Summary of Index Daily Closings for Week Ending September 3, 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 a modest 65 points, in line with last week's Short-term TII reading of positive 9.25. Volume remains anemic on this summer rally, averaging a mere 991 million shares traded on the NYSE this week. Monday's was the lowest of the year and Friday's was the second lowest. Not a lot of confidence in stocks right now. As we will see, a significant turn down looks no more than a week away - tops.
Thursday's out-of-nowhere 121 point rally came among whispers the Plunge Protection Team was window dressing the markets for Dubya's acceptance speech. We have no proof of that but there were likely a lot of shorts covering positions that day. The Bear hates everybody. Low volume rallies don't support the view that the public is jumping back in and a sustained intermediate-trend Bull is underway.
Our explanation for that rally is it was a very small degree wave three of a terminating 5 wave rally inside the "c" of an a-b-c correction. The $SOX have hit new lower lows which will put downward pressure on the NASDAQ. It is not unusual for technology stocks to lead the general market lower.
|Equities Markets Technical Indicator Index (TII) ™|
|Week Ended||Short Term Index||Intermediate Term Index|
|May 7, 2004||(28.75)||(47.75)||Scale|
|May 14, 2004||(25.75)||(66.45)|
|May 21, 2004||22.00||(67.23)||(100) to +100|
|May 28, 2004||( 3.50)||(48.48)|
|June 4, 2004||(55.75)||(34.07)||(Negative) Bearish|
|June 11, 2004||(77.75)||(25.92)||Positive Bullish|
|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)|
|Aug 27, 2004||9.25||(39.81)|
|Sep 3, 2004||(39.25)||(40.06)|
This week the Short-term Technical Indicator Index comes in at negative (39.25), indicating a market decline, possibly severe, 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 (40.06).
There are a cluster of five Fibonacci Trading Day time periods converging next week from prior highs or lows in the Dow Jones Industrial Average. Whenever clusters occur, there is usually a very high probability of a trend change. September 8th through the 13th - 4 trading days - mark the turn. Since we are wrapping up a three-week rally, we expect the next turn to be a decline.
From the top on February 11th to September 8th 2004 counts as 144 trading days. Also pointing to September 8th as a turn date is the phi relationship between the number of trading days from the beginning of the Bear Market 1/14/2000 to the 11/27/2002 top to 9/8/2004. From 1/14/2000 to 11/27/2002 was 722 trading days, or a Fibonacci 61.8 percent of the 1168 total trading days from 1/14/00 to 9/8/04. From 11/27/2002 to 9/8/2004 is 446 trading days, or 38.2 percent of that same time period. This phi relationship has held for every single top and bottom over the past four years with another top or bottom.
Pointing to a top on 9/10/04 is the 55 trading days from the June 23rd 2004 top to 9/10/04. Pointing to 9/13/2004 as the start of the next decline are the 34 trading days from 7/26/04's bottom and the 21 trading days from the 8/12/2004 bottom. A turn can occur at any time within this cluster, plus or minus a day or so. So this morning's (9/3's) intraday high of 10,321 may have marked the top. Or, as we believe, there may be one more thrust higher coming next week, perhaps even as late as the following Monday or Tuesday. The Bear is ready to resume its damage according to Fibonacci.
The above chart backs this up as the SPX/VIX ratio has once again risen to crash - or at the very least significant decline - territory. This ratio sits at 78.87 as of 9/2/04. Each decline since February 11th 2004 has started from this near 80 level. Over the past six years the correlation of this indicator with S&P 500 price trends has been uncanny. When levels rise above 70, major tops are near. When this ratio declines to below 35, major bottoms are at hand.
Another ratio - not shown here - that we monitor for hints of imminent tops and bottoms is the 10 Day Average Call/Put Ratio. Whenever this ratio approaches 1.40, a top is near. Whenever this ratio approaches 1.00, a bottom is near. As of Friday, September 3rd, this ratio sat at 1.18. Tops and bottoms don't have to reach these levels for trend turns. But when they do reach these levels, it is further evidence of a key reversal. So we interpret the current reading as neutral, conducive to either more rally or a turn down.
The Elliott Wave count for the DJIA indicates the rally since August 13th is about over. Prices fell just short of the 78.6 percent Fibonacci retrace of minute degree wave 1 down (green). The move up since wave 1 bottomed 8/12/04 has occurred in a "three" indicating it is corrective, an a-b-c wave 2 up of a larger degree minor wave 1 (red). Minuette degree c is just about complete. I count the smaller micro degree waves 1 through 3 inside c up complete (not shown) with 4 in process and 5 a final thrust up to finish this rally, probably inside our cluster time frame of the 8th through the 13th of September.
Interestingly, the RSI is not oversold, but the move up is so weak that it may not get there as it has now reached the same level it did at the three prior tops since February 11th. The MACD looks tired as its upward slope has flattened and the histograms stopped increasing.
Prices moved back above the 200 day moving average - but not decisively. The 50 day moving average remains pointed down and solidly below the 200 day. The next leg down is a minute degree wave 3 inside a primary degree wave (3). This next slide should be significant.
Semiconductors Are Crashing!
Back in June 18th 2004's issue no. 59, we showed a chart of the Philadelphia Semiconductor Index when the price was at 453 (available in the archives at www.technicalindicatorindex.com). We showed a Bearish Head & Shoulders top with a minimum downside target of 300. The way we put it was, "If ever there was a chart that looked ugly, and signaled a stock index about to float down the river, it's the Philadelphia Semiconductor Index ($SOX)." Today this index closed 96 points below that level, down 21 percent. Semiconductors have crashed.
But the crash is much worse than that. Since January 2004, the $SOX are down 205 points - 36.4 percent. On Friday alone, this average fell more than five percent. Yet, it is going lower. The minimum downside target remains 300. That is only a minimum. Both moving averages, the 50 day and 200 day, are pointed down, with the 50 day below the 200 day and prices sharply below both. The MACD didn't move up very far on the recent rally and is now once again rolling over. The RSI can't seem to get out of oversold territory. Getting to minimally neutral readings is a major coup. This does not bode well for NASDAQ. With the general equity market set to decline hard, this index could move back to levels seen in October 2002.
The Economy: The Commerce Department reported on Wednesday that U.S. Construction Spending rose 0.4 percent in July. I have no doubt about that. Drive around and there is construction everywhere. But vacancies are everywhere too. Question is, will enough folks purchase what is being built?
The Institute of Supply Management announced that its Purchasing Managers Index of Manufacturing fell to 59 in August from 62 in July. Readings above 50 represent growth. The National Association of Purchasing Management added that Midwest Business Activity fell to 57.3 from 64.7 in July.
The Commerce Department reported on Tuesday that Personal Incomes rose 0.1 percent in July, the weakest pace in two years.
The Labor Department reported Friday that 144,000 non-farm payroll jobs were created in August, far below the 250,000 to 300,000 needed each month to support a recovery. Thursday we learned that Jobless Claims rose to 362,000 last week, again far too high for a recovery.
CNN/Money conducted a survey on Tuesday, asking website visitors (www.cnnmoney.com) " What are you most concerned about?" The results: "Job Market" came in at 55%, "Oil prices" 16%, " Stock Market" 16%, and "Unconcerned" was 13%. It's this that leads me to believe Kerry could surprise the pundits in November.
And of course, the net result of all the above is that Consumer Confidence took a big hit in August, down to 98.2 from 105.7 in July according to The Conference Board, a business research group.
Money Supply, the Dollar, & Gold: M-3 jumped $36.5 billion last week on a seasonally adjusted basis according to the Federal Reserve. In spite of last week's increase, M-3 is up a mere $6.7 billion over the past 10 weeks and is actually down $9.8 billion over the past 8 weeks. Our research shows that whenever M-3 is flat to down, equities decline. The Fed knows this and may be sensing it is time to preempt another equity decline, especially down the home stretch before the elections. They did this back in April/May 2004. One week does not make a trend, but we will be watching to see if the Fed puts the liquidity pedal to the metal.
I've been reading that the U.S. trade-weighted Dollar is stronger with many forecasting it will rise. Well, the fact is the U.S. Dollar is not stronger, is not rising. Since April 2004, it is down 1.78. The Dollar remains inside its long-term downward trend-channel, and sits at the top, meaning the probability for this mature trend to continue down is high and that its price is about to bounce to the lower boundary of the channel. A Head & Shoulders Top supports this view. A break below 87 should lead to a drop to the low 80s. Should the Dollar bust decisively above 90, the long-term trend would be broken and the outlook would turn Bullish.
Gold remains inside its long-term rising trend-channel. A Bearish Double Top warns, but so far so good. The Head & Shoulders Top has lost its proportionality, so is less reliable. We wait.
Bonds and Interest Rates: Last week we mentioned that the 30 Year Treasury Bond's MACD and RSI looked like they have topped and that one more thrust up would get us a neat and tidy Fibonacci .786 retrace of wave 1 down of (3) down (markets seek order). It appears that thrust occurred this week and that the next leg down, wave 3 of (3) is underway - or soon will be.
The ominous Head & Shoulders Top shown above (chart courtesy of www.stockcharts.com) will be confirmed with a break below 102.5. Should that occur, there is a minimum downside target of 85.0.
What is interesting is that so many markets appear to be topping all at once. Equities, Commodities, Bonds, the Dollar, and perhaps even Metals. How is this possible? The one scenario that fits all is Deflation. Central banks would no doubt flood markets with liquidity should that ugly beast appear, which would put more pressure on Bonds and the Dollar to tank. Markets may decline in sequence, not necessarily simultaneously, as in the short-run an equity collapse would no doubt sustain Bond prices. But money-pumping would quickly change that. Just a thought.
In Loving Memory of Robert D. McHugh, Sr.
Once in a lifetime a larger than life character is born leaving the world forever changed by his mark. This newsletter is dedicated to the memory of my best friend and father, Robert D. McHugh, Sr., who was called home to be with his Lord and Savior, Jesus, this week.
Not all are blessed with a loving home, a dedicated father, whose sole purpose was his family. I was lucky enough to be one of those few.
My thoughts journey back to the days of our youth and backyard baseball. Dad's steadfast friendship, guidance, great sense of humor, and larger than life outlook was the legacy that impacted my life and the lives of so many others.
He was born to the late Charles McHugh and Agnes Murphy, brother to Charles and Patricia, earned his Eagle scout merit badge, and was a star running back for his high school football team, Colt Memorial High in Bristol, Rhode Island. This earned him a scholarship to the University of Brown when the Ivy League was the powerhouse of college football, where he was recruited to be the tailback along with another young man, a quarterback by the name of Joe Paterno. Putting country first, Dad forfeited that opportunity and enlisted in the Navy at the tender age of 17, early in 1945, in the middle of his senior year of high school. When he came home after the war, he played three years of semipro football, then attended the University of Rhode Island, graduating in 1953. He married my wonderful mother, Joan Norine Mycock on August 1st, 1953. He joined General Electric for thirty-six years of distinguished service which included receipt of the "One-in-a-Thousand" award from Jack Welsh. He was a devoted husband and father, never missing a sporting or school event for any of his children, myself, Lori, Greg, and Matt. He showed us who Jesus was by his selfless acts of love day in and day out, taught us what it was to become a man, or what wonderful characteristics to look for in a husband. We laughed often around him, saw our mother's eyes sparkle with joy whenever he was with her, and never let us know when times were tougher than we thought they were. He was inducted into the Rhode Island Hall of Fame in Bristol in 1987. He retired that year to be with his gravely ill wife, our mother Joan, and nursed her as only a best friend can, keeping her spirits alive and making sure she passed in peace in 1993. He loved the Lord and devoted his retirement years to service for Him in volunteer work, and enjoying time with his children, our spouses, and his grandchildren.
And in the end he battled cancer with a courageous resolve he foreshadowed as that fresh faced seventeen year old from Rhode Island, marching off into WWII. And although he'll be remembered at General Electric's Aerospace Division for committing thirty-six years, and although the United States Navy decorated his honor with three war metals for duty in the Pacific, and although Audubon, PA recognized his vision and hard work that turned an empty lot into a community youth center and little league as its first commissioner, it is the role of Dad he will be most remembered for . . . what a man, so deserving of the title.
Until I see you again, Dad.
Bottom Line: Markets appear ready for key reversals next week with major declines set up according to the chart patterns, Elliott Wave counts, and several reliable technical indicators. Should volume rise on any decline, gang way below. Caution is warranted.
"Jesus said to her, "I am the resurrection and the life;
he who believes in Me shall live even if he dies."
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|Key Economic Statistics|
|Date||VIX||Mar. U.S. $||Euro||CRB||Gold||Silver||Crude Oil||1 Week Avg. M-3|
Note: VIX complacent, Gold down, Dollar down.