MomentumCycles

MomentumCycles commentary for the open of Wednesday, January 19, 2000:

PCratio is still lurking in the overoptimistic zone, suggesting that the eventual outcome will be some significant retrenchment of price to lower levels. This is not an indicator for precise timing, but sets the probability of the weatherstorm in the future, and can be weeks early with its indications. Anyone who has been through many expirations knows that they have dynamics of their own, unrelated to overbought/sold oscillators, valuations, and even sophisticated support/resistance calculations. During "E" week, price has a greater probability of finding support or resistance at specific strike prices rather than the fibonacci or classical pivots. Thus the 800 strike provided resistance to the OEX today. Another characteristic of "E" week is to shake out the weak hands holding on to deteriorating teenies, with hope for salvation on Friday. Thus, we always expect some up and down motion this week. Some pundants are calling for a short tem low Wednesday or Thursday. This is a possibility as the INDU60 minute Nsync is now almost oversold,its RSI is oversold, and the Rate of Change on the OEX has turned positive on the OEXfibret chart. Also note that the Cyan/YellowDot Trend indicator is still pointing upward on that same chart. OEX Nsync is targeting 809 and the OEX30 min chart has been making higher "tea" handles near the brim of a deep cup. Issue AdvDecl and Flow Rate were both negative on Tuesday. All we are saying is to not be surprised if the OEX bursts up through 800 after a bit more early morning weakness on Wednesday {and possibly Thursday AM} in spite of the overriding P/C sentiment and fundamental valuations. The latter will eventually will win out, but in the meantime there is an expiration to unwind against a cloud of rising interest rates. Expirations are sometimes used by the strategically powerful to maximize leverage. Many option traders are accustomed to looking at lognormal distribution curves since that is what is manifested most of the time. However, there are times such as at expirations and at government interventions in interest rate direction when prices take on a leptokurtic distribution, also known as a fat tail distribution. This can take the OEX to the upper or lower Grey Cone temporarily. The OEX Projection Oscillator is trending in overbought and will turn down as VIXpnf shoots up. And it is guaranteed to do that. Just when is the million dollar question. MOSS and AMOSS have dipped back into Neutral in preparation for another assult on the 800 level for expiration. This would force the shorts to cover positions at 800 and a strike or two above. So, being that the NDX and SPX settlement are Friday morning we should see some more choppiness with an upward bias into that time. Then, when the OEX is on everyone's attention Friday afternoon we should see one hell of a gonzo move. Friday you might want to leg into a long straddle or strangle for 2.5 or less on each leg as the OEX jockies between the then current strikes. Might be best to do this on paper just for edification purposes.

We pointed out the short term non-confirmations of the recent lows in price on the XAU charts{sidebar,charts right side bottom up arrows}.Today saw a move from below the lower 3.5% band to above the moving average.Whether this is the start of something more is yet to be seen.The upper band is doable from the short term oversold condition.Sentiment is about as bearish for the XAU as could be asked for for contrarians.Notice that this was the first short term XAU buy signal generated on the chart since the sells at the 92 highs and subsequent sells at the tests of resistance at the upper 3.5% band.

We said FNM was short term about as overbought as you see,with yesterday's STOCHASTIC 5 near 100.FNM open to close Tuesday 64.5 to 60.75,off 6%.Cover any short term short position{if you entered it on Tuesday's open} on this issue tomorrow near the open for a likely 4+ points.Notice how 30 year T bonds were weak in concert with FNM,and how the short term overbought FNM position Friday reliably predicted T bond weakness Tuesday.

MomentumCycles commentary for the open of Thursday, January 20, 2000:

Looks like the pros are nearly finished cornering the market on teenies and are positioned to run with them into expiration. Thursday morning looks like a gap opening, handing instant wealth to anyone who bought the notion that Wednesday was going to put in a low. The OEZAS dropped to 2 5/8 upon J. Murphy's appearance and pre-earnings report manipulations. It happened so fast that it would not have been prudent to post a www. Personally, I believed enough in the oversold nature of the INDU60 and its Nsync to buy some of the gift handed out in the last hour. CNBC posts their upcoming guests on their website every day. Not a bad idea to note if the upcoming speaker is a "heavyweight" bull or bear. The result of the appearance is usually a transient one, facilitating entries into a position. The first part of the week has been down; the second may be up, with the OEX challenging the 800 level again. Some will attribute the market advance to the lunar eclipse tomorrow, but I will believe it is old fashioned greed in the pits. Keep your eyes on the tape, AdvDecl, FlowRate, S/R pivots, and Vix implied volatility. If you are running TradeStation or SuperCharts, and need the classical or fibonacci pivot code, send an email request to bobrabcd@earthlink.net and I will send them to you. Note how the day session of the snp hit S1 the last two days, and closed above the keyline or center pivot on Wednesday. As the RangeTrader says, that improves the odds for higher prices the next day. Last week and this week are special for OEX traders in that the option premium dynamic and the premium level make for great day trading, IF you are in sync with the action and don't expect more than a few points of gain. A lot of money can be generated trading off support and resistance levels,knowing in advance that this week does not have lasting trends and is prone for reversals.

The Swing Machine is pointing to higher prices on Thursday and Friday. Three statistically probable paths are shown. The market looks to be explosive on the open. It truly looks like a moonshot is coming. That is what expirations are noted for. Note that all three projections show some pullback after the AM settlement of spx and ndx options. The green path shows a push up into the oex settlement on the close, however, maximum gains appear to be in the AM in all three cases. The Swing Machine is courtesy of Clyde Lee. Happy trading.

FNM open was 60 13/16,where the cover short was to have been activated from the STOCHASTIC 5 overbought position discussed on the weekend.Open Tuesday 64 1/8;open Wednesday 60 13/16.We are out with 3.4375 points in one day.

XAU is still under the buy signal seen at the lower band of price{up arrows on XAU charts on sidebar}.Wednesday saw stalling at the moving average.We still feel a tag of the upper 3.5% band is in the cards.We are holding some stock components{not options} as long term calls on the sector.

MomentumCycles commentary for the open of Friday, January 21, 2000:

Those who follow the London FTSE trend and close just knew that the US was going to have a hard day. The big question is, "Did we get a buy indication on Thursday"?. Technically there were a few events that say yes. One of them is the price and TICK divergence. That buy mid-day was accompanied with the classic -1105 TICK level marking bottoms, if even temporary. Then in the final hour there was another price and TICK divergence. The INDU60 chart has a DragonFly reversal candle at that divergence low, as well as oversold Nsync and RSI. Net FlowRate and Adv/Decl were both extremely negative as we often experience on the "Terrible" Thursdays. Even VIXpnf stabilized at its halfway retracement levels in bull and bear swings. Over half the volume on the NYSE in optionable stocks is due to market makers hedging their positions. The skeptical contrarian in me says that minimization of market maker liability has more than a little to do with positioning the cash between 1445 and 1450 for Friday's open. So what happens after the spx settlement on the open tommorrow now that the OEX Jan call Open Interest has been squeezed into submission? If "they" have been shorting stock to reduce January call liability in the large open interest, then there may be some massive short covering, and they clean up again on the OEX closing settlement. I've seen it before with ten to one gains made on the out of the money teenies. Not to say that is going to happen this time- just entertaining myself with some speculative thought in a mixed technical environment. There have been times when the market has been down all week only to make a moonshot on Friday to net the week out towards the unchanged level, so as not to stir up the weekend analysts and massive mutual fund interests. Again, more speculation, and it is best to stick with the technicals. Mr. Biggs is known as Mr. perennial bear, and as usual the market took a spill prior to his late day appearance. Deviating back to a few techincal pictures, the NYA found support at the yellow Midas support line where we might get a bounce. Five day advancing volume is still greater than declining volume. SuperT also found support at a Midas support line. CODIoex indicators are in the whipsaw zone, i.e. pulled into retracement levels...anything can happen here. Trend Exhaustion is still saying that a top is not in. Risk monitor has pulled back to dead center neutral as have the MOSS and AMOSS. Our beautifully accurate CONES made an upper green cone tag on the open and a red cone tag at the divergent low today. A red cone tag can represent a price exhaustion with expectations of a higher close the following day. And the CONE Projection Oscillator has made it back to neutral. Oscillators can be deceiving so when they drop back to the 40% to 60% levels there is a tendancy to find support, or to bounce, or to continue down. If the current bull trend is still alive, then we expect the first two options. There is no denying that the PCratio is waving a red flag, but if you look back to early 1999 you see that it can stay in the Danger zone for months before it relaxes its stress mode. The Equity only PutVol (cyan) chart shows that the odds are high that Thursday was a short term low as it tagged the "Shallow Threshold",as it does in corrections. Of course, it can go higher if there is more serious selling, but it looks closer to a buy than a sell(short term). So our first expectations are for a trading low before considering something more serious. The OEX has dropped back to the weekly support at the PL5Dot on the Sentiment chart. Resistance for Friday would normally be expected at the BRDot cyan level of 791.29 and then the Yellow dot level of 794.31. These correspond with the Green and Red Cones based on implied volatility. You might get a clue on Globex tonight since that is where some of the manipulative activity takes place in positioning the snp for the open. You might also take note of how the FTSE 100 is doing before our open, to get clues for the day's sentiment.

Here are some statistics from the Yale Hirsch Almanac: Fridays close higher 55.9% of the time. Fridays are the second strongest day of the week following Mondays. The 21st day of the month is the sixth strongest day of the month. The 2nd, 9th,10th,20th,and 21st days{in that order} are the strongest.

XAU is basing again at the lower band.There are some bullish divergences present in the present low price,seen best in the price oscillator chart.

MomentumCycles commentary for the open of Monday, January 24, 2000:

Expiration has come and gone. It wasn't as exciting as they can sometimes be in the last hour. It was downhill all week. Last weekend we pointed out the extreme readings in the PCratio, the EquityCP and the PutVolume. They all were suggesting too much optimism on the call side, which meant a downward expiration bias. Interest rates and FOMC fears are keeping a lid on prices. That may continue right into the positive seasonality next week after a bit of post expiration influence has worked itself out. Technically things are getting a bit tense with the McOsc about to drop into negative territory. The net Trend Exhaustion is starting to look like it is peaking out at the zero line. This is a composite of the top and bottom trend exhaustion indicators posted here previously. The TEIdiff gives a better picture of the three zones that it goes through. The CONE projection oscillator is nearing the oversold level, but can trend there if negative "think" continues. Using the matching Projection bands with the Projection oscillator gives the impression that the OEX could tag the lower band on Monday near 775. Other indicators have backed off from extremely overbought to the neutral levels, such as the MOSS and the RISK monitor. Too many interest rate rises will eventually take their toll on equities just as they did in February 1994. The INDU made it all the way down to the 50 day moving average where it bounced last time. The 200 day MA is next if it can't hold here. So, for next week we have some very contrary forces, with the net result to be more of the consolidation to continue the consolidation channel on the Volatility chart.The thing to watch for is to see if rallies get met with more selling like last week.

Overlaying the CBOE equity only P/C ratio with the combined equity plus index shows that levels below 0.35 occur at index price peaks.

"Market Phase and Chart Formation"

These quotes reference an excellent article by Chuck Dukas in the February 2000 issue of Stocks & Commodities. A few of the paragraphs are quoted here to illustrate why the 50 day moving average mentioned above is important. What applies to individual stocks also applies to the indices. The article has some excellent chart examples to illustrate the concepts.

"I assess the movement of stocks in four phases (accumulation, markup, distribution, and markdown), and the crossing of the 50-period simple moving average (SMA) indicating an intermediate bullish or bearish trend exists. I use two periods of closing price above or below the 50-period SMA to confirm the move."

"During the markup and distribution phases, prices must be aove the 50-period SMA, whereas during the distribution and markdown phases, prices must be below. I associate buying with the accumulation and markup phases and selling with the distribution and markdown phases."

As you can see from the INDU chart the Low for Friday came very close to the 50 day moving average. This may indicate that the first three phases are over and the Markdown phase is near. Perhaps it will coincide with the rise in interest rates next month. Here is a description of the Markdown phase per the article:

"The major trend comes to an end (Figures 4 and 11) as price moves below the 50-period moving average. Prices penetrate support for more than two periods. Volume dries up on rally attempts, so it is most advantageous to sell the first pullups. Volume need not expand on downmoves, but breakaway gaps on heavy volume are common. Declines are sharp and volatile, usually a thre-to-one ratio to the downside."

The End of Day Cumulative Volume chart shows that most stocks have been under the markdown phase since last summer, and only major index components continued on up to make new highs. The EODCV has been tracking sideways on the 200 day MA with the DOW moving up to new highs. Theory says that EODCV eventually wins out.

Perhaps another rally before it wins out? Seasonality says we might be in store for a trip up the midband or the upper 3.5% theoretical band on the DJIA,maybe even this week. Remember,the 50 day can act as support in bull markets.

FNM /T bonds have not given a non-confirmation buy signal here,even though FNM is below the lower 3.5% band of price.Previous tags in the past 2 years have given excellent FNM/30 year T bond trades,when accompanied with downside non-confirmation signals.Therefore,no short term FNM/T bond trade is recommended presently.

Will the 63 XAU area hold?This area is well tested previous support.We got a downside non-confirmation buy on the XAU recently,and recommended small ABX positions as a long term call on the sector{not option positions}.This may take a while to work out.Long time readers will remember we saw the wipeout in 1997 in Asia as a long term buying opportunity,as well as oil a buy at 14$ the barrel.Asia came back from the fall 1997 lows,by and large,and oil is nudging 30$ the barrel.Will the XAU at 63{and thus its components} seem the same opportunity in the longer term?Its been a 20 year bear;remember, a while back, Buffet saw silver as a value close to present levels.

MomentumCycles commentary for the open of Tuesday, January 25, 2000:

Monday gave us day 1 for an INDU close under the 50 day moving average. Some believe that two closes under the 50 day ma is the beginning of the markdown phase that follows the distribution phase {which follows the markup phase, which follows the accumulation phase}. Then it starts all over again, usually synchronized with interest rates and presidential election cycles. McOsc closed below zero, bringing in institutional- type selling. Market technician par excellence, Joe Granville, used to say bull markets don't close under their 200 day ma. The INDU low today came close to it but decided to rest on the -3.5% trading band. It would not be surprising to see the INDU test the 50 day ma from below as the 5 day RSI is at 18.19, a bounce level. That would be the yellow channel line on the INDU%b chart also,11200 as of Monday's close. Super T is within one day of hitting the "Correction" level. It will be very interesting to see how bad the damage gets this time. The YR 2000 winter consolidation continues on the Volatility chart. Whether that channel low is at OEX 750 or 735 will soon be revealed. CODIndx was giving a sell alert and momentum sell alert last week. CODIoex was also giving a warning. CONE Projection oscillator made it deep into oversold as the OEX made one of those moves to the Grey cone. The EquityCP and Sentiment are still on sells. Monday's action took the Modified Option Strategy Spectrum down to the neutral to oversold boundary. PCratio still looks dangerous. Cumulative volume is falling like Niagara Falls. End of Day Cumulative Volume RSI's are close to the oversold bounce level. Let's not forget that oscillators can be a trader's worst enemy if a new trend is being established. RISK Monitor is working its way lower and could be considered neutral at this point, but that isn't the lowest risk entry point. No one has been talking about the drop today being expiration related. If the drop today was precipitated by put assignments on expiration Friday, then the drop will be short lived, just in time for end of month seasonality to kick in. But wait, who in their right mind is going to front run Greenspan?

XAU has disappointed again,short term,with a close under previously tested support at 63.We still feel that this index is eventually due for a run to the upper band at minimum,but this may take patience for longer term holders.That is why we recommended holding a small equity component position instead of an option position,as a long term call on the sector.

No short term signals presently available on FNM/T bonds.Charts to the left on the sidebar.