MomentumCycles

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Momentum Cycles Update prior to the open on October 24, 1997:

Breadth Analysis:

McOsc of issue and volume are retesting the April lows. Another few days and we will know whether the personality of this bottom is a "tweezer" or complex bottom with left and right shoulders and a lower head in the center. The NYA chart shows just how ugly things were today. The 2500 declines were much greater than any of the advances in recent days and the A/D line continues its downward slope. From a breadth analysis it is too early to commit funds to this market. Breadth needs to stabelize and turn around in order to support upward price movement.

Volatility Analysis:

Today was a gonzo day on the AMOSS chart. It zapped the Z Timer all the way up to the buy alert zone. A buy won't be officially issued until the Z timer pivots downward. This could happen by the close on 10/24. The Modified Volatility Index also made a beautiful maneuver today. It tagged its lower band intraday and closed at what would normally be a rally point. Note how far the outer bands are and notice how much price movement will occur over the next week.

Relative Strength and Stochastic Momentum:

Golds up, yields down, stocks down sums it up. Goes to show you that you cannot rely on yields always propelling stocks up or down. Bonds tend to decouple from stocks when they become a haven for fearful investors, so decoupling can be a sign of panic. Tonight we have a Market Mandala from some investing friends in Tibet that might illustrate what happened today. It is related to the dominant market cycles that successful traders are attuned to. The only instructions that were shipped with it were lost in transit except for one scrap of paper that had the words "Unto Thee I Grant......Meditate on Cycles".

Of Special Interest:

CODI remains on a sell for Friday Morning. Artificial intelligence analysis has a 93% up probability rating for the NDX on Friday's open. Technically the NDX is flirting with one of those fate determining trendlines. OEX analysis has a 97% down probability rating for Friday's open. When two related indexes are in such dire conflict it's best to wait a bit. We are still looking for a cycle low to end before the end of the month. Greenspan has put himself in quite a situation at this point. He doesn't want to be the one that causes a crash, but he doesn't want to lose credibility on the inflation front. I honestly don't know what he will say given the state of the world markets.

In summary, no trade is recommended for Friday.

Momentum Cycles Update prior to the open on Monday, October 27, 1997:

The loyal readers of this page made 56% on a long trade from Monday, October 20 open to the stop out on Wednesday moving stop loss. We also warned you that a W shape bottom was more likely than the blastoff V. Well, it sure looks like a W from here as long as 7600 holds. No trade was suggested for Thursday and Friday. Now I know a lot of traders would have preferred to have been short Thursday and Friday. In fact, CODI did recommend such a situation. But, as you know, we prefer to risk the most on trades at the extremes of CODI and AMOSS. Such a situation is building up for early next week. In fact, we'll go out on a limb and say we expect a rally starting either Monday or Tuesday. The highest probability is that we will rally into early November. Now November is tricky. Seasonals argue for a rally starting late November. And as you know, our weeklies have turned down. So the rally that should take place this week into early November should be followed by some downside action in November. More than this at this point we can't say. The contrarian position is to look at the price actions of various commodities as well as stocks and bonds. Nobody will touch gold with a ten-foot pole. To us, it looks like a spike low. Is it possible that somebody risking a very little on the February 315 calls on gold might possibly take advantage of an oversold rally? Of course, one should place an intelligent stop loss on any such speculation.We use an extremely low stochastic reading for this reasoning- look at the futures page in Investor's Business Daily. We have a special new feature for this site. Many readers have asked us to give opinions on different equities. We decided to present how we might analyze an equity situation. Click on this button for a complete and thorough discussion comparing fundamental and technical analysis for equities.

Volatility:

Both the MVI and AMOSS are on buy alerts for the next few days. OEX P/C volume ratio is in neutral just above the sell line. The P/C ratio takes less priority in non expiration weeks.

Breadth:

McOsc of issue and volume are in a probable bounce condition. NYA had an internal tug of war between the advances and declines on Friday with the declines narrowly finishing ahead. This leaves the CODI indicator in the Buy Alert zone. It can go higher into the zone before it turns into a full fledged buy signal so it is safest to wait for the cyan line to cross the red signal line. Speculative types might jump the gun here with appropriate diligence.

RSI & SMI:

Gold stocks down, yields down, stocks down. Remember a few weeks back it was stated here that if gold and gold stocks were being used as a hedge, they should be sold when the hedge was no longer needed. Inspite of the financial futures that have replaced the yellow metal, gold still remains sensitive to current events.

Cycles:

A cycle low is in the making. We expect a rally starting Monday or Tuesday.

Of Special Interest:

Longer term the Rainbow weekly for the DJIA remains on a sell from two weeks back. The Ergodic Oscillator took money off the table even further back than that into early August and also remains out of the market. For nimble traders, the short term indicators above can net some profits, but it should be done in the context that the weekly trend is down.

Well, we weren't short into this , BUT AREN'T YOU GLAD WE EXITED LONG LAST WEDNESDAY!! To quote from the last 3 or 4 updates:

"The loyal readers of this page made 56% on a long trade from Monday, October 20 open to the stop out on Wednesday moving stop loss. No trade was suggested for Thursday and Friday. Now I know a lot of traders would have preferred to have been short Thursday and Friday. In fact, CODI did recommend such a situation. But, as you know, we prefer to risk the most on trades at the extremes of CODI and AMOSS. Such a situation is building up for early next week. In fact, we'll go out on a limb and say we expect a rally starting either Monday or Tuesday. The highest probability is that we will rally into early November. Now November is tricky. Seasonals argue for a rally starting late November. And as you know, our weeklies have turned down. So the rally that should take place this week into early November should be followed by some downside action in November. A cycle low is in the making. We are still looking for a cycle low to end before the end of the month. Greenspan has put himself in quite a situation at this point. He doesn't want to be the one that causes a crash, but he doesn't want to lose credibility on the inflation front. I honestly don't know what he will say given the state of the world markets. Note how far the outer bands are and notice how much price movement will occur over the next week. From a breadth analysis it is too early to commit funds to this market. Breadth needs to stabilize and turn around in order to support upward price movement. The foreign markets are extremely weak, with Japan near to breaking key support and Hong Kong down 10% just today.Longs still exposed{which you wouldn't be if you read our stop loss advice!} should be prepared to exit more quickly than usual in case this becomes a panic. If the foreign markets continue to link with us on the downside and Asia is down again at 10:00 pm eastern, this US correction could become a panic. Of course, we exited long positions on Wednesday's spike up. Key support is 7713, then 7560 to 7600, then 6900. This leaves the CODI indicator in the Buy Alert zone. It can go higher into the zone before it turns into a full fledged buy signal so it is safest to wait for the cyan line to cross the red signal line. "

Momentum Cycle Update prior to the open on Tuesday, October 28, 1997:

Breadth:

McOsc of issue and volume appear to be halfway through the formation of a complex bottom. Last week it was pointed out here that it would take a few more days to determine the real nature of the bottom and it was advised not to buy the drop of the first leg but to wait to see the quality of the test of the first drop. That is coming to pass now. NYA shows just how much of a disparity there was today between the advances and declines. CODI has reached heights unseen before and is still on a buy alert. The alert will become a buy when it pivots downward. This could occur any day now.

Volatility:

VIX reached market bottoming levels today. Momentum will precede price as usual. The VIX and OEX movement today is reflected in the MVIs touching their lower -2 std dev bands. The MVI adaptive is more useful in these extreme situations and is poised for a reversal. AMOSS has also reached unseen levels with all three components at the extreme oversold level. No question this is bearish action now that the 90 day component has flipped from zone 6 to zone 1. This cycle takes about 12 to 18 months. The 90 day could very well track in zone 1 for awhile while the 5 and 20 cycle in zones 1 through 3&4. With the VIX having peaked at 40.04 today and closing at 27.21 a Fear peak may have been put in place today. This may be the beginning of the end of the bloodbath. 27.21 is still a high level that makes buying puts or calls a very risky business because the mkt can turn on you or simply become quiet and wipe out any gains even if the correct direction has been picked. This is another reason why we chose not to trade the last few days. The MVI bands are extremely wide leaving room for an upside trade very soon. We would like to see the blood stop flowing first, but as option traders a contrary eye has to be open. Thus some of our indicators are on buy alert, which will become outright buys when the signals are confirmed.

RSI & SMI:

Gold stocks down, stocks down, yields flat.

Of Special Interest:

The Flow Rate chart shows just what happened today in terms of the flow of shares measured in shares per minute being traded. It also shows that the trading halt may have contributed to an acceleration in the selling. Note how both the total flow rate in the top plot and the net flow rate in the center plot both increased dramatically after the halt was lifted. The NDX is tracking inside the fibonacci fan lines. The tag of the lower fanline today resulted in a flurry of trading right at that level. For the academically curious here is the Artificial Intelligence breadth analysis from last week. Note the 97% probability down. The On Balance Volume Percent dropped to zero, and that was a precient warning for Friday and Monday. This is one reason why Momentum Cycles advised not to buy this dip and to wait for the reversal of our timing indicators. As of the close on Monday the ER breadth for the OEX is only 58% up probability. The encouraging factor is the positive Volume Accumulation Percent.

Momentum Cycle Update for the open of 10/29/97:

Click on here for a discussion of fundamental versus technical analysis using a sample equity.

We told you to expect a low Monday or Tuesday this week LAST WEEK,since Friday, Monday and Tuesday included the 19th trading day of the month, fear of the ECI report, Greenspan testifying, and the linking of world markets in what was becoming a panic.Longs exited last Wednesday with a 56% profit and were totally unexposed to the drop.We also went out on a limb and told you a rally would start Monday or Tuesday into early November, and that November would likely see some more selling pressure until the late month seasonals took over.We also mentioned the key support of 7713, then KEY SUPPORT of 7550-7600.The next number on the chart LAST WEDNESDAY was 6900.Today the spike low was 6933.So a break of KEY SUPPORT 7600-7550 IMPLIED 6900 near term as a target where short covering was to be expected.What are the next important support numbers?These are NOT predictions, just areas where targeted buying and selling take place, like magnets.6900,6335,5915,5220.A break below one target gives you the next.John Q Public starts to worry when anything{any asset class} drops more than 10% from its all time high closing.Then its a bear. So the market was brought back up to less than 10% below its all time high of 8259 closing, closing today at 7498, after testing the breakdown level of 7550-7600, which now becomes key resistance.A fall back below the 10% level at 7433 means more retesting. Below 6933, this is SERIOUS SELLING!Now when you saw our proprietary CODI in the buy alert zone, you KNEW a rally was due,just as last week's sell was predictable in the sell zone.Love that CODI!Its like a roadmap with distance AND time duration of market cycles.Get it here and no where else!

Volatility:

VIX swings were even greater today than on Monday. This helped contribute to the violent rise in both of the MVIs. MVIa is pretty responsive and landed on the lower band for only one day. Cycle lows tend to be characterized by rapid rebounds. This rebound is also evident on the AMOSS chart. It is to be hoped the extremely violent downside is over for the short term, perhaps at least through the next several trading days. The swings have been so extreme that some backing and filling would be expected.

Breadth:

The McOsc of issue and volume paint a different picture than a greater than 300 point DJIA move. Also the NYA chart shows both the advances and declines above the magic 1200 level. The YOYO price movement would have been more impressive if the declines had been only triple digits rather than four. Total volume was impressive but look where price ended the day relative to the previous days. The scariest numbers on breadth today were the new high new lows. New highs were only 12 and new new lows 317!! This is bearish action whenever new lows expand above 30.

Relative Strength and Stochastic Momentum:

Relative Strength charts show a moderate attempt at reversals. The stochastic momentum chart is still pretty sick looking. The short term cycle weighting would say the worst is over for a week or so, but the seasonal cycle would say backing and filling could go on for a month and a half.

Of Special Interest:

The NDX is hanging tight within the fibonacci fan lines. CODI did make a buy pivot early today. We have to go with that for the time being with some common sense behind it that says it could make a second high{ that is, lower prices for equities} on some backing and filling. Trying to catch a trade when the VIX is as high as it has been the last week is a hazardous proposition unless limit orders are used. For example a 30% vol implies +/- 500 POINTS MORE FREQUENTLY than once every ten years. In fact about 1% of the time. This means if your adrenaline is running high and you just have to jump on the bandwagon and buy that call or put with a market order at say $9, you might just get filled at $45 hours later. Exiting is just as bad. You will note that Momentum Cycles has not tried to participate in these wild swings with VIX in the high 20's to 50's. In 1987 it was even higher. Some traders will even avoid trading during expiration week because of the increased volatility. If you want to be a long term survivor in the options arena you have to pick the times you will play and the times to stand aside. When VIX is above 30, option spreads have a better chance of working for you if you can even get them filled. The last couple of days it has been best to just sit back and watch the show.

The one equity we have on buy watch , looking for a breakout of its long term Ted Warren type downtrend, is CMR.TO. CMR Volume Accumulation Percent is still negative extending the basing period. This on a watch for a switch to positive. The fourth quarter of the year{ which often has tax loss selling} is an excellent time to monitor a stock like this. It doesn't matter how good the fundamentals are. A stock can still decline due to selling pressure because the buyers can be on strike as long as mid to late December or even after the first of January.We are monitioring this equity daily for a breakout because the fundamentals suggest an eventual 10 for 1 return from its extremely undervalued state.Technicians wait for buy confirmations.They watch the fundamentalists overwhelm the sellers and THEN jump in.

Flash update 3:43 pm Wednesday:

About 1:42 it looks like profit taking started sneaking in.

Momentum Cycle update prior to the open on Thursday, October 30, 1997:

What was many times tested KEY SUPPORT{7550-7600} to many players became resistance today as predicted on yesterday's update .Sell programs came in along with a plus +1000 uptick.Faithful readers of this site{ having read numerous discussions of +1000 and -1000 ticks }therefore KNEW that profit taking was about to ensue.Across all markets, in all of trading history, tape readers have said" broken support becomes resistance". Some call it "overhead supply".The urge to"get out even" is a powerful psychological barrier.So the powerful tides of monthly reinvestment cash will have to fight human nature reacting to a +10 decline and a lower low.In addition, we have the FED meeting, tax selling, November seasonals, and an unresolved instability in currencies.So the CODI sell pivot discussed below{ although not in the sell short, bet the house extreme}should be a warning that 7600 must be strongly exceeded on a closing basis to achieve 7713, and 7713 exceeded to achieve prices in the upper trading band.It is our feeling that November will most likely see more selling, unless breadth and momentum suddenly improve.Note that at 7 am Thursday,Japan has broken a key support level at 17000, and world markets are very weak.Those traders who are long {no such trade here!}should tighten those stops in case correlation returns.

Breadth:

The Halloween scare has been felt, now it is time for the treats, maybe. Advances led declines by a comfortable margin today on the NYA chart. This is also reflected in the McOsc issue and volume oscillators turning up from the grossly oversold levels. CODI suffered a minor sell crossover in the Buy Alert Region raising the question what to do about it on Thursday. It appears that late in the afternoon on Wednesday some profit taking set in as the Flow Rate returned to pre crash levels. It remains to be seen whether this will continue into Thursday. The monthly cash momentum cycles should be kicking in Thursday or Friday, so the CODI crossover sell may only be effective on the open and sometime mid-day be overrun by the positive cash momentum cycle. Now we do have a potential problem here, and presently only the mutual fund trust managers know the truth. Many employees that are enrolled in mutual fund retirement programs have restrictions on when they can switch from equity funds to cash, bonds, money market funds. That day is the first of the month. The trustees know during the month what the switch requests total and they relay this to the fund managers during the month in order to be prepared for it. Switch requests have to be made by the employees by a specific number of days before the end of the month. We won't know for certain until November 3rd just how much this recent debacle has frightened Joe and Jane employee. If Thursday and Friday are down heavily then cash is most likely being raised to satisfy the redemptions. If the positive momentum cycle kicks in over the next two days, then we know the debacle has not been sufficient to scare J&J into switching. They may wish they had later in November.

Volatility:

VIX has been running at market basing levels for a week now and the modified volatility indices have generated buy signals. The AMOSS Z timer is also on a buy, although it did make a sell pivot in the Buy region just like CODI did today. This confuses the picture for the open on Thursday. As an intraday trader this means potential weakness on Thursday open with a momentum cycle override later in the day or on Friday, barring massive mutual fund redemption requests.

Relative Strength and Stochastic Momentum: XAU RSI is now in the oversold region but its Stochastic Momentum is still in a downtrend. This suggests more basing in the gold stocks is ahead. Yield RSI and SMI are at basing levels. Seasonal factors have a tendency to make yields hit a low in the first quarter of the year,usually February or March, so this basing helps support year end rallies after tax loss selling. Stocks have entered the tax loss selling period and on the SPX RSI are in the oversold region whereas on the SMI they are halfway from overbought to oversold. The expectation here is for the price indicators to improve for a brief period accompanied by improved breadth and a dropping in volatility. Then a second wave of profit taking and tax loss selling should kick in.

Of Special Interest:

CMR, our equity on the watch list, continues its basing action and gradual improvement in the Volume Accumulation Percent. We want to see what happens to the price when VAP crosses above the zero line. Currently Price is locked in a down channel. Note what happens to price when these two indicators cross the zero lines in the NDX and OEX breadth charts. Note that the "price" for NDX and OEX is not the same as the regular price indices. NDX is hugging the center Fibonacci fan line in the technically mysterious way often seen on charts. From the NDX breadth analysis it does not appear to be ready for release from the emergency clinic, whereas the OEX breadth analysis says let's try to rally.

Flash update 1:33 pm Monday eastern time:

Take long profits now. The Dow is up 160. Flow Rate has turned negative.

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