Summary of Index Daily Closings for Week Ending August 20, 2004
|Date||DJIA||Transports||S&P||NASDAQ||Jun 30 Yr Treas |
|SHORT TERM FORECAST |
(Next Two Weeks)
|Market Rise||Medium||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)|
This week the Dow Jones Industrial Average closed up 287.61 points to close the week at 10,224.14. All other major averages were also up. However volume has been low on the rally, typical of a Bear market correction designed to shake out the shorts and lure in the longs. The Bear hates everybody.
We ran into a similar rally in late July that had the markings of hitting Fibonacci 61.8 percent corrective levels - but that rally failed at 50 percent. This one appears to have better legs under it and should manage to reach that retrace level. The advance may get choppy from here as momentum starts to wane. Perhaps a few days down followed by another three to five up before completing.
Sentiment remains Bearish - which is short-term Bullish - per the 10 Day Average Call/Put Ratio. As of August 20th this ratio was 1.05. Levels just below 1.00 indicate extreme Bearish sentiment and are where rallies begin. Levels above 1.40 are where Bullish sentiment is at an extreme and are where strong declines begin. This is somewhat surprising after a 287 point advance in one week. Nevertheless, investors remain concerned about the risk of a substantial decline. More upside is necessary.
|Equities Markets Technical Indicator Index (TII) ™|
|Week Ended||Short Term Index||Intermediate Term Index|
|Apr 23, 2004||94.00||(22.69)||Scale|
|Apr 30, 2004||(33.25)||(34.88)|
|May 7, 2004||(28.75)||(47.75)||(100) to +100|
|May 14, 2004||(25.75)||(66.45)|
|May 21, 2004||22.00||(67.23)||(Negative) Bearish|
|May 28, 2004||( 3.50)||(48.48)||Positive Bullish|
|June 4, 2004||(55.75)||(34.07)|
|June 11, 2004||(77.75)||(25.92)|
|June 18, 2004||(40.25)||(31.17)|
|June 25, 2004||(34.00)||(26.10)|
|July 2, 2004||(41.50)||(27.64)|
|July 9, 2004||(32.50)||(30.21)|
|July 16, 2004||(33.75)||(41.99)|
|July 23, 2004||(59.00)||(49.98)|
|July 30, 2004||46.25||(52.18)|
|Aug 6, 2004||(38.00)||(50.40)|
|Aug 13, 2004||(15.75)||(49.03)|
|Aug 20, 2004||9.25||(43.82)|
This week the Short-term Technical Indicator Index comes in at positive 9.25, indicating a sideways move is probable. 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. Market conditions can change on a dime, or the Plunge Protection Team can come in and temporarily stop market slides, so it may be unwise to trade off this weekly measured indicator.
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 (43.82).
The top chart on the next page compares the DJIA against the University of Michigan Consumer Sentiment Index. The correlation is nearly perfect. While the two indices often move contemporaneously, back in 2000 the U. of Michigan Sentiment Indicator led the DJIA down, giving it a six month advanced warning. Usually when one of the indices strays from the other - takes the lead - the other follows. Currently we have the U. of Michigan Index once again out in front - to the downside - forewarning of a significant DJIA decline.
The second chart shows the latest relationship between the S&P 500 and the VIX as of August 20th, 2004. The ratio sits at 68.54, a level seen at market tops, not at the beginning of intermediateterm market bottoms. Whatever rally occurs from here, it is not the beginning of a sustained Bull advance. In fact, this is the level where prior significant declines have occurred.
The above chart shows the weekly correlation of seasonally adjusted M-3 with the Dow Jones Industrial Average over the past two years. The Federal Reserve controls - is charged with managing - M-3 "to maintain a stable currency." M-3 varies from either changes in borrowings at commercial banks or from the buying and selling of U.S. securities by the Fed.
Clearly there is a direct correlation between M-3 and the DJIA, a causal relationship. Whenever M-3 rises for more than two months, the DJIA rises. Whenever M-3 plateaus or declines for more than two months, the DJIA declines. It takes M-3 from 2 to 6 months to effect changes in the DJIA. The green arrows mark rises and the yellow arrows mark plateaus and declines. I've labeled matching pairs with the same letters. Thus, the rise in M-3 identified as A caused the rise in the DJIA identified as A. The plateau in M-3 marked B led to the decline in the DJIA marked B. And so on.
There appears to be some degree of correlation as far as length of time, and some degree of proportionality as far as magnitude of changes - more so in the case of rises. It is important to understand what happened with M-3 decline D and M-3 rise E. A rather lengthy M-3 plateau/decline during the latter half of 2003 led to a DJIA decline in early 2004 that had all the markings of a huge violent stock market debacle. World markets were crashing - China, India, Russia - and the U.S. market was about to go. The Fed stepped in and pumped enormous amounts of M-3 liquidity into the system to prevent a crash. They succeeded in suspending it, but the corresponding rise identified as E in the DJIA was minimal. Had markets not been crashing in March-May 2004, that magnitude of M-3 injected likely would have fueled a spectacular rally. Instead the rally fizzled quickly. Since May 2004, M-3 is once again plateauing, fueling the recent decline in the DJIA marked F.
A slowing economy puts the brakes on one of the key growth engines for M-3, the borrowing/ lending function. The Fed cannot indiscriminately and indefinitely buy securities at will - monetize the U.S. debt - in the hopes of boosting the stock market. That is because the dollar would plummet and foreign investors would dump not only their stock holdings but their U.S. securities holdings as well. In fact, with the last two Fed Funds rate increases, the Fed is tightening, raising short-term interest rates which are used to index floating rate loan prices. In other words, the Fed is gently tapping on the lending brakes, slowing the borrowing function and therefore M-3. This does not bode will for stocks.
The chart on the next page shows the Dow Jones Industrial Average as of Friday. The Elliott Wave count has it completing a minute wave a up of an a-b-c corrective minor degree wave 2 up that should retrace somewhere between 61.8 percent and 78.6 percent of the decline from June 23rd, which we've labeled minor degree wave 1 down. The entire move down from June 23rd is the start of primary degree wave (3) down. The first phase of this major five wave decline (one that should take the Dow below 6000) will be an intermediate degree wave 1. Inside this intermediate degree wave 1 is a five wave decline of which we are currently in wave 2 up.
Next week should bring a minute degree b wave decline - not a significant move - and then the final up move, wave c of 2 which should land somewhere between 10,225 and 10337 for a short-term top. Once complete, we expect a precipitous decline into the fall, one that takes the Dow to at least 9000, minute degree wave 3 of intermediate degree 1 of primary degree (3).
The rally that occurred the last week of July failed to move prices to overbought levels because it turned out to be a minute degree wave iv - typically not a strong countertrend move - of a five wave decline from June 23rd's top. That is why the RSI stopped at 50 and turned south again. Once oversold, wave 1 was complete. Since the current move is a higher degree wave countertrend, we expect it will not be complete until the RSI indicator hits at least 70 (overbought territory) and the MACD turns down. Currently the RSI is only at 54 and the MACD is rising with good momentum. Countertrend minute degree wave 2 up is not complete.
The chart points out the weak volume on this rally, far weaker than the short-term downtrend that completed August 13th. That is to be expected for a corrective move inside a larger downtrend. The series of declining tops and bottoms since February 2004 remains intact.
The next chart is of the Trannies. Prices have been bouncing between their 50 Day and 200 Day moving averages. The Elliott Wave count is the same as for the Dow Industrials. Long-term, the Trannies have formed a perfect picture of Distribution, a Rounded Bearish Top.
As with the Industrials, volume has been weaker during this countertrend rally than during the six week decline form late June. The Relative Strength Indicator is in neutral territory with an expectation of it reaching overbought levels before this rally fizzles out. The MACD has good upside momentum.
The next chart is of the QQQ's, our NASDAQ proxy this week. It has formed a Bearish Head & Shoulders, confirmed by a price break below the neckline. The rally this past week filled a gap on the way down, eliminating the need to send prices back up here later. The minimum downside target is 29. The rally has been on weak volume - like all the other major averages - but there does appear to be room for more upside before the next decline, which should be sharp. Momentum up is good and the RSI is neutral.
One of the major problems for the NASDAQ is the Semiconductor Index ($SOX). This chart remains ugly. We continue to target 290 for this index before an intermediate-term bounce of some significance takes hold. Once again we see a Bearish Head & Shoulders and Rounded Top pattern with a confirmation. The Elliott Wave count supports the pattern, needing a wave 5 down to complete.
Dow Component General Motors Corp. Crashes! Down 25% Since February.
Automotive giant and Dow Industrial's Component General Motors Corp. has crashed, down 25 percent since February 2004. Worse, the patterns tell us there is much more downside to come.
A Bearish Head & Shoulders pattern has completed, confirmed by a sharp break below the neckline. The minimum downside target is 29, obtained by measuring the top of the Head from the neckline and then subtracting that from the neckline. It is a classic pattern of distribution where those in the know dump shares (at the right shoulder) to an unwitting public thinking another new high can be reached, above the head. The smart money won't take that chance. They moved some of their money out at the peak and take the rest out at the shoulder. Panic should soon hit this stock as the amateurs realize they got fleeced and dump. This stock's coming decline should fuel the next leg of the DJIA's slow-motion crash.
Both moving averages are pointed down, with the 50 day significantly below the 200 day. Prices find themselves Bearishly below both.
The Philadelphia Federal Reserve Bank's index of U.S. Mid-Atlantic business conditions declined twenty-one percent in August, coming in at 28.5 versus 36.1 in July. Readings above zero indicate growth and below indicate contraction. The New Orders component fell forty-five percent. Some recovery, eh?
The Labor Department reported that the Consumer Price Index fell, that's right, fell 0.1 percent in July. Core CPI, which excludes food and energy - as if they don't matter - rose 0.1 percent. Go figure. Oil is skyrocketing, yet including energy, the CPI is down and excluding energy, the CPI is up. Hmmm. Makes sense to me.
Labor also reported that Jobless Claims came in at 331,000. Unsatisfactory.
Oil set another new record this week, and nearly hit 50 on Friday intraday. Nobody seems to care. If this parabolic spike doesn't conclude soon, markets most certainly will care. Gold and the Gold stocks already do. They are preparing for a worst case scenario - which is what they are supposed to do, and which is why so many conservative investors accumulate the precious metals. They are rising.
Money Supply, the Dollar, & Gold:
M-3 has plateaued over the past three months, down $8.8 billion on a seasonally adjusted basis from May 17th through August 9th according to the Federal Reserve. Over the past six weeks, M-3 is down $50.5 billion, an annualized decrease of 4.6 percent. As our charts show, whenever M-3 plateaus or declines, it is a forerunner to declining stock prices. M-3's behavior supports our intermediateterm expectation for a continuation of the decline in the major averages.
The U.S. Dollar is being supported by a declining money supply. However, the chart at the top of the next page (courtesy www.stockcharts.com) shows a textbook perfect Head & Shoulders Topping pattern nearing completion. Confirmation of this Bearish pattern would occur with a break below 87. Should this confirmation occur, the minimum downside target would be just below 82. Resistance sits near 88.75 where the 50 Day and 200 Day moving averages have locked horns. The Dollar's price action since late July has been a series of descending tops and bottoms. This is Bearish. The recent price action of commodities seems to be expecting the same.
Oil ($WITC) is in the midst of a parabolic spike. We know that parabolic spikes lead to crashes, violent retracements of the entire move up. The question becomes, when is "up" high enough? The chart at the bottom of the next page shows that there was another parabolic spike in oil a year and a half ago. It started in late 2002 as drums pounded out Iraqi War fears. The spike lasted four months and concluded at the start of the war after a 60 percent rise. The descent was swift, retracing the entire move up in two months, about half the time the rise took. So far the current parabolic spike has occurred over 2 months and lofted prices 40 percent. The RSI and MACD are both overbought - but have not spent anywhere near the time in overbought territory that they did during the 2002/2003 spike. The 50 Day MA is sloping close to vertical. The longer it stays vertical, the higher the probability prices will soon top. Nevertheless, there is no way to call the top here based upon this chart.
Hooray for Gold! It is battling adversity like a Spartan warrior. This week it eliminated two risks to a Bearish forecast. The first - Gold prices bolted from the bottom of their long-term upward trend-channel, and sit comfortably above it. Second - Gold blew up the Bearish Head & Shoulders pattern that was forming and near completion as part of a larger degree Bearish Head & Shoulders pattern. So no right shoulder H&S pattern. It has failed.
Also Bullish - or shall we say less Bearish - for Gold is that this week's price action has deformed the proportionality of the larger degree Head & Shoulders pattern (denoted in orange). The Right Shoulder is losing symmetry with the left. That weakens the validity of the pattern. Further, for this pattern to confirm, prices would have to decline below 375. Gold sits a whopping ten percent above that critical level.
What's left for the Bears is the Double Top formation. That pattern dissolves once prices break above 435. A breakout above 435 would be very Bullish for Gold, and probably very Bearish for world financial asset markets.
The Commodity Research Bureau index closed up 10 points this week. We haven't seen a move up like that in ages. Oil is skyrocketing. Gold is rising. These items catapulting higher all together carry the scent of trouble for the U.S. Dollar. Perhaps there is a financial asset bloodbath about to occur which will force the Fed to pump massive amounts of liquidity into the system. Perhaps.
While the prospects for Gold have improved dramatically over the past two weeks, the Gold Bugs Index, - while also up nicely - has not knocked over the same number of roadblocks that Gold the metal has. First of all, Gold the metal blew past both its 50 Day and 200 Day MA. The HUI ran into its 200 Day MA today and was instantly repelled. Secondly, the RSI for the HUI is overbought, but is neutral for the metal. Thirdly, the above Elliott Wave count down from the December 2003 top remains alive and well. Prices hit the 61.8 percent retrace point of wave 3 down today, a bit high for a 4th wave, but certainly acceptable. The 200 Day MA is trending down. A Bearish Double Top pattern remains in effect for both the metals and the stocks.
On the plus side, both sit in the middle of long-term upward sloping trend-channels. No downside violations yet. Bullish for the HUI is the MACD indicator. It is positive and momentum is up hard.
I found it interesting today that as oil backed off its highs for the day, the HUI also backed off its highs. That makes me wonder if the recent spike in Gold and the HUI is being fueled by rising oil fears. That's okay. That is why many people keep Gold and precious metals stocks in portfolio to some degree or other. Catastrophe insurance. For the time being we remain Bearish the $HUI. Should prices retrace much more of wave 3 down, that view could change.
Bonds & Interest Rates:
The above chart of the 30 Year U.S. Treasury Bond shows an ominous long-term Bearish Head & Shoulders pattern nearing completion. We await prices to break decisively below the neckline, below 102, to confirm. Should this occur, the minimum downside target is 84. The Fibonacci 78.6 percent retrace level of wave 1 down from March to June 2004 is at 112.50 - and prices are just about there - a likely point for minor degree wave 2 up of intermediate degree (3) down to conclude. The Relative Strength Indicator is at overbought levels - has been there a while now - and is due to turn down. The MACD is up but could be running out of steam.
If equities are about to decline in earnest, how could Treasuries accompany them? Wouldn't a flight to quality rally Bonds? Maybe. However, should the Fed respond to an equity event with massive infusions of fiat paper, the U.S. Dollar would likely take a hit and Bonds would follow. Should oil continue higher - perhaps to 55 or 60 - inflation fears (cost push) could ignite a simultaneous Bond and Equity sell-off. The Elliott Wave pattern for both Bonds and the major Stock indices is calling for a wave 3 inside a larger degree 3 down soon. If this count is right, financial-asset markets are at great risk.
Here's a sinister plot. You want to get reelected but the technical landscape is awful, fundamentals stink and that little pronounced fact is leaking like a sieve - despite yeomen's efforts by your people to cook the books - as we approach traditionally the worst season of the year for equities. What do you do to bag an election-guaranteed-win equity rally? Well, after careful deliberation with the Master Planner S.W.A.T. team deep inside the bowels of the Situation room, you decide to matriculate a parabolic spike in crude oil over the summer, and drive fear into the markets. But you support markets - mitigate the damage - with Plunge Protection Team buying. Tell them to bid like mad at the first sign of trouble. Tell them not to worry, their holdings are certain to be worth far more in the autumn. Then just before November, perhaps starting in late September, you stop buying oil. Release supply form the strategic oil reserve. All in the name of "big government to the rescue." Let ' er fall, baby. And as she crashes down like an Athens cannonball diver, markets rally, euphoric that oil is normalizing and all is well with the world. Or, try this. The Master Planners have lost control - the above is simply fiction. Caution is warranted.
"Oh Lord, Thou has searched me and known me,
Thou dost know when I sit down and when I rise up;
Thou dost understand my thought from afar.
Thou dost scrutinize my path and my lying down,
And art intimately acquainted with all my ways.
Even before there is a word on my tongue,
Behold, Oh Lord, Thou dost know it all,
Thou hast enclosed me behind and before,
And laid Thy hand upon me.
Such knowledge is too wonderful for me;
It is too high, I cannot attain to it."
Psalm 139: 1-6
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|Key Economic Statistics|
|Date||VIX||Mar. U.S. $||Euro||CRB||Gold||Silver||Crude Oil||1 Week Avg. |
Note: VIX complacent, CRB, Gold, Silver up. Oil sets a record, above $49, then backs off.