Summary of Index Daily Closings for Week Ending Mar 26, 2004
|Date||DJIA||Transports||S&P||NASDAQ||Jun 30 Yr Treas |
|SHORT TERM FORECAST |
(Next Two Weeks)
|Market Rise||High||Very High||80%|
|Very Low Under||20%|
|INTERMEDIATE TERM FORECAST |
(Next 12 Weeks)
|TREND||PROBABILITY||Substantial||800 points+ (DJIA)|
|Substantial Rise||Low||Market Move||200 to 800 points (DJIA)|
|Market Rise||Medium||Sideways||Up or Down 200 (DJIA)|
|Substantial Decline||Very High|
This week the Dow Jones Industrial Average fell sharply to new intraday and closing lows, hitting 10,012 on Monday and closing at 10,048 on Wednesday, as was projected by our Short-term Technical Indicator Index reading of minus (-) 12.00 last week. Since these lows hit, we saw an impulsive countertrend rally on Thursday on mediocre volume followed by weak follow-through on Friday. The decline from February 11th to March 24th (using closing prices) marked the end of the first leg of what promises to be a huge intermediate term decline. Prices came very close to their 200 day moving average after blowing through their 50 day MA. This was expected. We cited a target bottom for this move of 9800 to 10,000 in last week's newsletter to be followed by a bounce that tests its 50 day moving average. Look for a bounce into the 10,350 to 10,500 area. Should prices fail to exceed formidable resistance at the 50 day MA, expect fear to return as investors realize the Bear is back.
The bounce-back rally is being fueled by a 90 percent volume down day on Monday, indicating short-term selling exhaustion. Once the trend change was evident, shorts had to cover their positions, supporting the buying on Thursday. Ironically, those most pessimistic about equities must buy stocks and fuel the rally. It will be critical for the Bulls to see demand volume pick up on further rallies.
|Equities Markets Technical Indicator Index (TII) ™|
|Week Ended||Short Term Index||Intermediate Term Index|
|Nov 14, 2003||(42.75)||(52.33)||Scale|
|Nov 21, 2003||0.38||(51.90)|
|Dec 5, 2003||(31.75)||(55.18)||(100) to +100|
|Dec 12, 2003||(5.83)||(54.43)|
|Dec 19, 2003||(6.50)||(47.03)||Negative (Bearish)|
|Jan 2, 2004||(48.17)||(40.33)||Positive (Bullish)|
|Jan 9, 2004||(96.50)||(39.28)|
|Jan 16, 2004||(20.00)||(40.65)|
|Jan 23, 2004||(8.13)||(32.15)|
|Jan 30, 2004||2.81||(25.98)|
|Feb 6, 2004||11.75||(20.19)|
|Feb 13, 2004||(68.25)||(22.19)|
|Feb 20, 2004||(30.00)||(22.36)|
|Feb 27, 2004||(31.00)||(20.17)|
|Mar 5, 2004||16.00||(17.17)|
|Mar 12, 2004||( 9.00)||(14.70)|
|Mar 19, 2004||(12.00)||(27.60)|
|Mar 26, 2004||73.00||(38.35)|
This week the Short-term Technical Indicator Index comes in at positive 73.00, meaning we can expect the equity market to move up next week. This indicator is a useful predictor of equity market moves over the next two weeks, both as to direction and to a lesser extent strength of move. For example, readings near zero indicate narrow sideways moves are probable. Readings closer to +/-100 indicate with a higher degree of confidence that an impulsive move up or down is likely over the short run.
The Intermediate-term Technical Indicator Index is useful for monitoring what's over the horizon - over the next twelve weeks. It serves as an early warning system for unforeseen trend changes of considerable magnitude. This week the Intermediate-term TII comes in at negative (38.35), warning that a significant reversal remains at risk over the next three months. This indicator once again worsened substantially this week, reflecting the deteriorating technical landscape. It will take massive increases in M-3 to mitigate the damage or the timing, which so far on an intermediate-term basis does not seem to be occurring.
We remain on a Dow Theory "sell signal" and watched Trannies and Industrials hit and confirm new lows this week. The 50 day moving average of the Transports is now downward sloping. Should it cross under the 200 day moving average, another technical analysis "sell signal" will trigger. There are Bearish technical patterns forming all over the place. The Trannies ($TRAN), the NASDAQ 100 ($NDX.X), the Semiconductors ($SOX.X), Gold & Silver stocks ($XAU.X), and the Amex ($XAX.X) have all formed Head & Shoulders tops, just waiting for decisive moves below their necklines to complete. The Russell 2000 ($IUX), the S&P 500 ($INX), and the Wilshire 5000 ($TMW.X) have formed Bearish Triple Top patterns. These are statistically highly reliable technical patterns.
The Dow Transportation Average has completed a major degree Bearish Head & Shoulders Pattern and is poised to break down sharply from here. Trannies prices dropped below both their 200 day moving average and the neckline of this pattern on March 22nd this past week and held there for a few days before bouncing up. The pattern is nearly identical to one that occurred in this average in 2002, about the same time of the year as a matter of fact. Then, as now, when prices first hit the convergence of the 200 day MA and the neckline, they bounced back up a bit, an "in denial" mini-rally before plunging downward. And that is the right word to describe what happened next, Trannies plunged. The pattern we see forming now is probably smaller than what it will look like when it is finished. I wouldn't be surprised to see prices rally back up to their 50 day MA before turning down in earnest, thereby forming an even more alarming, larger Head & Shoulders than we presently see. As it stands now, the minimum price target for a move down is 330 points lower than the neckline to 2420. That's the minimum move, about 15 percent below where we stand now. Most major averages should follow the path of the Trannies.
The next chart shows the Elliott Wave count since the grand top in January 2000. Wave (1) of five down finished its damage in October 2002. Since then we had an A-B-C rally recovering nearly 78.6% (square root of Fibonacci 61.8%) of the first down leg, labeled wave (2) up. The decline from February 11th to March 24th is a minor degree wave 1 of (3) down. It may even be a minute degree wave 1 of a minor degree wave 1 of (3) down. (3) is a biggie, a nasty wave that should take all the major averages far below their October 2002 lows. We are likely in a wave 2 minute wave rally that should take the DJIA up to 10,350 to 10,500ish. An alternate count allows for one more new high to complete wave (2) up. I don't expect the alternate count to develop. I believe wave (3) has started.
Fibonacci numbers appear throughout nature, and are a fundamental law of the physics of the universe. These numbers are 1, 1, 2, 3, 5, 8, 13, 21, 34, 55, 89, 144, 233, 377, etc... Each Fibonacci number is determined by the sum of the prior two Fibonacci numbers. Thus, 8 = 3 + 5. 13 = 5 + 8. Etc... The ratio phi is determined by taking each addend as a percentage of the next number in sequence. For example, 21 divided by 34 equals .618. 34 divided by 55 equal .618. And so on. If 13 plus 21 equals the next Fibonacci number, 34, then the first addend, 13, divided by 34 equals .382 (1.0 minus .618, and the second addend, 21, divided by 34 equals .618. Thus 13 and 21 are mates in a .382 to .618 relationship to 34 (1.000). .382 + .618 = 1.000.
The next chart tracks time - in trading days - between tops and bottoms on a closing price basis, and is an astonishing testimony to the impact of Fibonacci ratios, in particular the ratio phi, in the determination of trend reversal dates, or more colloquially, market tops and bottoms. Every single top or bottom since the Bear market began on January 14, 2000 is a function of a 38.2 percent to 61.8 percent golden ratio with another top or bottom, +/- a few days. Every one! Therefore, it is logical to theorize that future trend reversal dates can also be determined by extrapolating the golden ratio to the next prior sequential top or bottom looking for a phi mate. The following chart lists each top or bottom (each bifurcation point) in date sequential order along with its known phi mate. The color bars identify tops and bottoms' mates. Each color bar means one top or bottom is .382 days from another top or bottom's distance from the 1/14/2000 Bull Market Grand Top. This means that the number of days between that top or bottom and its mate's top or bottom is .618 of the total distance. I skipped a few bars on the chart to avoid making the chart impossible to read. Looks like the next big trend reversal date is scheduled for June 15th, 2004. My best guess is this will be a low ready to reverse upward.
|* 3/7/2000's low is 38.0% of the total # of trading days from 1/14/2000's High to 5/26/2000's Low|
|* 5/26/2000's Low is 38.0% of the total # of trading days from 1/14/00's High to 12/20/00's Low|
|* 9/6/2000's High is 38.3% of the total # of trading days from 1/14/00's High to 9/21/01's Low|
|* 10/18/2000's Low is 38.8% of the total # of trading days from 1/14/00's High to 1/4/02's High|
|* 11/6/2000's High is 37.6% of the total # of trading days from 1/14/00's High to 3/19/02's High|
|* 11/22/2000's Low is 37.9% of the total # of trading days from 1/14/00's High to 4/29/02's Low|
|* 12/5/2000's High is 38.7% of the total # of trading days from 1/14/00's High to 5/14/02's High|
|* 1/3/2001's High is 37.6% of the total # of trading days from 1/14/00's High to 8/22/02's High|
|* 3/22/2001's High is 37.9% of the total # of trading days from 1/14/00's High to 3/11/03's Low|
|* 5/21/2001's High is 62.6% of the total # of trading days from 1/14/00's High to 3/19/02's High|
|* 9/21/2001's Low is 61.6% of the total # of trading days from 1/14/00's High to 10/9/02's Low|
|* 1/4/2002's High is 61.5% of the total # of trading days from 1/14/00's High to 3/31/03's Low|
|* 3/19/2002's High is 63.4% of the total # of trading days from 1/14/00's High to 6/17/03's High|
|* 7/23/2002's Low is 61.7% of the total # of trading days from 1/14/00's High to 2/11/04's High|
|* 8/22/2002's High is 62.1% of the total # of trading days from 1/14/00's High to 3/24/04's Low|
All color bars represent two distances, one .382, the other .618, of the total distance of that bar, each start, phi division, and end point occurring at a market top or bottom.
If we consider the next sequential bottom or top without a mate, 10/9/2002's, and extrapolate how many trading days from 1/14/2000's top we would need to go in order for there to be a golden ratio of .618 to .382, or in other words, what date would be necessary for the number of trading days from 1/14/00 to 10/9/02 to be 61.8% of the number of trading days from 1/14/00 to that date, we come up with June 15th, 2004. How so? 10/9/02 is 687 trading days from 2000's top and June 15th, 2004 is 1111 trading days from 2000's top, a 61.8% ratio. This would leave 424 trading days between October 9,2002 and June 15th, 2004, or 38.2 percent of the 1111 total trading days. As an aside, it is interesting that from the start of the March 11, 2003 rally to its end on February 11th, 2004 was an exact, to the day, 233 Fibonacci number of trading days. It seems that market movements are not random, but rather ordered.
Pretty good news all around. Existing Home Sales rose 2.0 percent in February according to the National Association of Realtors. And according to the Commerce Department, Sales of New Homes popped up 5.8 percent in February. They are up almost 25 percent over a year ago. Low longterm interest rates are doing the job.
Personal Spending rose 0.2 percent in February according to the Commerce Department. They also announced Personal Income rose 0.4 percent. Chain-Store Sales increased 0.2 percent for the week ended March 20th according to the International Council of Shopping Centers and UBS.
Durable Goods Orders rose 2.5 percent in January, however this was on the heels of a downwardly revised January figure of minus 2.7 percent. Excluding transportation - primarily military and civilian aircraft - the Durable Goods figure for February would have been down 0.3 percent. So big ticket orders remain laggard. The Commerce Department also informed us that fourth quarter 2003 GDP remains at a 4.1 percent annualized growth rate. This was about half the reported figure for the third quarter 2003.
The Fed's New York branch President Geithner jawboned about the evils of the federal budget deficit and the U.S. low savings rate. Truth is, with borrowing rates held artificially low - for a such a "robust" economic recovery, that is - what savings would you expect? Duh. Jobless Claims remained about the same they have for several months, at 339,000 for the week ended March 20th according to the Labor Department.
Money Supply, the Dollar, & Gold:
M-3 rose a huge $40.5 billion the week of March 15th, continuing the uptrend since year end. The Master Planners will not tolerate any unauthorized equity market events before November, so it's print and lend, print and lend, all together now, print and lend, sis boom bah.
The Dollar remains up in the face of extraordinary M-3 growth over the past two months. It should be sinking if paper's falling from the skies, the economy's soaring, and inflation is on the rise. It's not, and probably won't for a while. Deflation must be around somewhere. Perhaps in equities?
Look for Gold Shares to initially decline along with the rest of the equity market. The XAU's Head & Shoulders topping pattern is telling us this. Then, when it becomes evident to one and all that something awful is going on - deflation, joblessness, record trade and federal deficit imbalances - demand for Gold for its intrinsic monetary value will lead the gold shares back up, long before other equity averages rise. If a major currency, somewhere, decides to go back on the gold standard, these shares and the metal should rise - and that's putting it mildly.
Bonds and Interest rates:
U.S. Treasury Bond prices would seem due for a pullback given that bullish sentiment, a contrarian indicator, sits at extraordinary highs - near 90 percent - and the MACD has dropped below its 9 day moving average, thereby issuing a "sell" signal. The Elliott wave pattern also seems to argue for an imminent decline. 1987's equity crash was triggered in part by a sharp drop in bond prices and I have to wonder if this could trigger the next down leg in equities in 2004. What I struggle with here is the critical need for low long-term interest rates to fuel the real estate boom the Master Planners have determined is a vital cog in the economic recovery. In other words, technical theory may get trumped in the short-run so that long rates can remain low. The Fed has it within their power to accomplish this so long as foreign investors cooperate with their objectives. So far they have. If the Fed shifts its view and raises short-term interest rates, bond prices likely fall sharply as traders immediately discount several more rate hikes. But that would push equities down even harder. As equities slide, money will shift back into Treasuries, mitigating downward pressure on bond prices. Thus, while we might see increasing volatility in bond prices, I lean toward interest rates remaining low throughout the remainder of 2004.
The current equity rally will likely stall under the 50 day moving averages in most indices, resulting in renewed selling as fear sweeps over the markets as the reality hits that the rally since March 2003 is truly over. There should be a prolonged rush to the exits the deeper the decline goes, selling leading to more fear leading to more selling, likely at least until June - of course in stair step fashion as nothing moves straight down. But if panic occurs, the drop could be vertical at some point along the way. June 15th, 2004 looks like the next major turn date and it most likely could be a bottom. Not "the" bottom, but "a" bottom. This decline is going to surprise. Extreme caution is warranted.
"The Lord has established His throne in the heavens;
And His sovereignty rules over all."
|Key Economic Statistics|
|Date||VIX||Mar. U.S. $||Euro||CRB||Gold||Silver||Crude Oil||1 Week Avg. |
Note: New highs in Gold and Silver. Dollar is up.
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