MomentumCycles

MomentumCycles commentary for the open of Monday, October 11, 1999:

Friday's rally lacked breadth confirmation and thus is suspect. When price advances and the 5 day advancing volume decreases, and when you have more new lows and fewer new highs, you have to question the continuation of the price rise. End of day cumulative volume, EODCV, shows a volume and RSI divergence from the INDU. EODCV2 shows a drop in the Volume oscillator and it shows the EODCV hitting resistance at the 20 day moving average. Perhaps it can be attributed to the light pre-holiday weekend volume, or it may be expiration related. A few stocks can move an index around and thus affect open interest and volume. Friday was a good example of why an option trader does not live by breadth alone. The first and main concern is index price movement. It is reassuring if breadth factors are confirming, but they are not essential in the short run. Hourly Cumulative volume illustrates this disparity more clearly. VIX did drop in confirmation but it also dropped to what is considered overbought and from which sell signals are generated. OEX CODI is now on a sell pivot in the Sell Alert zone. Its momentum oscillator has made a cautionary down pivot also. NDX CODI is also on a momentum sell alert. SPX weekly closed the week after running right up to the 21 week average and the downsloping trendline. This is one of those moment of truth situations where a breakout or reversal occurs. The McOsc made one of those minimum point changes to the downside hinting of a gonzo move with 66% probability of occurring within 4 days. Some days back we suggested the Probs chart would have a mean reversion to 700 to 710 and that the OEX call open interest has a distribution centered on 710. This picture hasn't changed and the Time and Price zone boundaries are steady;the current swing they are derived from is still working on a high. The time zone for the next pivot high is 10/1 to 10/14. The OEX is well within the strike range and time range for the pivot high, so it could happen any day next week.

Now that the OEX has swung up into the time and price pivot zones and the stochastic rsi oscillator has moved above 85%, and various other indicators such as CODI and Momentum indicate "overboughtness" we need to begin anticipating a pivot high and the next pivot low projection zones. If we assume Friday 10/98 is a pivot high, and that really is an assumption, then we have the next time and price zones for pivot low of 10/13 to 10/22 and 686 to 634. That would take the McOsc back below zero to a higher low and pretty much finish off the tax loss selling for 1999 and complete the setup for the year end rally.Interestingly enough,the STOCHASTIC 20 measurement on such representative issues as AOL,CMGI,FNM,and QWST are all near the 95-100 area-an area that has been cyclically seen in past months repeatedly as a short term profit taking point.

There is never a dull moment or a lack of ways to look at price movement. Taking a closeup look at the INDU via the WinMidas technique we see support was found at the S3 line followed by break of resistance lines R1 and R2. Resistance was found at S4 and just below R3 on Friday. Due to the swing length from the S3 low, low VIX readings in sell alert, breadth divergences and CODI and Momentum sell alerts mentioned above, failure of bonds to rally on good news,and finally more tax loss selling to hit later in October, it is expected that the INDU will find stiff resistance to further upside next week. Cadbury's Option Premium Ratio short term outlook, available at is targeting the "SPX down 1.3% to 1319 or less at October 15th close and down 1.9% to 1311 or less at October 22 close. One of the most alarming figures comes from the current AMG Data Services announcement that the net inflow of cash taken in by the equity funds was unusually low for one of the first weeks of the quarter-only $2.3 billion for the week through Wednesday. Usually the new quarter money flows have been two to three times larger during the last few years. Short positions are advised at 1349 or higher or on breakdowns to 1320. 5-point intraday stop is recommended.

So assuming Friday is a pivot high and using 5 minute bars, then swing probability says a pull back in the OEX should occur in in the next two trading days to between 687 and 672.

In summary,we are inclined to agree with Favors and Cadbury this week. Using 5 minute and 30 minute bars and assuming Friday is a pivot high, then we probably will get a modest correction next week. WinMidas has the INDU sandwiched between resistance and support.

There is speculation that the total short gold position still remaining may be 3000 to 7000 tons.The recent spike in price and current pullback may quite possibly prompt these shorts to reduce their risk exposure.The endless free ride on the backs of central banker gold bashing is probably over.XAU STOCHASTIC 5 is now 10;short term oversold.STOCHASTIC 20 is 60;still overbought-neutral on this longer measure.Price has reversed from well above the 14% band back to tag the upper 3.5% band,as we indicated would be probable.This pattern was seen in April/May.We are holding HL patiently.It closed at 2.9375.Readers who wished to cash in had prices from 3 3/8 to 3 to take 40-50% short term gains-and that cashing in would have been quite reasonable.Our reasoning for holding is that central bankers may have called a cease fire in their war on the precious metals,as that storehouse is too tempting for debt relief if price can be prevented from further declines.Holding HL from near 2$ as a perpetual call seems a good tactic;the outstanding shorts at some point may cause another large spike that could feed on itself.

Here are the charts:

5 DAY ADVANCING VOLUME CHART. CONE CHART. CV HOURLY CHART. CYCLE CHART. INDU CHART. MOSS CHART. NYA CHART. OEX DAILY CHART. OEX FIBRET CHART. OEX NSYNC CHART. OEX WEEKLY CHART. PROBS CHART. RISK CHART. SUPERT CHART. TPRZ 5 MINUTE CHART. TPRZ LOW CHART. VOLATILITY CHART.

MomentumCycles commentary for the open of Tuesday, October 12, 1999:

Holiday blahs confined price to a narrow range, setting up narrow fibonacci ranges Tuesday for the OEX. NYA Volume breadth was positive but issue was negative. NYA and INDU and OEX found resistance immediately overhead. VIX and CODI are in Sell Alert zones, meaning this resistance is going to be tough to get through. There is always the possibility that a big cap blue chip could release super earnings and spark a rally and temporarily win the tug of war. Modus operandi from this corner is to trade short term on the half hour cycle the rest of the week.Remember we were bullish from near 10100 once 3 day breadth and other indicators turned up near the lower 3.5% band of price-and that was a lonely position to take.The option premium ratio at the price lows finally moved into the low .50's-usually a precursor to a short term rally.In contrast,the weekend reading was .69.Readings from .71 to 1.04 {only a short distance above} are a necessary {but not sufficient} condition for fast drops at short term rally tops.Being near the upper 3.5% band on cumulative negative breadth can be a good setup for a drop also.Getting close.

As noted on the weekend commentary,XAU STOCHASTIC 5 was oversold short term at a reading of 10.XAU promptly rallied 4% today,although HL stayed at 2 15/16,with present resistance seen above 3.We still feel the potential for another short covering spike is present,especially once XAU STOCHASTIC 20 reaches oversold.

Here are the charts:

5 DAY ADVANCING VOLUME CHART. AMOSS CHART. CONE CHART. CYCLE CHART. EODCV CHART. INDU CHART. MCOSC CHART. OEX DAILY CHART. OEX FIBRET CHART. OEX NSYNC CHART. OEX WEEKLY CHART. PROBS CHART. RISK CHART. SUPERT CHART. VOLATILITY CHART.

MomentumCycles commentary for the open of Wednesday, October 13, 1999:

We had noted on the weekend commentary and on Monday that STOCHASTIC 20 measurement of representative issues such as AOL,CMGI,FNM,and QWST was approaching 100,the overbought area that signalled a short term decline was about to occur.All these issues were down Tuesday;3 of the 4 by 4-5%,FNM by 2 1/2 %.

Option premium of .69 was within "spitting distance" of the .71 that signalled the probability of a selloff.

For all intents and purposes, Tuesday was a "Monday" and the book title says "never sell stocks on Monday". The basic thesis of the indicators at Tuesday close is that many have come back to previous support levels and/ or made normally expected retracements. So far there is nothing techincal to panic about, and this still looks somewhat expiration inspired. Corrections happen fast these days due to communications technology and high tech analysis packages and trading programs. For example, the SuperT has already tripped down to the "Correction" level where decent rallies have been launched. OEX on the McOsc chart found support at the 100 day exponential moving average. McOsc has only dropped to the zero line where it could bounce on Wednesday. Even the 5 day advancing volume only came back close enough to kiss the 5 day declining volume- note they have not crossed yet. Strike up a few points for CODI and MOSS. Cone Projection oscillator correctly pointed to the direction for Tuesday and is now in the oversold zone. The green cone provided temporary support and the red cone at 688 held the low for the day. Adaptive Modified Option Strategy Spectrum dropped back to the Neutral line. We expect this kind of pullback in such a rise off the last pivot low. One outstanding event was that VIX did not rise further than it did with such a DJIA point drop and NYA negative breadth. It must say something about what is going to happen the next three days. Before getting too excited about its implications it should be said that the October option components of VIX dropped out of the calculations on Monday close,or last week,we're not sure which. Upcoming economic reports are producing fear-inspired selling;that kind of selling is never a good thing to do. The real reason is more likely to do with open interest in calls and puts than anything else this time of month. If you have been following the open interest saga, you know that put open interest was nonexistent above 700 and the call OI had a centroid around 710. As of CBOE data 7/12 close the Call centroid has moved to 715. There is essentially no put open interest above this level. The narrow fib ranges for Tuesday facilitated breakout signals, whereas the fib ranges for Wednesday are wide, facilitating a wide range before resistance is hit. These kinds of strike price range shifts do occur more during expiration week than any time and the market can go up just as fast and far, or further than it dropped, by Friday close. This is not a good week in which to make long term decisions. One sector can come in favor just as fast as the defense sector falls out. Money derived from selling defense one day may show up in other index boosting sectors the next day. More rumors, upgrades, downgrades, announcements occur during this week than most other weeks. It only takes a few well chosen stocks to manipulate an index into quantum leaps, with the result that teenies are turned into gold bricks at expiration. Cumulative volume looked somewhat like that seen in the give up phase when owning stocks has an uncomfortable feeling. Such moves are accentuated by the appearance of notable analysts on cnbsee, such as John Bollinger on Tuesday. MLynchum made a pronouncement that may help stocks into the expiration, in that ML recommended T bonds as good value at current yields. If the masses believe this then we could see yields tick down helping the indexes recover into expiration. I believe it was Bill Gross that said bond yields would cycle between 6.25 and 5.75 for the rest of the year.

Tuesday became so neutral to oversold on so many accounts, that it is first going to be considered a retracement in the current upswing and is a buying opportunity. So looking at the swing Time and Price zones using 30 minute bars going back to the second quarter of this year we see the potential for a pivot high being made Wed, Thurs, Fri, and the price zone is 693 to 714. A benign PPI and other reports on Thursday and Friday could send the bond market up, yields down, stocks up into Friday close.

Option sentiment as measured by the modified Hines Ratio is as neutral as can be and supports neither the bullish or bearish camp.

Playing the contrary role one of the well respected analysis packages provides this view of the OEX using 60 minute bars. It says the OEX is making a 4th wave retracement to the green line near point 4 as of Tuesday. It has a make or break level just above 680 where the third retracement level might be. IF a sustainable rally can be generated from there, a fifth wave is projected to 709 by 15:30 on Wednesday or 11:30 on Thursday at the upper make or break line. There is also a 5th extension as high as 725. The Osc is making the classic 4th wave pullback and dip below zero. The Elliot Trigger has caught all the previous dips and appears to be on top of the current one. Tomorrow will be a revealing day as to the personality of this market.

The NDX on the CodiNDX chart found support at the lower edge of the Do Channel. Also an RSI retracement to 40 level can occur and still have price remain in an uptrend. In fact pullbacks to the 50 or 40 RSI level may be buying opportunities. A bull trend will see CODI cycle between the Sell Alert zone and the Whipsaw zone.

On the INDU chart, when Rate of Change is Positive, the Force Index bounces quickly off of the green oversold line. INDU is testing the 200 day moving average again.

XAU STOCHASTIC 5 oversold got the Monday bounce up;STOCHASTIC 20 being not yet oversold got the Tuesday bounce down.When both measures reach oversold we'll get a setup for the next rally.Meanwhile we are holding HL.

Here are the charts:

CODI NDX CHART. CV DAILY CHART. CYCLE CHART. EODCV CHART. INDU CHART. INDU FIBRET CHART. MCOSC CHART. OEX DAILY CHART. OEX FIBRET CHART. OEX NSYNC CHART. OEX WEEKLY CHART. PROBS CHART. RISK CHART. SPX FIBRET CHART. VOLATILITY CHART. SENTIMENT Chart.

MomentumCycles commentary for the open of Thursday, October 14, 1999:

Now you know why it is dangerous to take MLynchum's recommendations. It was bonds at 6.21%, and you get creamed with yields now at 6.29. Those with Zero coupon bonds really got skinned. ML recommended Compaq at 50 to a friend of mine. Now look where it is, and it is still on the buy list! That's what they facetiously call a value stock; value at any price, just help us clear our inventory before tax loss selling gets underway. One problem with full service brokerages is they are buy side oriented and never tell you when to sell. A week or two ago, another young lady with curly hair said stocks were 5 to 10% undervalued and they should and would rise. What a gift of information; who needs it? Then there is her DOW target of 12,000 and her buddy's at 13,000. Oh, and don't forget those book titles, DOW 40,000 or some such absurdity. IBM being touted as the next internet stock and target of $200, such BS. And Joe Batman, perennially bullish, that's why they call it the Boob Tube and BubbleVision, constantly viewing a bubble now in the process of imploding. Finally, we got a guy who says 9300, so now we must be near a temporary bottom just ahead of expiration. Bear markets grind away and have sharp rallies. We will have a sharp rally wherein teenies are turned into gold. Pros have learned how to use the leverage of expiration. The OEX open interest centroid just above 700 put a lid on further rise. Dropping the indices is a fast way to eliminate having to pay off on any of that call OI. No doubt, the CBOE computers know how much Call OI capitalization disappeared into the balance sheets of market makers. Since Put OI was minimal, the indexes could drop without creating new liability and in fact reduce it. Now if Put OI expanded and call OI decreased, we might just still see some upside the next few days, but don't count on it. It could just be that major players are short and have been short Call OI playing off of the weak October seasonality. A few more days like today and panic should set in with VIX reaching levels high above 30 wherein the volatility spreaders can clean up with credit spreads. Volatility chart compares VIX, implied volatility, with the INDU. This has been a rather orderly descent so far. Specialists drop the bid when they can't pass a stock through, so we know they are in the accumulation phase. Prices will continue to drop until price facilitation occurs, i.e., when they can pass stock through to match buyers and sellers. Then we might see the distribution phase occur again on the upside. Betcha the distribution phase will be at higher prices going into year end. That is the name of the game; build inventory and then distribute it, over and over, creating those cycles for technicians to play with. Looking at the EODCV2 chart, we see that the INDU would have to drop a minimum of 496 points to 9736 to 3/5/99 as the Cumulative Volume has. The problem is, the CV will continue to drop as the INDU drops, so at some point, i.e., the bottom, CV will stabilize as the INDU catches up. It's not there yet. That is what the industry is searching for. If the market rallies and volume dries up, prices will be bid back down until volume is facilitated.

Looking at the daily technicals, we see that SuperT hit the Correction level and the INDU dropped to the yellow line support where good rallies have started from. McOsc hit the oversold side of neutral. CODI moved up into the whipsaw zone and AMOSS dropped below the oversold side of neutral where rallies have started from. We did have some TICK vs SPX and SP futures that indicates something is fishy. Cumulative volume hourly continued the Niagara-like waterfall. OEX found support in the red cone for a second day. RISK Monitor appears to be putting in the double bottom or tweezer-like formation, as at previous lows near band G. INDU finally closed solidly below the 200 day MA.

Option sentiment was so heavy on Wednesday it pushed the Modified Hines Ratio all the way to the outright buy calls level. This suggests a trading low is at hand. Note on the Sentiment and EquityCP charts that the OEX 670 level has produced rapid and sizeable moves up in the OEX. August 13 produced a one day up move of 16.4 points and was followed by two more updays, two consolidation days and then a run to 725. October 4th produced an up day of 12.62 points followed by an up move to 701. June 28 produced a run all the way up to 735 starting with 5 straight up days. Of most significant interest is the 20.39 rise on September 3 following an outright buy calls signal.

XAU up 5% today;HL unchanged at 2 7/8.The 20 year war on gold is probably in cease fire mode.Still looking for further short covering spikes on that huge short position in the commodity.

Here are the charts:

5 DAY ADVANCING VOLUME CHART. ADVANCE/DECLINE CHART. CODI NDX CHART. CYCLE CHART. EODCV CHART. INDU FIBRET CHART. OEX 30 MINUTE CHART. OEX DAILY CHART. OEX FIBRET CHART. OEX NSYNC CHART. OEX WEEKLY CHART. PROBS CHART. SPX WEEKLY CHART. SUPERT CHART. VIX2 CHART.

MomentumCycles commentary for the open of Friday, October 15, 1999:

6:35 a.m. update:Equity CP and Sentiment charts now have corrected data. It should be noted that the SMI and 3XIND indicators have not turned up yet. The sequence is- first 3INDX turns, then the EquityCP or Sentiment, and then SMI. It looks close for calls, but we have to wait for price to stop dropping. At least wait for the 3XIND to turn.

Thursday lived up to its reputation by having a high VIX reading. VIX point and figure is an efficient way to view the VIX trend. VIX with bands is a convenient way to compare it with the OEX, and an overlay of VIX RSI and OEX RSI is a precise way to see the buy and sell signals. They give the impression that a buy signal was generated on Thursday morning; although vix did not close above its band it did push above, and the Point and Figure chart did print above 30. Thursday did have a -1185 TICK reading when VIX went over 30. Those sorts of things indicate short term lows. Projection midband resistance is at 682 and upper projection band resistance is at 702. Cone Projection oscillator turned up in the oversold area, as did SuperT. CODI turned back down in the whipsaw zone as the Momentum oscillator crossed below the Buy alert level. TrinVix both closed below the "strength" on open tomorrow line. Risk Monitor is working on its tweezer bottom. MOSS made an upward pivot on the oversold side of neutral. The evidence seems to say that tomorrow's expiration will have an upward bias. Why not? It's the one time of month when those who control the inventory can transform out of the money October call teenies into gold. This is especially true in the last hour when volume is thin. Sentiment and EquityCP indicate the preference is for call ownership. Equity call volume may have a bad data point from the CBOE and may be distorting the CP ratio. One surprising event on Thursday is that stocks did not cave in when T Bond yields rose to 6.333%. Several things must be at play here. One, the yields are not expected to hold on Friday, and were jacked up in anticipation of a negative PPI report. Bill Gross, bond manager extraordinaire, now targets the upper end of the range at 6.5 and lower end below 6%. So, stock fans may just have concluded that bonds have more potential to rally than to drop significantly. The other factor at play may just be that money is coming out of bonds and into stocks in anticipation of a gonzo stock rally, so who cares about interest rates for the time being. Higher yields can be tolerated when growth is strong and steady and earnings are increasing. If the market is going to rally strongly following our Sentiment indicator Buy Calls signal, then Friday is the best day for the indicator to add 20 points or more to the OEX {just dreaming here}. The reason it is the best day is because of the leverage in the out of the money teenies that market makers have collected earlier in the week as the index was making strike price range shifts downward. Monday was flat, Tuesday and Wednesday were down, Thursday was down and then up. Friday has a history of being up strongly to restore much of the point loss earlier in the week. The truth of the matter is that issue and volume breadth still points to lower prices ahead. An uptrend in prices is going to need days with consistently more advances than declines and more up volume than down volume. So when we talk about a rise in prices here, it is in the short term context.

One of the big disparities, as everyone knows, is the long term deterioration in the advance/decline line, and as has been posted here previously, the end of day cumulative volume. Recently the EODCV has dropped back to the March 1999 levels. CV theory says cumulative volume leads price. That would mean the DOW has 300 or more points to drop just to catch up with CV.

We said XAU STOCHASTIC 20 needed to base before the rally could resume.STOCHASTIC 5 reached oversold and a bounce ensued;STOCHASTIC 20 needs to reach oversold and then turn up.We are holding HL in the expectation of another eventual short covering spike.

Here are the charts:

5 DAY ADVANCING VOLUME CHART. ADVANCE/DECLINE CHART. CODI NDX CHART. CYCLE CHART. EODCV CHART. INDU CHART. MCOSC CHART. MONEYFLOW CHART. OEX 30 MINUTE CHART. OEX DAILY CHART. OEX FIBRET CHART. OEX NSYNC CHART. OEX WEEKLY CHART. PROBS CHART. SUPERT CHART. VOLATILITY CHART.