(12-10-04) Technically the indices are at an inflection  point. All the indicators  suggest that equities  are at a technical point, from which strong markets move higher, and weak markets break down (see pages 3, and 4) Given the time of the year, and the strength that the market has exhibited so far, the logical expectation would be one of higher prices. However,  the real news would be a break-down, because it would indicate a sudden change in the character of the market. Given the present chart patterns, the three most likely scenarios for the next 7-10 trading days are shown below.

(12-3-04)   The indices kept pushing higher thru-out the week, while almost all short term indicators have failed to keep up pace with price, registering negative divergences. The key thing going forward is whether the indices  can overcome resistance (see table below) If they do, the odds would favor higher prices, if they don't, we would expect a pullback between 3%, and 5%. If such pullback was to take place, it ought to start no later than Wednesday of this week. The  level of assets in the RYDEX bear funds signifies that at the present time, the greater risk ought to be on the downside, even if it is only for the short term.

(11-19-04)  Last week (11-12-04)  we said:  

"...The SP stayed above support for the first 4 trading days of the week, and on Friday it closed at 1184.17 (close enough to 1185) Consequently, the odds now  favoring a further advance to 1210-1220, are better than even. There are three things to keep in mind:

a) "Better than even" doesn't mean 100%, it means better than even!

b) The total assets for the RYDEX bear funds are very near the bottom of their range for the past two years.

c) The pattern displayed by the Thrust Oscillator, is indicative of a 3-legged advance that it is now in its final leg."

Consequently, we would use any rally up to 1210-1220 to lighten up on long positions.

(11-19-04)   The indices held up until Thursday, and then  on  Friday, which happened to be  options' expiration day, investors and traders all of a sudden they rediscovered that high oil prices,  lower dollar,  higher inflation, monstrous twin deficits, disappointing corporate profits, and renewed violence in Iraq  didn't exactly match with the SP "knocking on heaven's door" at 1200!  Historically, the  up-coming week tends to be rather positive going into the holiday, consequently, the most probable scenario is a bit further decline perhaps to the 1160-1150 in the SP, and 2000 in NASDAQ the first two days of the week, and then a rally on Wednesday and Friday.  In any case, we don't put that much significance on the price action during a short week because of  a major holiday.  Having said that, we also strongly advise you to be prudent, and not to trust the market, if support gives away next week, lighten up on at least any long positions that haven't been acting well, if a stock  kept acting poorly while the major indices advanced  non-stop for three weeks,  then more than likely, it won't act any better if the market begins to go down!

(11-5-04)   If you recall, in the weekly report for week ending 10-22-04, we listed 3 conditions which if they were met,  it would mean that there was a 72% probability -according to our system- that  NASDAQ  would rally above 2020, and a 67% probability that the SP would rally above 1145.  The conditions were met in the following days, and the indices did rally above the target levels. All in all,  since 10-25-04, the major indices have gained between 7% to 8%, with half of the gains taking place before the election, and the other half of the gains taking place after the election.  At the moment, almost  every investor is confronted with the same two  questions; a) is the rally of the past 10 days the "kick-off" of  a multi-month bull move similar to what we got from March '03, to January '04, or, is it the last leg of that very same rally? And b) given that the indices have rallied for 10 consecutive days,  is a pullback imminent, or,  is it going to come from higher levels?  

We'll tackle the second question first, since it has to do with the  behavior of the market in the  very short-term, and  our opinion is based strictly on fact, leaving very little room for error.  Statistically speaking, after a 7%- 8% gain achieved by the major indices over 10 consecutive days of rising prices,  the probability of a  pullback in excess of 3.5% is nearly  60%, based on 25 years of market data. However, according to the same data, there is roughly a 30% probability that the indices will rally  another 3% to 5%, before there is a pullback in excess of 3.5%.  The SP,  has traditionally  provided the best clues with regards what to expect next.  This is what you have to look for:

If over the next 3-4 trading days the SP stays within a 15-20 point range without trading below support, and by the fourth, or,  fifth day it closes at least 1.5% above today's close, then the odds favoring another 3%-5% advance will be better than even. For example, if over the next 4 trading days the daily highs and lows for the SP are confined between 1180 and 1165, and on the fifth day it closes at 1185, the odds favoring a further rally to 1210-1220,   will be better than even.  Consequently, if the SP stays above support for the next 3-4 trading days, while it keeps making higher highs on an intra-day basis,  you may want to add to your long positions, using the 1160 support level as your stop. 

If over the next 3-4 trading days the SP can't overcome resistance, and it closes below support,  it would signify that the odds favoring that  a pullback is underway, are better than even, in that case  you may want to take some profits, using the 1160 support level as your first  sell stop point. Once  the SP  finds support at the levels listed in the table below and reverses to the upside, use the occasion to add to longs.   

If you are looking for an entry point for NASDAQ, notice that it has double support at 1950. Consequently, we would  look to go long at that level. 

With regards to the first question ( is the rally of the past 10 days the "kick-off" of  a multi-month bull move similar to what we got from March '03, to January '04, or, is it the last leg of that very same rally?) our  opinion is based more on  our own interpretation of our current market observations, rather than previously proven fact, and thus, we have to allow for the possibility that ultimately we will be proven wrong, sometimes it happens!  It has been our observation over the years that multi-month bull moves  start at times of heightened negativism and bearishness, take a look at the total assets  for the  RYDEX  bear funds, they are at levels, that in the last two years have marked intermediate term tops.  The same holds true for  put/call ratios,  volatility ratios,  mutual fund cash levels,  they are near the same levels that in the past have been associated with intermediate term tops. In addition, other asset classes such as bonds, and  the dollar, are on the verge of misbehaving badly. The 30 year bond  appears to have completed a triple top, and it is sitting at critical  double support, if it breaks below  support, the triple top will be confirmed. At the same time the U.S. dollar  has weakened significantly, despite the removal of the uncertainty over the election outcome, despite the huge rally in the U.S. equity markets which theoretically should have sparked  participation by foreigners,  thus, creating demand for the dollar in order to buy dollar denominated securities, and despite  rather positive employment numbers. If three major positive  developments could not aid the dollar what-so-ever, one has to wonder whether the currency has crossed a point of no return, and thus, instead of an orderly decline which everyone seems to think it's a good thing, we are about to experience a currency crisis.  We have never observed a case in which the equity markets  kicked off  a major multi-month bull move, during a time when   bond yields put in  an intermediate term bottom, while  the dollar couldn't seem to find one! Maybe,  the dollar will stabilize, maybe bonds will reverse once again, maybe oil prices will decline below $40.00 per barrel, maybe all kinds of good things will happen, and  none of our concerns will materialize. Never-the-less, the  point is, the overall current  financial conditions are   very  different than the ones usually present at the start of  major bull moves, in fact, many of the present conditions, in previous times  have been  major contributing factors for  intermediate term declines  by the equity markets!.

In conclusion,  we have enough  factual  technical evidence  to be short-term bullish, until proven otherwise. With regards to the intermediate term, we  are quite skeptical,  but open minded.  After all,  the market's behavior  is nothing more but a direct reflection of the collective beliefs, values, and actions of its participants. Today's  financial markets  are "blessed " with a generation of  participants, who have proven over and over, that  they see no reason to make decisions  about their investments,  that are based on investment merit!   In other words, just because it makes no sense under  the current  circumstances  to entertain the idea that  the market is kicking off  a multi-month rally, it doesn't mean that it can not happen. It sure can, for the very simple reason that the majority of market participants don't employ common, or, financial sense in making market decisions,  which at times, causes the market to act in ways that  can't be explained,  understood thru, or,  be associated  with any  kind of   financial, or,  economic principle and theory. 

(10-29-08)  Last week the bears were unable to follow thru, and the bulls were able to snatch victory out of the jaws of defeat. Objectively speaking, the technical picture is positive and we ought to expect higher prices. However, any forecast and prediction for this coming week can be turned upside down due to the election outcome. The best advise we can give for next week is for each investor to ask himself/herself this question:

 "What would  hurt my financial goals the most, waking up in the morning and finding out that by waiting for the smoke to clear I missed out on the first 5% of the advance, or, by being fully invested to avoid  missing out on  any gains, I lost 5% of my invested capital?"  

The technical picture and price action suggests higher prices, but we suggest that investors stay on the sidelines until the smoke clears!

(10-22-08)  Last week's market action  was -in our view- among the top 10  most fascinating ones in 15 years that we have been students of the markets. Bullish investors continued to sell low-beta stocks (Dow/SP500) and invest the proceeds in high beta ones (NDX) betting on the traditional positive seasonality between late October and the end of the year. As we explained last week the goal behind the  re-positioning, is to maximize  returns by being over-weighted the NDX, which tends to out-perform both the Dow, and the SP500 during this time of the year. Although the re-positioning may produce somewhat bearish price action in the Dow, and in the SP500, overall, it is not bearish for the equity markets as a whole, because money is NOT leaving the market, it is simply re-invested in another sector.  Moreover, the preference for NDX stocks indicates a willingness -although misguided-  by investors  to take on more risk.  A robust preference for risk, is at least for the short term, bullish. The market would  be in trouble, if  investors were to start  selling both low, and high beta stocks, and  moved into cash. In other words, if investors were to suddenly start selling NDX issues,  it would indicate an increase in risk aversion, which is bearish for the markets. Between Monday and Thursday of last week, investors kept  pilling up on NDX issues demonstrating a robust preference for risk, ignoring  higher oil prices,  a lower dollar, and increasing  uncertainty over the outcome of the upcoming elections. Finally on Friday,  disappointing earnings and/or guidance from  Microsoft, Amazon.com , Broadcom, and Ericsson, in addition to  higher oil prices,  a lower dollar, and increasing  uncertainty over the outcome of the upcoming elections, all together conspired  to bring rain to the bulls' parade, forcing them to sell their high-beta darlings.  Obviously if that was to continue, it would indicate a change in the dynamics of the markets, and the expected outcome ought to be a bearish one. Friday was a victory for the bears, but the key thing is continuation. Since NASDAQ has been the bulls' preferred vehicle, if there is a change in investors'   beliefs, expectations, convictions, and preferences, to less bullish, or to outright bearish, it will immediately show in NASDAQ's price action, and in its technicals. As of Friday's close the picture is neutral, with a modestly bearish bias, here are the reasons why:

 1.  "Technically" speaking the markets in general, and NASDAQ in particular, finished the week at a pivotal point, and it is equally possible  to reverse to the upside, or, to continue lower. The NASDAQ  McClellan Oscillator tested the zero line and turned back down, which is  rather usual behavior, and it doesn't reveal much. Notice  that in December of 2003, the Oscillator backed off, but within two days it turned positive. Also notice that in April of 2004, the Oscillator again backed off, and then continued lower. In other words,  Monday's and Tuesday's action will tell us the real story. If the Oscillator turns positive, and NASDAQ closes above 1960, then Friday's decline was another pullback within an ongoing rally, if the Oscillator  falls deeper into negative territory, and NASDAQ closes below 1887, then Friday's decline  represents a key reversal day. 

2. We get the same picture from examining investors' sentiment as expressed by the RYDEX Asset Ratio (see chart below). Notice that  in the past, most of the time the ratio had to decline to lower levels from its current of 1.09, before we got a rally, however, there have been TWO times in the last 12 months  that rallies started with readings equal to the present one. Consequently, if the ratio declines further, and  markets continue lower next week,  it would suggest that Friday's decline  represents a key reversal day.  If the ratio arrests its decline and it turns up along with the markets within 1-2 trading days, it would suggest that Friday's decline was another pullback within an ongoing rally for NASDAQ, and a shake-out for the Dow, and the SP500. 

 We also get the same picture from the hourly charts, and from examining a similar price pattern  that took place twice last year (see charts and comments below the  RYDEX chart)

Notice  that in March of 2003, and again in August of  2003, a very similar price pattern resulted in an upside break-out. Things are quite different between now and then, and we are not implying that the current  outcome will  also be an up-side break-out,  we are simply pointing out the fact that Friday's action could indeed turn out to be a key reversal,  but as it stands right now it is premature to come to such conclusion. For the bears to declare victory, they must be able to follow thru,  and to close below support not only the SP/Dow, but also  NASDAQ, as well, which has been  carrying the bullish torch. 

 4.  It must be noted that both NASDAQ and the SP have held above critical support at 1887, and 1091 respectively. Consequently, by definition the trend is still UP, and the bears are not in complete control yet, despite Friday's decline.

Notice that the 1887 level, represents both channel support, and also a 38.2% Fib. re-tracement level.  In order for the  bullish case to stay alive, 3 conditions must be met next week:

1. NASDAQ  must remain above 1887.

2. It must close above its 50 hour m.a. at 1925.

3. Then, it must follow thru with a close above 1960.

If  all three conditions are met, the  probability -according to our system- of a further rally to 2020, or higher,will stand at 72.15%. A  failure  at any of these 3 points,    especially at 1887, will  eliminate most of the bullish possibilities. If NASDAQ closes below 1887, the  probability -according to our system- of a further decline to 1835, will stand at 85.76%, and if  NASDAQ closes below 1835, the  probability -according to our system- of a further decline to 1750, or lower, will stand at 61.88%,

There is an outside chance that NASDAQ could decline to 1860, or, 1835, and try to rally from either of those two points.  If that happens, then  how it negotiates with resistance at 1890, will be critical.

Notice that   support at 1091.68  has not been tested, yet.  The 1091.68  level   represents both channel support, and a  61.8% Fib. re-tracement level. 

In order for the  bullish case to stay alive, 3 conditions must be met next week:

1. The SP must remain above  1091.68. (1091.68 is the line in the sand)

2. It must close above its 50 hour m.a. at 1106.

3. Then, it must follow thru with a close above 1126.

If  all three conditions are met, the  probability -according to our system- of a further rally to 1145, or higher, will stand at 66.67%. A  failure  at any of these 3 points,    especially at 1091.68, will  eliminate most of the bullish possibilities. If the SP closes below 1091.68, the  probability -according to our system- of a further decline to 1080, will stand at 87.18%, and if  the SP closes below 1080, the  probability -according to our system- of a further decline to 1055 or lower will stand at 62.57%,

NASDAQ:  1887  is critical. If it holds, and NASDAQ reverses to the upside while the McClellan Oscillator turns positive, then cover shorts and  reverse to  long. If the 1887 level doesn't hold, do nothing, or,  add to your short position.

SP500:  1091.68  is critical. If it holds, and the SP500 reverses to the upside while the McClellan Oscillator turns positive, then cover shorts, and reverse to   long. If the 1091.68 level doesn't hold add to your short position.

(10-15-08) Considering the price action that took place last week, most investors are probably  wondering  "Is the rally over, or, last week's decline was only a pullback, and the indices are about to resume their advance?"

Last week's action gave us the opportunity to make some very important and helpful observations:

a) First of all, the overall technical condition of the market has turned from positive to just neutral, which reflects just what one would have expected after a 3.5% decline. In other words, "technically" the markets  are neither stronger, or, weaker than their price action. Last week's action didn't create either a  positive, or, negative divergence between price and technicals.

b) The  Dow was a notable "lager" while  NASDAQ, was the market's  leader. Some market observers view the under-performance by the Dow, as a "negative divergence"  and they try to read something into it. At this particular point in time,  the Dow's under-performance -in our view- doesn't mean anything, in fact, if it is viewed in the proper context,  it reflects exactly the type of action  one would expect going into the end of the year. The expectation among investors of all colors, is that the markets  will  soon start their traditional "end of the year rally."  If you examine all the "end of the year" rallies that have taken place in the last 10-15 years, you'll see that NASDAQ has outperformed the rest of the indices the majority of the time.  Currently, the markets are mostly dominated by hedge funds which  need to outperform their benchmark index by a certain percentage, in order to get paid at the end of the year. All  the performance data that have been published up to now,  suggest that most hedge funds have not made any money this year, consequently, the next two months represent the last and only opportunity hedge fund managers will have to turn things around, and finish the year with both absolute and relative  positive returns, so they can collect their  performance fees.  So, if you are a hedge manager, and you are counting on the "year end rally" to bail you out, you want to get the most out of it. Recent history has taught you, that NASDAQ tends to have outsized returns going into the end of the year, so, it is a "no brainer" you sell your  low-octane senior stocks,  and  you load up, on the high octane crap, NASDAQ is so well known for. In summary, what is happening right now, is that hedge fund managers -and to a lesser degree, mutual fund mgrs.-  are trying to boost their yearly performance by overweighting the sector that tends to outperform  this time of the year.   That's all there is  to it,  there is no fundamental  conviction,  investment merit, or  intellectual  justification for what is happening, money managers are simply acting in their own best interest, so, don't try to read anything else into it, and do not consider the Dow's uninspiring performance as a "sign" of  any kind.

c) The inflow/outflow charts below provide visual confirmation of  money managers'  rotation out of the senior sector, and into the junior one. Notice how outflows have increased at the NYSE, while inflows have increased at NASDAQ, suggesting that money managers are reducing their exposure to the senior sector, and  they are using the proceeds, to increase their exposure to the junior sector.

d) The chart above, shows the 10 DMA of the up-volume, as a percentage of total volume for NASDAQ. Notice, that  up-volume  declined during every rally that took place this year, with the  exception,  of the latest one that started in the middle of August. Each high made during the current rally, has been accompanied and confirmed by higher highs in up-volume. It is very rare for a rally,  that is accompanied by expanding up-volume,  to be abruptly aborted without any warning signs. 

e)  The  rising channel that has defined NASDAQ's price action thru-out the rally, is still intact, and thus, by definition  the trend is up.

Consequently, the picture that emerges after taking into consideration the observations we mentioned, re-affirms the opinion we stated several times last week, that even if the overall rally is in jeopardy, the odds favor one more push to the upside with NASDAQ leading the way.  So, with that in mind, let's examine the hourly charts of NASDAQ, and  of the SP500, in order to determine the pivot points which  will confirm, or, refute  the scenario that calls for another push higher.

Notice that the 1887 level, represents both channel support, and also a 38.2% Fib. re-tracement level.  In order for the  bullish case to stay alive, 3 conditions must be met next week:

1. NASDAQ  must remain above 1887.

2. It must close above its 50 hour m.a. at 1927.

3. Then, it must follow thru with a close above 1950.

If  all three conditions are met, the  probability -according to our system- of a further rally to 2020, will stand at 75.34%. A  failure  at any of these 3 points,  will call into question,  the validity of  any bullish expectations.

There is an outside chance that NASDAQ could decline to 1860, or, 1835, and try to rally from either of those two points.  If that happens, then  how it negotiates with resistance at 1890, will be critical.

Notice that   support at 1101 held, which is encouraging because  it is also  the 50% Fib.  re-tracement   level. Pullbacks,  within a rally, that stop at the 50% Fib. re-tracement level are rather common. In fact, the SP could fall further to the 1091.68,  without damaging the bullish case, because the 1091.68 level represents both channel support, and a  61.8% Fib. re-tracement level. 

In order for the  bullish case to stay alive, 3 conditions must be met next week:

1. The SP must remain above either, 1101, or, 1091.68. (1091.68 is the line in the sand)

2. It must close above its 50 hour m.a. at 1121.

3. Then, it must follow thru with a close above 1126.

If  all three conditions are met, the  probability -according to our system- of a further rally to 1145, will stand at 68.11%. A  failure  at any of these 3 points,  will call into question,  the validity of  any bullish expectations.

NASDAQ:  Possible  test of the 1887 level. If it holds,  open  long position, if it doesn't,  do nothing. Add on a print above 1930, and  1950. If  it fails to get thru either, take profits on the long position and switch to short.

SP500:  1121 is critical,  long above it (add on a print above 1126) and short below it, prepare to cover between 1100 and 1091. If 1091 is taken out, in all likelihood, the rally has failed and the SP is headed to 1080, and perhaps 1055-1050.

(10-8-04) The indices did stall at resistance but there are two important observations that can be made:

a) The short-term up-trend is still intact, which means, by definition until the up-trend is violated the indices are in a short-term  bullish mode. 

b)  The intermediate-term down-trend is still intact, which means, by definition until the down-trend is broken the indices are in an intermediate-term  bearish mode. 

Consequently, next week we can expect either another test of intermediate term resistance, or, another test of  short-term support. If short-term support is tested early in the week, we would expect  a bounce which may carry the indices back up to intermediate term-resistance  the week after. Therefore, if the decline of the past two days continues on, short-term traders ought to be buyers if short term support holds. If the indices turn around at the opening on Monday, then we'll get another test of intermediate term resistance by Tuesday-Wednesday. If the markets can't overcome resistance -once again, or, they do just marginally-  and they turn down again, then, both short and intermediate term traders ought to be sellers. 

Take a look at the charts of oil/bonds/gold/dollar/sp500. Bonds appear to have made a double top, while oil has broken out and is moving higher. Back in April, the exact same set-up resulted in lower equity and gold/gold stock  prices. History doesn't always repeat itself, but it is always a good guide with regards to what we ought to be looking for. Therefore, if bond prices continue to fall while oil prices keep rising, we would expect a top in equities. If higher yields can help the dollar to stem its fall, then we would also expect a top in gold and gold/gold stocks. However, if  bond yields/oil continue to  rise, and the dollar continues to fall, then we could get an explosive parabolic move to the upside in gold/gold stocks. We believe this can happen later in the year, or, early next year, but not now. Why not now? We just don't think  the  FED will stand aside and allow -going into the election- a parabolic rise in oil and gold, while bonds, the dollar, and equities sink in sync!

(10-1-04) The indices fell early in the week but picked up by mid-week and accelerated sharply on Friday erasing all of the previous week's losses and turning pretty much every indicator positive. Technically speaking one ought to expect continuation and  a test of resistance, which is not all that far from Friday's closing prices.  The dramatic advance on Friday legitimately raises doubts because it came amid rising interest rates, higher oil prices, and disappointing economic data. However, notice that sentiment -as measured by the assets in the RYDEX bear funds- has remained for the most part, negative. Consequently, the rally may have more to go. For now everything has turned positive and the next test will come with a test of resistance. If resistance is overcome, we ought to double up on the long position from 15% to 30%. However, if the indices stall at resistance,  it may be a good sign that Friday's sharp rally was due to short covering and it is already over.