(9-26-03) The markets did not have a chance right from the start of the week. A sharp decline in the dollar on Monday got the correction started not late on Monday as we were expecting, but as soon as the markets opened for trading.  The markets lost ground 4 out of 5 days, and for the first time since March, there seemed to be a genuine absence of buyers, as illustrated by the market's inability to sustain early rallies, consistently falling apart in the last hour of trading. So, does that mean that the  character of the market has  finally changed, and the rally from the March lows is indeed over?  Not necessarily. In the past 14 years that we have been students of the market, we can tell you that every major decline we have observed, has started by displaying the same exact tape action that we witnessed last week. However,  not  every time we have observed such tape action has resulted in a major decline. It takes more than just a few days of lack of buying interest to reverse a trend that has been in place for several months (please see this week's EXTRA for complete analysis on the subject)  Given the  oversold readings in the McClellan Oscillators, and the fact that the majority of our own indicators are near, or, at the bottom of their ranges, the odds favor a bounce. However, whether the bounce materializes  at the start of the week, or later in the week, deserves  special attention, and scrutiny. The preferred action would be an additional decline on Monday and perhaps Tuesday, in order to achieve fully oversold readings, and then a recovery. If the markets rally immediately at the opening on Monday,  the danger is, that the current oversold condition, will be alleviated by Tuesday-Wednesday, and then the markets will  turn back down again. We would be much more confident buyers -for trading purposes- near the first downside targets, than near current support. Assuming the odds do come into play, and the bounce materializes by Tuesday-Wednesday, we would expect it to last into the  following week. One thing to keep in mind, is that the troubles of the dollar continue unabated, and if things get out of control, the stock market won't be able to withstand the crisis.

(9-19-03) The indices broke above resistance, and the price action suggests that they will test resistance. However, the buoyant price action has not been confirmed by many indicators. To us such non-confirmation means one of two things; either the markets are about to go parabolic, or, there is meaningful correction coming in the next 1-2 weeks. For the coming week, the odds favor a suspension of major bullish operations starting late Monday, or, Tuesday and lasting thru-out the week (resumption of bullish activities should take place again the following week, for a final push to reach nirvana!) It should be noted that in the last 9 trading days, the equity markets hesitated on the same day that the venerable US dollar fell sharply. Such action, could very well be a sign that the markets can no longer ignore the plight of the US currency. It also suggests, that a run on the dollar can have a serious impact on both the equity markets, and the fixed income markets as well. The many technical divergences in the equity markets, do not necessarily mean that the markets must go down, but they  do signify that the markets  are ill-equipped to deal with an outside crisis (which is the reason for our 25% allocation only, on the long side). Should a negative surprise was to take place, the markets don't have the underlying strength to withstand a crisis successfully.  The dollar is the wild card, and any mischief on its part -in our view- will take a toll on the markets. "  

(9-5-03) Investors came back and decided that they wanted to own stocks because things are getting better, then on Friday they got a dose of reality when the employment numbers showed that the economy lost another 93,000 jobs, marking the seven consecutive month of job losses. Never-the-less, price momentum and hope remain strong enough, that in our view the markets should remain strong for another 3-4 weeks. In last week's extra, we pointed out that momentum readings were higher than the beginning of the rally in March. Although, such high readings coming after six months of the original up-thrust, may indicate that the rally has entered a terminal phase, at the very least they also indicate that in the absence of an exogenous event that changes the dynamics of the market, the odds of an immediate roll-over are less than 15%. Given that all the indicators are near the top of their range and they have turned down, we ought to expect a consolidation lasting between 2-5 trading days, and then another push higher.  Overall, the current indicator reading suggest that we should expect higher prices for another 3-4 weeks, which means the end of September-first week of October. We will be looking to re-establish long positions, if NASDAQ pulled back to the 1820-1800 level.

(8-29-03) The markets followed the script, suggesting that the bullish character  that has prevailed since March,  is still intact. Given that the markets last week behaved identically to the way they behaved during the previous three up-legs since the March lows, the odds favor that they will continue to do so, unless an exogenous event  changes the dynamics of the market. If the market continued in the same path, we would expect a top by  Tuesday, and then a pullback  which should last 2-3 days, and finally another push to the upside. In the absence of any fireworks, the SP should remain below 1015-1018 this week.  One thing that we need to pay attention to is the fact that the price action has been rather bullish, and the markets are near the top of their range, without the aid of any institutional buying. That means, when institutional investors return next week, if -on balance- they decide to up their exposure to equities,  they can cause the markets to break out, and in a matter of a couple of weeks the SP can be in the 1050-1100 zone, and NASDAQ in the 1890-1940 zone. By the same token, if they come back and they decide to lighten up, as they did in September of 2000, then the markets can easily break down as well.  To sum it up,  all else being equal, the odds favor a minor pullback starting Tuesday-Wednesday, to be followed by another minor rally, which should carry into the middle of the following week. Neither move should  result in either a decisive break-out, or, a decisive break-down. Thus, if at any time next week the markets close either above the resistance, or, support levels shown in the table below,  then the pattern will be broken, and we should expect further continuation in the direction of the break.  

(8-22-03) We got the acceleration, both the Dow and NASDAQ broke above resistance, they came within a few points shy off the first upside targets, and then they reversed. The SP never made it above resistance at 1015. So, is this a failed rally, a false break-out? NASDAQ's indicators suggest, NO, but the SP's indicators, suggest YES. We believe the answer will be given in conjunction with the Thrust Oscillators, this coming week. Notice that the TOs have had a negative cross-over.  However, so far the character of the overall  rally since the March lows, suggests that the first negative cross-over, doesn't automatically mean a decline. It takes another 5-10 trading days for the market to actually roll over. Thus, if the character of the market remains intact, the decline shouldn't last more than a couple of days, by Tuesday- Wednesday the markets should be rallying again. However, if that doesn't happen, and the market sells right on down, the market  would be sending a very important message: IT HAS CHANGED CHARACTER! There is no need  to speculate as to whether such a change has indeed taken place, let the price action provide the answer. However, the steep divergences exhibited by the McClellan Summation Indexes, and by our own Quantifiers, suggest that may be the case. 

(8-15-03)  For the 11th week the indices remained stuck in the same trading range, with one important difference; they entered the range back in May with NASDAQ leading and the Dow lagging, and now the Dow is leading and NASDAQ is lagging. Usually such switch takes place near the end of rallies, and not at the beginning of new ones, the key thing to keep in mind of course, is that usually doesn't mean always! from a technical point of view, all indicators violated  the zero line, and subsequently we got a rally back up to that line, which is the most common action after a violation of the zero line.  With all the indicators resting near the zero line, the implication is, that we are about to get either a failure, or, an acceleration to the upside. Judging from the low volume that has accompanied the rally, the odds favor a failure. However, that doesn't preclude a false break-out and then a failure as it happened in 1998.  We continue to believe that the most preferable course of action is the use of option straddles with about 10%-20% of available capital, until the indices re-establish a clear  trend."

(8-1-03) As it turned out the SP did find resistance at 1005 -it traded as high as 1004.69- at which point it rolled over, rendering last Friday's rally a "one day affair." In the process, the internals -at least for the NYSE- turned rather ugly, as evidenced by the NYSE a/d line and cumulative volume. The a/d line appears to have formed a "head and shoulders" type of top, while  cumulative volume has formed a triple top, with the third top being the lowest among the three, indicating continuous contraction in buying interest. Charts do not lie, and it is tough to put a positive spin on these two charts, they are outright nasty looking, and suggestive of more weakness to come. Having said that, we ought to keep in mind that NASDAQ is still holding up. It has been our experience over the years, that until the leader surrenders, it is not over, thus, the bulls still have a chance to turn things around, but the odds are now against them.  Assuming the tide has turned in favor of the bears, there are two possible scenarios for next week, either the indices continue on down below support and test the first downside targets, before we see a bounce, OR, NASDAQ finds support on Monday at 1710-1715, and pulls the SP up with it, in which case we should expect the SP to rally back up to 992-995 and at that point we should see another reversal to the downside. At this point we are modestly bearish because all of our timing indicators have turned negative for the SP, but since NASDAQ is holding up, and its trend is still positive, we also need to remain flexible. Keep in mind that a close above 1780 for NASDAQ -which is only 45 points above Friday's close- will turn the picture quite bullish.

On a separate note we would like to mention two things: the yield on the  ten year treasury bond has risen 125 basis points, and oil prices are at $32.5 per barrel, any further advance in yields and in the price of oil, will put a serious dent in the second half recovery scenario. Given the sky high valuations -in anticipation of that second half recovery- if  that second half recovery doesn't have the courtesy to show up again, the stock market will be in serious trouble.

(7-25-03) The indices followed a "topping pattern" until Thursday, however, on Friday instead of accelerating to the downside, as would have been the expectation, based on the action between Monday thru Thursday, the market  turned around and staged a respectable rally. Is Friday's rally  a part of the topping process, and it represents the market's last gasp, or, is the beginning of another leg to the upside? Let's step back for a minute and examine the action from a bit longer time frame, and in terms of liquidity. We have said many times, that one observation that we have made consistently since December of 2002, is the clear lack of selling pressure. The lack of selling pressure combined with buying interest/excess liquidity between March and June resulted in an explosive move to the upside. Since early liquidity dried up, but selling pressure has remained absent, so the combination of lack of sellers, and also lack of buyers has resulted in the sideways action of the past 8 weeks. In order for the market to decline, we need to see an increase in selling pressure, while in order to go up, we need an injection of liquidity. Unless either of these two actions take place, we can't expect a dramatic change.  The key thing to keep in mind, is that neither is present at the moment, and either can take place going forward, so, we ought to be neutral and un-biased until selling pressure shows and causes the market to close below support on increasing volume, or, liquidity returns into the markets and causes a break out above resistance on increasing volume. Until one of these two events takes place, there is no rational reason based on our technical work to be either bullish, or, bearish, which is the reason why we have been buying straddles lately.  For next week, we need to pay attention to the 1005-1015 level in the SP. A continuation of Friday's rally and a close above 1015, should give buyers more confidence to return back to the market causing a break out which -if it is real- can take the SP to 1068. If the SP, finds intra-day resistance at 1005 early in the week, and fails to close above 1015 sometime during the week, it should be taken as a sign that Friday's rally was a one day affair, and we should expect the markets to return back to support levels.

(7-18-03) For the 7th consecutive week, the SP and the DOW traded in the same narrow trading range, while NASDAQ remained above the key support level at 1685. The Dow  and the SP have   been either in a bullish  consolidation mode, in which case they should overcome resistance within the next 5-7 trading days, or, they have been in a "topping" mode, in which case they should break support within the next 5-7 trading days. Given the information that we present in this week's "EXTRA" the evidence points that the indices have been forming a top. However, until price DOES BREAK DOWN BELOW SUPPORT -which it has not yet- it is premature to get too bearish. All the evidence points to weakness, but price is the ultimate arbitrator, and much to the bears frustration, it still remains above support. Going into next week, we will be looking for three possible outcomes:

 a) Given the oversold levels of the McClellan Oscillators, we will see a continuation of Friday's bounce, but if the markets are topping out, the bounce should not last beyond Tuesday, or Wednesday.

b) The indices turn back down on Monday, and they make contact with the first or second downside target by mid-week, and from there we get another oversold bounce into Friday.

c) The indices rally right from the start, overcoming resistance, and continue on to reach the first, or, second upside targets by the end of the week.

(7-11-03)For the sixth consecutive week the markets continued to trade in a narrow range between support and resistance, with NASDAQ displaying considerable technical strength, while the SP, and the Dow exhibited notable weakness!  Ultimately, the action of the past six weeks will turn out to be either one of a bullish consolidation, or, one of a top formation. NASDAQ's strength suggests that the odds favor a bullish consolidation, but the weakness in the rest of the indices, suggests that the odds favor a top, and a break-down. It would be quite odd to get both, the last time something like that happened was in January of 2000, when the Dow lost 17.2% between  1/13/00 and 3/13/00, while NASDAQ gained 30% in the same period! However, such behavior is the exception, thus in the end, more likely we will see the markets moving in tandem.  Considering  a) the weakness exhibited by  the Dow, the NYSE, the SP, and the Utilities,  b) the declining McClellan Summation Indexes, the negative McClellan Oscillator, the negative cross-overs by the Thrust Oscillators, the contraction in volume, the negative seasonality, the loss of momentum , c) the poor action by key stocks such as IBM, PG, HD, GE, SBC, KO, JNJ, and d) the disconnect between the price and the  fundamentals  of the current market darlings, we suspect that the resolution of the present impasse will be on the downside. However, given that price is still holding above support, it makes sense to wait until it actually breaks down, before turning bearish. One might suggest, that with so many negative elements presently at work, price "has" to break down. This is not true. After all, prices fall because there are more sellers than buyers. Since December of 2002, the most persistent element that has characterized the market, is the lack of sellers. There has been virtually no selling pressure. In fact one can argue that one of the most important  factors  behind the market's spectacular  gains over the past few months, isn't  a plethora of buyers,  but an absence of sellers.  Until sellers come back into the market, price will continue to defy the internal weaknesses illustrated by a number of indicators, and that is the reason why investors who wish to minimize risk, must wait for confirmation by price. Investors sell for one of two reasons, either to cut losses, or, to take profits. Keep in mind that the majority of  investors -who don't engage in short selling- before they  become  sellers, first they have to become  buyers.   They have to buy a stock before  they  sell it  later in order to cut losses, or, to lock in profits. During the last three years -on balance- sellers exceeded buyers, and that is why prices kept falling. At some point -that point appears to have been last October-  whoever wanted to sell in order to cut losses had sold, thus eliminating one source of supply (stocks sold at a loss) Therefore, the only other source of supply coming into the market has been from investors wanting to protect profits. However, the market has only been rallying for 4 months, and most people did not buy on the first day of the rally, therefore, most buyers haven't realized  yet enough gains that will turn them into net sellers. Until June, the  absence of forced sellers, and the  absence  of recent buyers   selling to lock in gains,  resulted in almost complete elimination of selling pressure.  However, now that the markets are up over 20%, and many stocks have tripled and quadrupled,  it is reasonable to expect  an increase in the number of recent buyers who are turning into sellers seeking to lock in gains, which in turn can push prices lower. Bottom line is this: bears need sellers to drive the market down, after three years of selling, there aren't that many around, which is the reason why price has been so resilient.

Next week is options expiration week, which frequently results in "split" action. In other words, it is highly likely that whatever the market does the first 2-3 days of the week, will do exactly the opposite the last 2-3 days of the week. A classic way to trade options expiration weeks, is to sit out the initial move early in the week, and then wait until it reverses Tuesday/Wednesday to open a position. Therefore, if the markets are down Monday, Tuesday, we'll be looking for a reversal by Wednesday to go long until the end of the week. Conversely, if the markets are up early in the week, we'll be looking for a reversal by Wednesday to go short until the end of the week. Of course there is always a chance that the market won't follow the script, in that case, we will examine the action as it unfolds and we'll advise accordingly. 

(7-3-03)This week we have a rather interesting development, the Trend for NASDAQ has turned up, while the trend for the SP has turned down, at the same time the action   by the NASDAQ indicators, is one indicative of a rally phase underway, on the other hand, the action by the SP indicators is one indicative of a rally that is about to fail. On top of all that, the Quantifiers remain positive! What can we make out of all these conflicting signals? NOTHING, ABSOLUTELY NOTHING! It is quite usual to end up with this type of conflicting action in a shortened week characterized by low volume. We do not place much weight on either the bearish, or, the bullish implications, however, we do believe that such action  is indicative of a market that is very close to a turning point ( "turning" doesn't mean down, it could very well be up). For next week's trading stick to the resistance and support levels, above resistance add to long positions, below support sell longs and/or initiate shorts.