(12-12-03) The Dow and the SP, have broken out and held above resistance, in addition, all indicators are above zero and rising. Consequently we ought to expect continuation to the upside, in the absence of any exogenous event that upsets the market. What could that be? We got three different forces that are pulling on the other direction, oil, interest rates, and the dollar (see charts below) So far, the equity markets have been able to overcome the "opposite pull." Will they be able to continue so, if  oil went over $35, and the dollar index below 85 for example? We do not know, but it is something that certainly needs to be kept in mind. Pay attention to the 10100 level in the Dow, and 1085 in the SP, for a reversal, if that doesn't happen, they are heading to the first upside targets.

(12-05-03) The indices broke support marginally,  three weeks ago, and subsequently they have spent the last 12-15 trading days rallying back up to the support line that they violated 3 weeks ago. After  making contact with the previous support line -which now represents resistance- they pulled back, but only modestly. As it can be easily seen both  from the  price charts (please see page one) and from the indicator charts,   the indices are still "coiling." In other words, they are building energy for their next move, which should be either a break-out, or, a break-down. Unfortunately, there is plenty of evidence that can objectively support both scenarios almost equally. On one hand we have outlandish bullish sentiment (AAII had 69% bulls, and the Consensus Inc., 72% bulls this past week) deteriorating liquidity, ample signs of distribution,  risk premiums at multi-year lows, several non-confirmations, and geopolitical uncertainty, on the other hand, we have  strong breadth, exceptionally strong 52 week highs/lows ratio, favoring the highs,   and a chart pattern that in several occasions in the past,  has resulted in upside break-outs.  Take a look at the charts below for example:

Notice that  a similar chart pattern for the NDX, accompanied with similar investor psychology,  going into the end of 1999, resulted in the blow off top in March of 2000.  Do the similarities "guarantee" a repetition? Of course, not. However, because the similarities are there, as long as price continues to hold above support, one can not dismiss the possibility of a break-out.

Take a look at the Transportation Index, notice that the exact same chart pattern resulted in  a break out in case B, and C, and in a break-down in case A. Consequently, it should be rather clear, that neither outcome at this point can be dismissed. If price starts to break down, and new daily lows start to exceed daily highs, and the  number of stocks above their 200 DMA drops below 60%, from currently 85%, and so on,  then one can say that the evidence is shifting in support of a break-down. On the other hand, if  the indices continue to hold above  support and investors remain enamored with equities, who can rule out another buying stampede?  Until the body of evidence starts to shift in clear favor of  one  of the two outcomes, we  ought to remain neutral and allow for either scenario to take place. 

Our own personal belief -as we also stated in the monthly report- is that the markets can continue higher -in the absence of an outside crisis- but they are vulnerable, and they are ill equipped to deal with the un-expected, such as,  higher oil prices, or, a currency crisis,  or, a sharp rise in short term interest rates, or, all of the above.  We further believe that if the markets started to decline,  the decline will be  quite fast and will not allow an orderly exit, due to the fact that many portfolio managers will liquidate positions in order to lock in, this year's gains.  

For next week, we need to contemplate  mainly two scenarios:

A) If  the indices continue lower for the first  2-3 days of the week, and they make contact with the support levels listed in the table below, the McClellan Oscillators, as well as, many of our own short-term trading indicators will reach  oversold territory, and thus we should get a bounce later in the week.

B) If the indices rally on Monday, the key thing will be whether they can close above last week's highs, if they do, then the rally can carry into the end of the week. If they stumble once again, then we would expect selling to resume by  Thursday.

Pay attention to support and resistance,  short-term traders ought to buy at support if it holds, and sell short at resistance if it holds.  However, we continue to believe that the best way to position for either a break-out, or, a break-down is thru the use of straddles, or, strangles for  the QQQ,   expiring  in January, February, or even March.  

A potential market moving event this week can be the FOMC meeting and the language they adopt. The FED has  stated that it intents to keep current interest rate policy for a "considerable period of time." Given the strong GDP, and ISM numbers, it would be difficult for the FED to defend the notion that the risk of economic contraction is such that warrants real interest rates to remain negative. Consequently, if they decide to remove the phrase "considerable period of time" from their statement, then  holders  of short-term Treasuries may get spooked and decide to bail out, out of fear that the FED will begin to raise rates, sooner, than later. Such an outcome will  result in higher short-term interest rates, a rally in the dollar, and a decline in gold prices. Normally, such a shift would also  impact equities adversely, although  the Wall Street propaganda machine will try to portray higher short term interest rates as a "good thing" because it means the economy is improving, which in turn will result in "untold riches"  for corporations,  which in turn will result in "significantly" higher stock prices, and thus, investors ought to be buying now, no questions asked!  Consequently, they may manage to get a rally out of this, but we  wouldn't bet on it. 

(11-21-03) The indices broke below support but only marginally, moreover, the breakdown didn't result in a downward acceleration, in fact the indices seem to stabilize, while almost every indicator reached the level that in the past 3 months has served as a "floor." If the overall bullish environment remains intact, one would expect that the indices will rally from current levels, imitating their previous behavior of the last 3 months, resulting in yet another leg up. Is the overall bullish environment still intact? Let's take a look at the inflows/outflows charts.

Notice that we got a negative cross-over,  outflows exceeded inflows. We did have a brief cross-over in mid-July for the NYSE, which was quickly reversed (point AA') If this turns out to be the case again, then Friday's action  by both price and indicators would represent yet another buy signal, and we would expect the indices to embark on another advance. However, if we don't get another  reversal, and outflows continue to exceed inflows, then the decline  is not over, and in fact it can accelerate rapidly. We have no way of determining whether the equity markets will get another liquidity infusion next week, reversing the cross-over, we can only report to you what the liquidity situation is. Next week could mark the beginning of another advance, or, the long awaited demise of the rally that started last March. Given that this is a holiday shortened week,  we may not see a dramatic move until the following one. In the mean time we shall pay close attention to the hourly charts. 

Notice that intra-day support has held, in fact -in the case of the SP- it can fall to 1020, and the intra-day trend will still be positive. Also notice that a similar pattern in October resulted  in a sizable advance. Given that the markets are relatively oversold, and intra-day support has held, we could easily see buyers coming in first thing on Monday, if they can take the indices above resistance (see table below) then we can expect continuation, even if the rally ultimately fails next week due to lack of liquidity. One thing that needs to be kept in mind is that during times of negative liquidity, the markets do bounce when they get oversold, but because there is not enough liquidity to sustain the bounce, it ends up being a few days affair. The markets are oversold right now, thus a  bounce is in the cards.

In summary, last Friday many indicators reached levels that in the past few months have generated reliable "ENTRY" signals. However, this time it may be different,  liquidity has turned negative and unless it quickly reverses,  we will see the first meaningful decline since last January. 

(11-14-03)  Both the price charts and the indicator charts  are demonstrating loud and clear that the markets  have been coiling for several weeks, building energy for the next move. Given that the coiling/consolidation has been going on since early September, we must assume that the markets have accumulated  enough energy to  support a move with a magnitude of at least 8%-10%. Furthermore, given that the indices are at the apex of their formations, we ought to expect the initiation of the move to take place very shortly, in fact from our observation of similar patterns over the years, we estimate that it should happen within the next 5-7 trading days. So, if a "breaK" is imminent, what is the most likely direction? Let's take a look at the charts below.

Notice that while NASDAQ and the SP are at the top of their range, the US dollar is at the bottom of its range, and oil is once again at key resistance. If the dollar is able to hold support, and oil  fails to overcome resistance, then, one can argue that the chances of the equity markets breaking out to the upside, will be enhanced. However,  If the dollar sinks further, while oil prices break out to the upside,  it would be hard to imagine that the equity markets will break out on the upside, as well! The fact that these four indices are at exact opposite points, illustrates -in our view- the great disconnect between the equity markets and the rest of the asset classes. Equity investors appear convinced that the  currency and energy markets will not hold any surprises going forward. If they are correct, then we ought to see the dollar holding support, and oil retreating. However, if equity investors are wrong in their assumptions, then the equity markets are quite vulnerable at this juncture, and we would expect the resolution to be on the downside. Furthermore, take a look at the charts for the HUI, and the Nikkei.

Notice that  the negative correlation between the dollar and gold/gold stocks has held remarkably well. Every top in the dollar has also marked a simultaneous bottom in gold/gold stocks. Notice that the HUI  thrusted to the upside in mid-July, rallying from 140 to 180 in a matter of seven weeks, and it has spent the last 10 weeks moving in a rising channel. The chart pattern  suggests a high-end consolidation, which should result to a break-out and a rally to the 250-260 zone. It may not happen, however, if it does happen, more likely it will happen because the dollar broke down.  In other words, the strength in the HUI  implies that the dollar may not hold after all.  In addition, the Nikkei -which supposedly had finally found a bottom- has lost 8.8% in just 15 trading days, and it is testing critical support in the 10150-9950 zone. If that support doesn't hold, then the Nikkei can be expected to fall to the 9150-9250 zone, losing another 9.8%. It is reasonable to expect that another 10% decline in the Nikkei, will have an adverse impact on the Asian markets. Given the positive correlation between the US equity markets and the markets in the Pacific Rim area, it is hard to imagine a scenario in which  the US equity markets break to the upside, while Taiwan, Hong-Kong, Japan, Malaysia, etc., are breaking down. 

The point we are trying to get across is this: the equity markets  should experience a sharp move relatively shortly, with a minimum magnitude of 8%-10%. The markets have been in an uptrend, and as of the close on Friday, support has not been violated, and thus by definition the trend is still UP. The indices have been consolidating for the past 10 weeks, and the consolidation is manifested in the formation of an "ascending triangle" -although some will argue that it is a "wedge." Given that the intermediate trend is up, and ascending triangles tend to be bullish formations, the odds ought to favor a bullish resolution. However, one can not examine the price behavior of one asset class in isolation, without  taking into consideration the overall environment. The price behavior of  oil, gold, and the dollar, has been diametrically opposed to that one of equities, and at the same time, equities, oil, gold, and the dollar are either at critical support, or, at critical resistance levels  implying that SOMETHING HAS TO GIVE. It could very well be, that the price of oil gives, and the dollar finds support and rallies handsomely, and equities break out to the upside. However, how about if the dollar tanks, oil goes over $37.5 per barrel, and international markets break-down, will the U.S. equity markets be able to break-out on the upside rewarding investors who have been buying U.S. stocks the last 3-4 months, in anticipation of  such outcome? Any reasonable investor -under such circumstances- will at least consider the possibility that the U.S. equity markets will break down as well. 

In summary, when everything is taken into consideration, the overall picture is neutral. For the near future, Investors need to pay attention not only to how the U.S.  equity markets are behaving, but also to other asset classes, such us commodities, and currencies, and also other major equity markets from overseas.  If the equity markets overcome resistance while the dollar is falling and oil is rallying, we would stand aside, because the break out may turn out to be a false one. However, if resistance is overcome while  oil, and the dollar behave, then we would initiate a pilot 10%-15% long position. On the other hand, we would  initiate pilot short positions of  20%-25% if the SP was to close below 1044. For next week, be prepared for a break, pay attention to the support/resistance levels listed below, and keep an eye on the action by oil, gold, the dollar and the Nikkei.

(11-7-03) The indices traded in a narrow range thru-out the week, in a manner indicative of a bullish consolidation. However, despite "stellar economic news" the indices were unable to break to the upside, which is an indication that all the "good news" are possibly already priced in, and thus the market has run out of fuel. We got three pieces of information that are somewhat -but not totally- supportive of this argument. 

First,  the total assets in the RYDEX bull funds are clearly in sell territory, but that doesn't mean they can not go even higher! 

Second, the SP finished the month of August at 1008, and NASDAQ finished at 1810. A month later, On September 30th, the SP closed at 996, for a net loss of 1.2%, and NASDAQ closed at 1787, for a net loss of 1.3%. Remarkably, during the same period mutual funds took in $17.2b. In the following month, the SP closed at 1050 at the end of October, for a gain of 5.4%, and NASDAQ closed at 1932, for a gain of 8.1%. However, during the month of October, mutual funds took in $32b, twice as much! What's the point? The point is, it is becoming increasingly difficult for the market to achieve new gains, despite the huge amounts of inflows. Apparently an increasing number of investors is selling into the rally. This type of action, is absorbing a big part of  the  new money that is  coming in, making it difficult for the market to advance. 

Third, we got several divergences which usually  are indicative of market that is overdue for a correction.

Consequently, the combination of all the above, does raise legitimate concerns about the sustainability of the rally, and the market's ability to continue much higher. However, there is one piece of the puzzle that it is still missing; price is holding above support, which means the trend is still UP! Moreover, although there has been increased selling into the rally, liquidity is still positive, there is more money coming in, than money going out. To sum it up, the overall environment is still supportive of higher prices, however, the risk of an abrupt end has been heightened, and in fact, if  the current rate of deterioration persists, we may see the indices finally rolling over within the next 9-12 trading days, even if the "roll-over" comes from higher levels, like the first upside targets listed on the table below. For next week, once again, we got to let price be the determining factor of our actions. A close below support, would imply a further decline to the first downside targets, while a close above resistance, would imply further strength.

(10-31-04) We got the bounce the indicators were suggesting, and now the overall technical picture has turned neutral, with all the indicators above zero, but diverging negatively. Given that price is holding above support, and acting well, the bias is on the upside, however, the upside potential is no more than 5% in the SP and the Dow, and no more than 8%-8.5% in NASDAQ. These are good percentage gains for short-term traders who are willing to take the risk. Notice that the total assets in the  RYDEX bull funds, and the RYDEX bear funds are now in SELL territory. For next week, we need to pay attention to what takes place early on, especially Monday. We got two zones to pay attention to, in order to get clues about the market's short-term direction: 9825-9785 for the Dow, and 1055-1045 for the SP. If these two indices trade above -and more importantly- close above the upper boundary of the zone, the short-term bias will remain on the upside. On the other hand,  If these two indices trade below -and more importantly- close below the lower boundary of the zone, the short-term bias will shift to the downside.

(10-24-03) Last week we saw modestly lower prices on increasing volume.  In addition, all the indicators that we follow are  near the bottom of their range, suggesting that although lower prices are possible -due to the technical deterioration- somewhere between Friday's closing levels and 3% lower, we ought to expect a bounce, even if it is a trading one.  For this coming week, if the markets tank early on, we would expect a bounce later in the week. On the other hand, if the market rallies on Monday, things will get a bit more tricky. If that happens, the key thing is whether the bounce stalls at resistance. If the indices just close the gaps and stall, then we ought to expect a resumption of the decline by mid-week. Something else that we would like to bring to your attention is the RYDEX ratios. Since March,  none of the other traditional sentiment indicators have had any predictive power. On the other hand, we can clearly see a sell zone, and a buy zone when it comes to  the short term from the asset levels of all the BEAR RYDEX funds combined. Notice, that every time the total amount in the bear funds reached approximately  $2b, the market rallied, and every time the total amount in the bear funds reached $1.5b-$1.2b, the market declined (SEE CHART ON THE BOTTOM) Right now, the total amount is about $1.75b, which is right in the middle of its most resent range, indicating, that as far as this indicator is concerned, the market can go either  wayin the short term. However, it gets more interesting for the intermediate term.  Notice that when it comes to the intermediate term, the total assets in the BULL RYDEX funds combined, can provide valuable clues, as well. The total  asset levels in the BULL RYDEX funds, are in the "sell zone." (SEE CHART IN THE MIDDLE) In other words, from a sentiment point of view, if we use the RYDEX funds as a guide, we must conclude that  in the short term, the market can either way, but in the intermediate term, it is making a top. Does it make sense that the Bull funds tend to be more accurate for  the intermediate term, while the bear funds tend to be more accurate for the short term? ABSOLUTELY! The reason is, most of the people who trade the bear funds, tend to be short term speculators, which isn't the case with the bull funds.

(10-10-03)Last week we saw modestly higher prices while at the same time the technical picture deteriorated, as evidenced by the many divergences. This is pretty much what one would expect as the market approaches a top of significance, with the exception of money flows. Inflows continue to exceed outflows by a comfortable margin. The steep divergences suggest that the advance could come to a halt, however, with inflows exceeding outflows, the  overall  picture is neutral forcing us to  place great emphasis on resistance, bullish above 1050 for the SP, and bullish above 1950 for NASDAQ. Going into next week we must pay attention to the combination of  higher oil prices, and a lower dollar. So far, the stock market has ignored both, but will the market continue to ignore oil prices above $35.00? We don't know, and neither does anybody else -especially those charlatans who steadfastly claim that they do! The risk is in the unknown.

In addition, the "neutral" picture created by the combination of negative technical divergences and positive money flows, can also be observed in the charts, especially the one of the SP500. Notice that the current pattern could be either an ascending triangle, targeting 1105, or, a "broadening top" targeting 960.  If the momentum readings we got 5 weeks ago were indicative of a new intermediate term advance, then the current chart pattern will turn out to be one of an ascending triangle, if on the other hand, the momentum readings we got 5 weeks ago were indicative of a terminal phase of the rally from the March lows, then   the current chart pattern will turn out to be one of a broadening top. At this point -from a quantitative point of view- the odds are almost even, because the negative technical divergence are offset by the positive money flows. For next week we will use the 1050-1025 zone in the SP, as our "neutral zone" we stay neutral  in between, we turn bullish on a close  above 1050, and bearish  on a close below 1025.

(10-3-03) Last week's advance shouldn't have surprised any of our subscribers, we talked about it two weeks ago, and again last week. The key thing is whether we get continuation, or, not. On that front, our assessment is that investors ought to  maintain a guarded optimism. Back on 8-29-03 (see extra for 8-29-03) we pointed out that  the momentum readings generated that week, were consistent with either the beginning of a multi-month advance, or, with the terminal phase of the ongoing rally. If what we were dealing with, was the terminal phase of the rally that had started in March, we would expect this phase to last 3-5 weeks, bringing an end to the rally in the first part of October.

So, last week's action fits perfectly, both with what we said six weeks ago, and with what we said the previous two weeks. However, The readings that we got so far, are inconclusive with regards to answering the question whether last week's rally was the "last act." The Quantifiers turned positive but not by much, the TIs, show the trend to be neutral, the McClellan Oscillators for NASDAQ, hardly made it above the zero line. In other words, there is enough improvement to warrant optimism, but not enough to warrant full confidence. For this coming week, we ought to pay attention to last week's highs. If the SP manages to get above 1040, then the 1065-1075 should be achievable. If the 1040 resistance stops the SP's advance, then in all likelihood the rally that started in March, is for all means and purposes, over.