(6-25-04)  The indices rallied on Tuesday, and Wednesday but "Buying Pressure" as measured by our indicators didn't increase by any notable amount, although by the same token, "Selling Pressure"  remained non-existent. The key thing to watch out looking forward is the steep negative divergences that have developed over the past few weeks. Basically they leave us with 3 scenarios.

1. The indices decline over the next 5-7 trading days, starting as early as Monday.

2. The indices manage to ignore the negative divergences for the next 10-15 trading days and work their way higher, bumping against resistance, before they finally succumb to the lack of buying, and the diverging internals around mid-July.

3. Over the past 18 months, the indices have overcome negative divergences and made new recovery highs, once again that could be the case.

(6-18-04)  The indices spent the entire week in a very narrow trading range, with a  magnitude of just 1.2% for the Dow, 1.4% for the SP, and 2.0% for NASDAQ. In our quest to   gain better understanding as to what is causing such lethargic action, we focused  on the supply/demand dynamics  that are currently influencing the markets. Thru-out the  week we spent a considerable amount of time analyzing and observing very closely the individual components that make up our Buy/Sell Equilibrium indexes. Our observations have lead us to   conclude that -at least for the past two weeks-  there has been a total absence of selling pressure. The reason the markets  were  able to move to the top of their trading range two weeks ago -and in the process,  they closed marginally above resistance-  on such meager volume, was because there was  virtually no selling pressure what-so-ever, consequently, even a small amount of buying  was enough to propel the indices higher. Last week, selling pressure remained non-existent, however, buying pressure dried up as well, resulting in a market that went nowhere, with no selling pressure to push it lower, and with no  sufficient buying pressure to  push it higher. The lack of desire to sell is easier to explain. Most investors are convinced that we are in a new bull market, the economy is improving, corporate profits are increasing, inflation is tame, etc, etc, thus, they expect that eventually the market is going higher, so why sell now? However  the lack of  sustainable buying pressure is  a bit more difficult to explain. Is it because investors are already fully invested? Is it because investors don't consider current prices  attractive? Is it because of investors'  newfound adversity for risk? It could be any one of the above, or any combination of the above.  The bottom line is, overall volume and buying pressure need  to pick up in order for the markets to move higher, otherwise, the recent marginal break-out will turn out to be a fake-out. Keep in mind that NASDAQ is still below both resistance lines, and the SP has negated only one of its resistance lines (the blue one) The more significant one (red line) has yet to be conquered. The thing to watch out for -if buying pressure continues to lag- is a rally over the next few days, up to the red resistance line at  the 1150-1155 level, which then becomes an exhaustion point, and the SP turns down in earnest. In that case, all those who bought while the SP was between the two resistance lines will get trapped. Those of you who are trading the SP, the Dow, or NASDAQ,  for next week  the support and resistance levels listed in the table below should serve as your  trading guide. If resistance is overcome, you can add to long positions and move your stops up to break-even. On the other hand, if support is violated close out long trades, and either stay in cash, or, initiate 10% short positions.   

(6-10-04)  The Dow and the SP overcame resistance and closed marginally above it. At the same time, all indicators are above zero and rising, implying  that the path of least resistance ought to be on the upside, at least for the short term. On balance the bulls  have the upper hand. However, we continue to be bothered by the fact that the Volatility ratios remain at the top of their range, a top that has been exceeded only once since their inception, and that was in August of 2000, a real awful time to be buying stocks.  Is it possible  that the break-out is a false one, and the action of the past few days, will turn out to be a "bull-trap?"  Anything is possible, that is why we insist that all positions that were open due to the "break-out"  have stops  at the break-even level, therefore, if the markets turn down, there will be no harm done.  The bottom line is this: Technically speaking, as long as the indices remain above support (see table below), the break-out is valid,  and the trend is up , whether we are skeptical about it, or, not!

(6-4-04)  Last week's market action  was one of the most extraordinary  and conflicting  we have seen in the last 16 years that we have been students of the markets.  The indices had a hard time going down, they also had a hard time going up, however, on balance they had a harder time going down than going up!  Several indicators are giving strong bullish signals such as the high put/call ratio, the COT numbers showing commercial traders net long, the NYSE member net buy/sell reached a new record number indicating that NYSE members bought the largest amount of inventory ever. Notice the chart provided by decicionpoint.com, the previous two times that their buying activity came close to last week's record level, was at the exact bottom in October 2002, and March 2003! On the surface, all the above are very bullish factors, and the market ought to be able to capitalize on the set up and rally sharply. However, at the same time we got the volatility ratios back up at the top of their range, which they have been able to penetrate only once, in August of 2000, volume has been low, despite the rally there are more stocks below their 200 MA today than in the beginning of May, the McClellan Oscillator rallied 700 points, and the SP managed to gain just 4.1%, when in the past the average price gain that has accompanied the up-thrust in the Oscillator, has been 14%, new lows routinely exceed new highs, and most "good news" are sold into. On the surface, all the above are very bearish factors, and the market ought to feel the pressure. In other words, one set of data is painting a very bullish picture, while another set of data is painting an equally bearish picture. Obviously both can't be telling the truth, a patient is either dying, or recovering, can't be  "dying and recovering" at the same time, these two states of being are mutually exclusive.  However, that is what the market is giving us to work with in terms of data measuring its internals. Therefore, we'll rely for the time being on pattern recognition techniques in order to determine what the market will do next, and how  to be positioned  accordingly.  Please  click on EXTRA to read the rest of  of the  report. 

(5-28-04) We got the rally which in fact was induced by an unprecedented infusion of liquidity by the FED. However, by the end of the week  all indicators are near their top of the range, which means the odds are better than even that this week the markets will experience a pullback. The magnitude of the pullback will give us a good indication whether the FED has managed to turn things around one more time. Although all of our timing indicators are on a BUY signal, our recommended position is CASH, until we see how the market behaves during a pullback.

(5-14-04) The action last week was similar to what usually takes place prior to a rally during options expiration week. In addition we got all the positive divergences that were also present prior to the rally off the March lows, coupled with a notable increase in negative sentiment. If you put it all together, we ought to expect a rally next week, but it may not start until Wednesday. The one thing that could throw a wrench in the gears, is a continuous rise in oil prices, accompanied with a resumption of  the rally  in bond yields.

(5-7-04) As we had expected, we got the bounce on Monday from the oversold condition, but by Wednesday it was over, just like all the other ones since  January. The reason for the market's inability to embark on a sustainable rally  can be found in the  persistent weak internals which were in full display last week in terms of  breadth and  up/down volume. People fail to realize that "deeply oversold" conditions are responsible for igniting rallies, improving internals are responsible for sustaining the rally, because they provide the fuel that the rally consumes in order to keep on going.  If your vehicle is running out of gas, and all of a sudden it stalls,  you can get it started  by using a starter fluid, but unless you get some gas in the tank, the starter fluid won't get you  where you need to go. We have received lately many inquiries with regards to whether the market is approaching another important  intermediate term  "buying" opportunity. Thus,  we would like to address this issue before we talk about our expectations for next week.  Since January, breadth has been constantly deteriorating,  new lows have been expanding, volume has been contracting on up days, and expanding on down days. Under these circumstances,  rallies can't  last, regardless of how oversold the markets get. Thus, no intermediate term "buying opportunity" can be expected to be found in this type of market environment.   Moreover,  given all the cross-currents that are currently exerting pressure on the markets  from opposite ends-good earnings, improving economy, geopolitical uncertainty, political uncertainty, rising interest rates, rising oil prices, etc- it is an exercise in futility  to  attempt to determine  in advance -with any degree of reasonable certainty-  when the  prevailing market conditions will change. Instead, by focusing on identifying  the conditions that are currently in play,  then  we can determine with a high degree of certainty, what can be expected of the markets  right now, and what we ought to be doing accordingly. For example, we can determine with a high degree of certainty,  that as long as breadth continues to deteriorate,  new lows continue to  expand, and volume continues to contract on up days/ expand on down days,  it will be very difficult -if not impossible- for the markets to make any progress, and for investors to  earn a return that adequately compensates them for the market risk they're talking.  To make the point  even more clear,  we shall take a look at the  A/D  and  Volume McClellan Oscillators and Summation Indexes for the NYSE.

The Oscillators are in oversold territory which means a bounce from an oversold condition is to be expected. However, notice that all four of these important indicators are below zero and declining, which leaves no doubt that the current breadth and volume attributes of the NYSE are NOT supportive of higher prices. Given all the cross-currents which are  exerting impact on the market at the present  time,  it is rather impossible to  determine with any degree of certainty whether the Summation Indexes will bottom at -500,  or, -1000. However, as long as all four remain below zero, and continue to decline, we can determine with a high degree of certainty that the path of least resistance is down, and thus it is premature to be looking for an intermediate term buying opportunity. In order to be  successful  in the market,  investors/traders  do not need to  determine  in -advance- when the market environment  will change, what they need to do, is to have a plan with regards to what they'll do when the environment  does change, and when it does, they need to recognize the change, and immediately act upon it, by implementing their  plan. Another example of what we are talking about can be seen in the A/D charts for the NYSE, and NASDAQ. The two charts on the top show the current A/D line.  Notice the difference in the formation  between now and March-April of 2003. Even a novice can tell that last year the A/D  had formed a bottom, and it was moving up. In that type of environment it made sense to be a buyer because most stocks were appreciating. However, over the past 3 months, the  A/D line has formed a clear top, and it is declining. In this current type of environment it makes sense to be a seller, because most stocks are  depreciating. The two charts on the bottom show the change that investors would want to see, in order to become buyers again. When the   A/D lines stop  to decline, and they begin to form -once again-  patterns that are usually associated with "bottom formations" then we can conclude with a reasonable degree of certainty, that a positive change in the market environment has taken place, and thus, we should be buyers.  Right now,  the A/D, and Cumulative Volume lines  for all major U.S. Indices are in a free fall, thus, it is premature to be looking  for intermediate term buying opportunities.  In fact, judging from the current chart  pattern, investors  ought to be  concerned with whether the markets are in the process of completing intermediate term tops.

With regards to next week, and  perhaps the  week after the next,   the  market action more likely will be impacted by two developments which took place last week.  Last week the Thrust Oscillators and  Buy/Sell Equilibrium Indexes turned up, while the Quantifiers and McClellan Summations Indexes continued lower. This twin action means the following; the McClellan Summation Index, and the Quantifier are telling us that the markets internally are too weak to embark on a multi-week  advance, but the positive divergences exhibited by the T.O and BSE are  suggesting that we are pretty close to another short term bottom, just like the one we had in March. Notice that the set-up then was identical to the present one -advancing BSE and T.O/declining Summation Index and Quantifier. Consequently,  we got to be alert for another  fast and furious rally coming.  The markets can rally this week, and then turn down next week going into options expiration, OR, we could see price weakness until about the middle of the week, and then a rally starting late in the week, that will carry us into options expiration the following week, on 5-21-04.

(4-30-04) The poor quality of last week's rally overtook  the artificial favorable price action, and the rally came to an abrupt and unceremonious end. In the process, all of the indicators that measure oversold/overbought conditions are in oversold territory suggesting that another bounce ought to be expected within the next 1-2 trading days.  However, the real question is this; so what if we get another bounce, we have gotten for example six from the -200 area in the McClellan Oscillators since January, but the indices are lower now than they were in January, February, and March! The point is, so far, bounces have proven to be opportunities to short, not opportunities to buy, and frankly we do not see any up-coming bounce to be any different.

(4-23-04)  Last week's price action turned those indicators that are "price-centric"  positive.  Consequently, if we only look at price action in a vacuum, we got  to conclude that we ought to see continuation this week. Having said that, there are two other developments that ought to be paid attention to.  First of all, the  McClellan Oscillators indicate a dichotomy between  advancing issues and up volume. The   A/D Oscillator is still negative at -105.46, on the other hand, the Volume Oscillator is clearly above zero, which means, most of the up volume has gone to a handful of stocks. The indices have  advanced due to advances in high capitalization stocks, however, the rest of the  stocks have not received  proportionate up volume, which makes the  rally vulnerable. Second,  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 summary, the  price action is  favorable, and suggests  continuation. However, the quality of the rally has been poor and makes it vulnerable to an abrupt end. For next week, pay attention to resistance (see table below) If the indices can't close above resistance, while breadth remains poor, and  volatility premiums continue to contract, then in all likelihood the rally will come to and end. If the indices do close above resistance, while breadth expands, we ought to expect  further gains at least up to the first upside targets.