and embarking on a new advance.  Over the past seven trading days the indices have done just that, they rallied with a vengeance! During the course of the rally,  the second significant development took place;  most indicators not only turned positive, but more importantly,  have exceeded their most recent highs! Such action means one of two things; either the rally is  already exhausted and the markets are about to turn down again, or,  the bull is starting another multi-week rally and the action of the past few days represents  the "initiatory thrust."  In other words, the markets have acted in a perfectly bullish manner. First,  price  responded favorably to the positive divergences, and second, almost all important indicators are giving readings consistent with a "bullish  up-thrust" In light of such overwhelming bullish developments, one ought to give the bull the benefit of the doubt, because the evidence -at least on the surface- suggests that the path  of least resistance is on the upside, and therefore, if the market continues higher, don't fight it! Having said that, we  also want to point out two other things;   a) when something looks  perfect, it probably isn't, looks can be deceiving, and b) some of the "picture perfect" and most convincing rallies take place right before  major tops, fooling even the "permabears."  Notice that the SPX/VIX, and NDX/VXN ratios are back  near  the top  their range. Every time -with the exception of August 2000-  the ratios have reached  these levels, the markets have turned down in a rather violent way. So, unless we are about to witness a total collapse in volatility premiums, something will have to give.  In conclusion, investors  need to recognize that the market is acting the way bull markets act, and  thus, the bullish case deserves the benefit of the doubt until proven otherwise.  Is there a chance that the "bullish act"  is after all just that, a sinister act designed  to suck in even  the last hold-outs? Yes, that is why longs should be established incrementally, and  protective trailing stops should be placed on all positions.  Going into next week, the odds do favor a pullback, given how overbought the markets are, however, strong markets that are for real,  can get overbought and still continue higher, without giving up much ground.  Last week we gave you  the two most probable  price patterns,  for either a bearish, or, a bullish environment. It  turned out that scenario #1 played out rather accurately.  For next week, we have three price patterns that are the most common given the current market structure.  Once again, we'll stick with the SP, because its current pattern is more reliable than NASDAQ's. On another note we would like to point something out about bonds. As you probably know, on Friday,  bonds suffered one  of their worst declines in recent memory. The chart below is the yield for the 10 year T-Note.  Notice that it may have formed an inverted "head an shoulders" pattern. If it materializes, the break-out targets  55, which is 14 units higher than its closing value on Friday. Such an advance would represent a 34% increase in  the yield of the T-Note, which would  probably un-nerve the stock market. Pay attention to the bond market, it has the potential to be a real party-pooper!

(3-26-04)  The markets did respond favorably to the positive divergences we mentioned last week with a furious rally. Next week comes the toughest part: continuation and a close  above the  first upside targets. If we are going to have continuation the two most likely patterns are illustrated in scenarios one, and two. If Thursday's rally was a one day affair, then the two most likely patterns are illustrated in scenarios three, and four. All of our indicators are  below zero and rising,  the "rising" part supports continuation, at the same time, the "below zero" part means that the probability of a rally failure are better than even.  If the SP closes above 1115,  it will attempt to overcome resistance at 1125. A close above 1125 suggests further continuation. On the other hand, if the SP closes below 1095, it would be a warning flag, suggesting that the rally is being aborted. In either case, we expect above average volatility, and thus the environment would favor option players. A straddle, or a collar  with striking prices no more than 3% above and below Friday's closing prices ought to be profitable if any of the four scenarios shown below takes place.  

Bottom line: Objectively speaking, last week the bulls won round one, but that is the easiest one.  A tougher test comes next week, and the possibilities are wide open.

On another note we would like to point something out about gold stocks,  for all those subscribers who have emailed us lately, asking our opinion. Our favorite  way of  identifying low risk entry points for gold stocks, is by examining the ratio between gold and the XAU. Low risk entries are found when the ratio is between 5 and 6. At the moment, the ratio is at 4.12, which is neutral, and it means gold stocks can go either way. This is not a low risk entry point, but it is not high risk either as the case tends to be when the ratio falls below 3.25. Due to the current ratio of 4.12 which is in the middle of the range, we are neutral on gold stocks.

(3-19-04)  Going into next week we  got two very important developments:

a) Almost all major domestic indices are testing  support at their break-out points, and the same holds true for several foreign markets, as well (see Germany's DAX index at the bottom)

b) There are steep positive divergences between price and the McClellan Oscillators, our own Summation Indexes, the Thrust Oscillators, the Buy/Sell Equilibrium Indexes, and the Quantifiers! 

Given that the indices are testing support, while we have numerous positive divergences, we ought to expect a rally, even if Monday turns out to be a down day, ASSUMING the overall environment is still bullish. All these positive divergences amount to unconfirmed  "buy signals." (a signal from a divergence becomes  confirmed when price actually follows suit) Buy signals -bottom picking- tend to fail in bear markets, just like sell signals -top picking- tend to fail in bull markets. Consequently, in the next few days we are going to get some very important clues regarding whether the bull is still in charge, or, the bear has quietly taken over. If the indices  continue to decline, and they close below support, despite all the positive divergences, then we must seriously consider the possibility that the cyclical bull is over, and thus, we ought to be shorting rallies, instead of buying dips. As it stands right now, there is no need to speculate on  whether the bear is back,  the market will tell us by its very own action. For Monday, pay attention to the  NASDAQ hourly action. If the price responds to the current positive divergences even on  a limited basis, then, we ought to see a bounce from channel support in the 1920-1925 zone, and a rally back up towards channel resistance in the 2030-2035 zone. 

(3-12-04)  Going into last week we had virtually all of our indicators re-testing their zero line. Ultimately they failed the test, and as it is the case with most failures at the zero line, they accelerated quickly and decisively to the downside. Due to the downside acceleration  which took place from below the zero line, most indicators made lower lows for the first time in 12 months. This is significant, and needs to be paid attention to. If the bull is still alive and well,  this type of development is a one-two day thing, and it turns out to be a  magnificent buying opportunity. However, if the market  has undergone a change in character, and the trend is now down, the lower lows by most indicators,  signify the "first thrust down" and there are more to come, which of course would mean lower prices.  For early clues we will focus our attention on the hourly chart for NASDAQ. Notice the declining channel which has controlled the price action on an hourly basis, since 2-16-04.  We can see that NASDAQ has resistance at the 2000 level, and then it has double resistance in the 2030-2040 zone (at the intersection of the blue and black resistance lines) If NASDAQ can get above 2000 and stay above 2000, for 3 consecutive hours, it would suggest that it has the stamina to mount an assault at the next and more significant resistance level in the 2030-2040 zone. If it stumbles there, then it can go back down to the  bottom of the declining channel  at around 1925, and  it can even break down from channel support.

(3-5-04)  The McClellan Oscillators did cross the zero line,  and they have managed to stay above it, however, they haven't accelerated to the upside, meaning, the internals  have improved, but only modestly.  Overall, the markets continued to display a rather mixed action which can lead to opposite outcomes. The Thrust Oscillators are illustrating the potential for  opposite outcomes rather clearly. Notice that they are  turning down, but we don't have a negative cross-over, as of yet. That means, we are at a point of "perfect  indecision."  We can end up with a negative cross-over, and a several day decline, or, we can end up with a consolidation that gets resolved to the upside (see the arrows below) Thus, going into next week, once again, we ought to let support and resistance guide our actions.  In our view, the most important thing  for investors/traders to realize,  is that  based upon the current technical condition of the markets, the  odds for either higher, or, lower prices next week, are almost even.  In the next page, we have several trading suggestions that will enable you to take advantage of either outcome.

 (2-27-04) Last week we got a rather mixed action. The decline that started last week, lost steam by Wednesday, then, the bounce that started on Wednesday, lost steam by Friday! For us the most important development going forward, is whether the  McClellan Oscillators turn down at the zero line, or, they penetrate it and stay above it. If they turn back down again, it would mean that the recent weakness, will last for another 5-10 trading days. However, if they penetrate the zero line, and stay above it, it would mean that Wednesday's bounce has legs."

(2-6-04)  We did get the additional 2% loss in NASDAQ, but the SP held above the critical 1122 level, while all indicators got  near the bottom of their range.  Last week's action was identical to the action that we have seen over and over since March of last year. We got a sharp internal correction, while giving up very little in terms of price, suggesting that the bull is alive and well. The only element of difference in this latest corrective episode was the total absence of concern, or, bearishness on behalf of market participants, no increase in the assets of the Rydex Bear Index funds, no spike in the put/call ratios. Strictly speaking from a technical point of view, since the SP held above trend-line support at 1122, and given the strong breadth that accompanied Friday's rally (over 2000 net advancing issues), in combination with the rising Thrust Oscillators, the odds favoring continuation are better then even! Consequently, as we said last week, we ought to trade on the long side with a stop loss at the support levels indicated in the table below. We got two concerns going forward, one is the lack of total concern among market participants, the other is the fact that the McClellan Oscillator got to the -200 zone for the NYSE. Usually, when it gets to that level, we get a rally up to the zero line, and then it turns back down again. In summary, the technicals and the price action are telling us to be bullish, at the same time, the action by the McClellan Oscillator, and the lack of bearishness on behalf of market participants also suggest that we need to keep trailing stops on long positions. 

 (1-30-04)  Last week's action resulted in a rather mixed picture, which -in our view- calls for a "neutral" bias going into next week. First of all, NASDAQ did close below 2105 which was negative, but the SP didn't close below 1122 which was positive. The McClellan Oscillators got to oversold territory, which means, a bounce should be imminent -a positive- but, the rest of the indicators  didn't come even close to the bottom of their ranges, which means, there could be additional downside risk in the markets -a negative. Based upon the current levels of most of our indicators, we estimate any additional downside risk to be  approximately 2%-3% for NASDAQ, and   2.2%-4.2%  for the SP. All in all, we ought to be prepared for either a bullish, or, a bearish action next week, and perhaps a dose of both! Notice that as long as the SP remains above 1122, price is controlled short-term by the rising green channel, which is bullish, and suggests that the SP can rally from  channel support, all the way up to channel resistance at 1155-1160. This can be accomplished in a matter of 3 trading days, by Wednesday as a matter of fact. Once the SP gets up to channel resistance, the oversold condition of the McClellan oscillators will be alleviated, while our indicators -once again- will be near the top of their range, which means, the SP can turn back down again, as early as Thursday, unless we have a break-out above channel resistance, and the SP rallies to weekly resistance at 1175-1178. On the other hand, if the SP closed below 1122, then  channel support will be violated, and the next downside target should be in the 1095-1088 zone (at the intersection of the two blue lines) This could also be accomplished in just three trading days, in a manner similar to  last week's decline, during which the SP reached a high of 1155 on Tuesday, and a low of 1122.38 by Thursday. In our view, that would be ideal, because that kind of action would drive the McClellan Oscillators even lower, and it would push our own indicators towards the bottom of their range, providing us with a  low risk entry point, for a tradable bounce  with a magnitude of at least 3%.  

We believe that the odds favoring either scenario, are almost even, since each positive is being offset by a negative, and vice versa. Consequently, if the 1122 level holds, we can trade on the long side, with a  trailing stop, originally set at 1122, and be ready to exit the long and switch into a short position in the 1155-1160 zone, assuming that  the SP will roll over at channel resistance. If the SP takes out the 1122 support level, then we'll wait to go long in the 1095-1088 zone.

(1-23-04) Last week -in the monthly report- we articulated our reasons for expecting a pullback between current levels and perhaps 3% higher. All of the indicators have turned down, after making contact with the top of their range, indicating  a temporary exhaustion. However, markets with such a strong momentum and liquidity behind them, usually do not pullback along with the indicators. In most cases they continue higher for another 1%-3% while the divergences between price and indicators become more pronounced.  Of course, nothing is guaranteed in this business, and that is why we need to pay attention to the resistance and support levels shown in the charts below, which should serve as a warning sign of what may be developing. Notice that  short-term, NASDAQ is in a well defined  steep and narrow channel as indicated by the two green lines. The top of this channel coincides with the top of the red channel that has controlled  price on an intermediate term basis. Ideally, we would like to see price moving up to 2180-2190 level which represents both short and intermediate term resistance, on a daily and a weekly basis, while the indicators continue to weaken. As of Friday's close, NASDAQ stopped just above  channel support -at 2105- If during next week, it holds above 2105- and moves higher, that should be confirmation that on a short-term basis price is still controlled by the green channel, and the odds for making it to the 2180-2190 level are still good. If it closes above 2155, the odds will increase significantly. On the other hand, if NASDAQ closes below 2105, it would confirm that price is no longer controlled on a -short-term- basis by the green channel, and we would expect a  further decline to 2070.  If 2070 doesn't hold, the next downside target should be 2000. At that point we should have enough of an oversold condition to warrant entering long positions. So, if the 2105 (-/+5 points) level continues to hold,  the odds favor higher prices, if it doesn't, the odds favor lower prices.

In the case of the SP the picture is quite similar. Notice that the SP has already made it to the top of its intermediate term rising channel (red channel) This top also coincides with another intermediate term  resistance (blue line) However, these resistance lines control price on a daily basis. On a weekly basis,  there is no resistance -as we pointed out on page 1- until the SP reaches 1178.  Thus, for next week if the SP was to close above 1150, then we know that daily resistance couldn't hold the index back, and it should be headed to the 1175-1178 level. On the other hand, if it continues lower, the next level to pay attention to is 1122. If 1122 doesn't hold, then the next support comes at 1095, which is the intersection of the previous tops line (red) and of the support line (blue) going back to the March, '03 lows. 

To put it all together then, if NASDAQ holds above 2105, and the SP closes above 1150, the odds would favor higher prices, targeting 2180/90 and 1175/78 respectively. If NASDAQ closes below 2105, and the SP not only fails to close above 1150, but it  closes below 1122, then the odds would favor lower prices, targeting at least the first downside targets listed in the table below.

(1-9-04)  As it turned out, NASDAQ did overcome resistance, and the  2090 level acted as a magnet pulling the index up, and as high a 2114. The action in all the indices was characterized by strong internals and by rallies to resistance levels. As the indices approach resistance, all indicators   approached the top of their range, indicating that a  pullback from current resistance levels may be in the making. Given that all indicators are near the top of their ranges, a pullback can easily be in excess of 5%. Having said that, we also want to bring up a very important point. The  markets are quite overbought, and having reached resistance levels, it does make sense that they pull back. However,  strong markets -despite being highly overbought- can push  thru resistance,  and when they do coming out of an already overbought condition, the ensuing advance can   be between 3.5% to 5%.   For next week we need to have a neutral bias, to avoid getting tricked!  Given the overbought state of he markets, and the fact that they are right below key resistance, it does make sense that they retreat, and in such case, the odds are better than even, that the magnitude of the retreat will exceed 5%. As long as the indices remain below resistance,  the pullback scenario is in play. However, if  they manage to close above resistance any time during the week, and there is follow thru to the upside the next day, then, the  3.5%-5% additional rally scenario is in play. 

Last week NASDAQ, provided the best set up, but this week, we need to turn our attention to the SP. To give you a better idea of  the different possibilities,  we'll take a look at the SP500, which offers the cleanest and most illustrative picture of the current situation. We can see that it is in a well defined rising channel, it reached channel resistance, and all the pertinent indicators  are at the top of their  respective ranges as well. Consequently, this would be a perfect place for the SP to pull back. Unfortunately, the markets rarely make it that easy. Based upon our observation of price behavior the last 15 years that we have been students of the markets, we believe that the three most possible  scenarios are the ones shown in chart 2, 3, and 4. If Friday's pullback continues into the first part of the week, and the SP finds support between 1006 and 1095, then we can get another run towards channel resistance between Wednesday and Friday, to be followed by another decline next week, as shown in chart#2. If the 1106-1095 can't provide support, then we ought to look for a further decline to 1080, and then another rally, towards the highs, to be followed by  a decline towards channel support, as shown in chart#3.  Finally, if the SP can stay above 1108, and ideally above 1114,  then in all likelihood, it will ultimately break out of channel resistance and rally towards the 1160-1175 zone, as shown in chart#4. Keep in mind, that there are other possible scenarios, but these three, tend to be the most common.  From a trading point of view, if scenario#2 was to take place, we could have 5 potential trades, each about 30-40 SP points.  

One last point that we would like to make for whatever is worth is this: Oil is threatening to break above $35 per barrel, while the US dollar has already broken below channel support. Up to now equity investors have ignored both trends. That may change, if oil and the dollar accelerate their moves simultaneously. 

(1-2-04) The indices are  at a significant juncture. For the short-term (next week)  NASDAQ offers the best answers, but for the intermediate and long-term we'll turn our attention to the NYSE, and the Dow.

Take a look at the hourly chart for NASDAQ over the past six months. It has been moving steadily upwards in an orderly fashion within a well defined channel. Until November, channel resistance was provided  by the blue line, since November, resistance has been provided by the black line, suggesting that the angle of ascend has decreased. On Friday, NASDAQ turned down, as soon as it hit the black resistance line. Consequently, if Friday's highs hold, we ought to assume that the black resistance line is still valid, and we would expect a pullback down to support, either at 1925, or, more likely at 1888. If Friday's highs are exceeded, then we ought to assume that the black resistance line has been invalidated, and we would expect the previous channel resistance (blue line) to act as a magnet pulling NASDAQ to the 2070-2090 zone.

Last week, we got a significant development with regards to the intermediate and long term. notice that the Dow and the NYSE are at a triple resistance point, which actually defines a bull from a bear market. The red line, is the declining tops line going back to 2000, the blue line is the 2002 bear market top, and the black line, is the long term support for the indices dating back to 1991, which was violated in 2002, and now represents long term resistance. The triple resistance point for the Dow is at 10650, and for the NYSE at 6465.  If the indices manage to overcome this triple resistance point, then all 3 significant resistance lines will be invalidated, and by definition, the bear market for the NYSE and the Dow is finished, and we would expect new all time highs to follow. Moreover, the current phase of the rally should extend by another 4.5%-6%, before it pauses.

On the other hand, if  the triple resistance holds the indices down, then by definition the bear market is still in effect. 

Given the significance of this triple point resistance, it wouldn't be surprising if the indices pull back, even if eventually they manage to get above it. Therefore, despite the positive seasonality during the first part of January, don't be surprised at all, if the indices pull back, they are at a point, that makes a whole lot of sense for -at least- a short term pull back to take place, and perhaps something even more significant. 

Another area of special significance for next week, is the possible direction of interest rates. Notice that the yield on the 10 year note is about to break above resistance. If it did, the objective is about 50% from current levels. Such a dramatic rise, if it occurred in a manner of 4-6 weeks, like the one in June, it ought to have important and adverse implication for the housing market, corporate borrowing costs, and ultimately the equity markets.