MomentumCycles

To quote fron the MomentumCycles Commentary for the open of Monday, October 5, 1998:

"XAU made a decisive breakout above the 78.53 area that had been three times tested resistance. The April '98 highs target 86 to 92. As the dollar drops, gold and silver stocks become more interesting. The dollar is vulnerable because the Fed's bias has turned to ease. Traders who bought on the breakout above 78.53 should be aware that the XAU is extremely overbought with stochastic 20 at 100. A pullback to the breakout point would not be unreasonable. It appears that the major trend, for now, is still up, with October having the reputation for a fear spike in the mid- or late month. The breakout above 78.53 must hold for the up trend to be valid.

Bonds have been forming a channel. They are extremely overbought. It would be logical to expect a move back towards the 5% area. So far, 4.9 has contained any selling. The major trend in price is up, and the major trend in yields is down. People will use any move back towards the 5% area to establish new long positions. If 5% holds, the uptrend must be termed to be valid. With a possible continuation of Friday's OEX rally, bonds may retrace a bit. Bonds, along with the XAU, is still a refuge for fear capital."

MomentumCycles Commentary for the open of Tuesday, October 6, 1998:

We warned a test of the XAU breakout was due- no surprise XAU fell 5.53% Monday almost exactly to the breakout at 78.31. The real test comes now if it can hold. STO 20 near 100,mentioned above, almost always signals an end to the short term rising trend.

The 30 year T bond channel,mentioned above, is intact,the trend also, as discussed before. Traders are using intraday retracements to add to long 30 year T bond positions. No significant retreat towards 5% has yet occurred. We warned not to short this market!! It's been 5 days of rally- some retracement is due- overdue at this point ..traders will use it to get long again back towards 5%,if it occurs.

Notice the tax selling hitting the NASDAQ? With VIX in the 40's we can expect more days like Monday. October 7 is another of those "energy point days where dynamic time cycles converge. It also marks the "end of the beginning of month seasonality". So far it has been overwhelmed by the sellers or it is delayed in time and price. If the latter is true, then we could have a compression of buying building up that would be shifted in time and last beyond the normal end date. Breadth improved on Friday as though the seasonality kicked in and then the weekend analysts dropped a bomb on Monday. Now that they are out of the way maybe Tuesday will be a better day followed by a "W" day for a high point. A stronger "energy point day" is October 16. This adds to the fun and games by expecting a reversal in trend on these days. If we stick to reading the tea leaves, then the McOsc chart still has not broken below zero, there is still an expectation of a bounce here. On the other hand if intraday data is taken into account, the McOsc did traverse significantly below zero and back up again. Even if we eventually get a rally out of this congestion, it will hit stiff resistance overhead. ADHL remains on an intermediate term buy as the NewLow strength is turning up, not a bullish sign. Super T is projecting lower prices in the days ahead. There is a change of direction in the INDU % bands from down to sideways.

Here are some charts:
CODI, CONE for Monday, CONE for Tuesday, S and P 500 FUTURES FIB CHART, OEX FIB CHART, S AND P 500 FUTURES PIVOT CHART, OEX PIVOT CHART, INDU, RSI STO, NYA, ASTROCAST, OEWJA, OEXJP, OEXJS

Clyde Lee has kindly forwarded his "Swing Machine" which shows probable near term price movement based on comparables.

To quote from the MomentumCycles Commentary for the open of Tuesday, October 6, 1998:

"The 30 year T bond channel,mentioned above, is intact,the trend also, as discussed before. Traders are using intraday retracements to add to long 30 year T bond positions. No significant retreat towards 5% has yet occurred. We warned not to short this market!! It's been 5 days of rally- some retracement is due- overdue at this point ..traders will use it to get long again back towards 5%,if it occurs."

MomentumCycles for the open of Wednesday, October7, 1998:

To quote from the YAHOO NEWS at Tuesday's close,

"US Treasuries close down amid modest stock gains... NEW YORK, Oct 6 (Reuters) - U.S. Treasuries pared a big early deficit but still ended lower on Tuesday, marking the first time in six sessions that the 30-year bond failed to set a record for a new closing low yield. ``All you need to do is look at the stock market,'' said Patrick Dimick, a U.S. market economist at Warburg Dillon Read LLC. ``We've traded perfectly inversely against stocks all day long.'' The benchmark 30-year bond closed down 17/32 at 111-29/32 to yield 4.75 percent at 1500 EDT/1900 GMT. On Monday, the benchmark set a fresh closing low yield of 4.72 percent. Two-year notes were down 3/32 at 100-25/32 to yield 4.085 percent. The Dow Jones industrial average, which had been up more than 100 points at one stage Tuesday, closed up 16.74 points at 7742.98. Dimick said rumors about institutions with troubles linked to hedge fund exposure had little bearing on price action. ``There is clearly a credit crunch going on, and banks that are perceived to have too much exposure I would imagine are having trouble tapping the capital markets for funds. That is no doubt going on every day that we come into work,'' Dimick said. ``But if you want to talk about the intra-day price action that we've seen, that really doesn't explain what's going on at the margin here today,'' he said. Tony Crescenzi, chief bond market strategist at Miller Tabak Hirsch & Co, said rumors circulated throughout Tuesday's session about an emergency Federal Reserve meeting regarding either another rate cut or possibly a troubled financial institution. ``I think it's all bogus...,'' Crescenzi said. ``I don't know that people put a lot of stock in these things, but at the very least it shows the extent to which the market remains focused on potential systemic risks that might be associated with hedge fund losses.'' Market skepticism was reflected in Tuesday's price action, the strategist said. ``If these rumors were fully true, the market would be on the plus side,'' Crescenzi said, adding that the yield curve would also have been steeper. Market players also cited talk that other European nations would trim interest rates after Spain on Tuesday announced a more aggressive easing by cutting its main money market rate by 50 basis points to 3.75 percent. Dealers speculated such moves could be announced after global finance leaders complete the International Monetary Fund's annual meeting in Washington this week. A salesman at one East Coast firm added that despite Treasuries' lower close Tuesday, ``a great underlying bid for the market'' remains. Treasuries stand to benefit as those with long positions in peripheral markets unwind positions. ``Any of the guys that are in trouble certainly aren't long Treasuries and short emerging markets,'' the salesman said. ``All the guys that are in trouble are the guys that have the flip side of that trade on.'' In other 1500 EDT/1900 GMT price action, three-month bill rates fell 10 basis points from Tuesday's opening levels to 4.06 percent, while six-month bill rates fell three basis points to 4.20 percent. Both were auctioned Monday. Year bill rates rose five basis points from Monday's close to 4.05 percent. "

XAU retested the breakout with an intraday stop run below 78 to shake out the longs,but with a close up 3.1% to 80.76.Uptrend still marginally intact.

NASDAQ relative strength versus DJIA weak-DJIA up 17,NASDAQ down 26.Tax selling ,flight to safety,and seasonals make this pattern in bearish Octobers.Generally the market is healthiest when NASDAQ relative strength is GREATER than DJIA,showing a greater degree of confidence.The opposite situation reveals anxiety.

October 16 1998 is shaping up to be a significant day. Both the Nature"s Pulse dynamic time/price cycles and the AstroCast chart are pointing to a day of remembrance. For those who were trading in 1987 you know the sinking feeling where there doesn't appear to be a bottom in sight. The bottom line is the market cannot rally and hold its gains and when it does rally it is in a divergence with the underlying breadth. A study of the 1987 crash revealed that the true bottom was not in a stock until it dropped to its intrinsic value as calculated by the Relative Graham Value formula. "The Graham approach of fundamental analysis should be considered among other tools as a predictor of long-term trends." In the short run we play games with technicals. To quote further from the reprint in the May-June 1988 Harvard Business Review, "Our findings suggest that the irrational behavior that typically biases traditional asset pricing and valuation models in normal times was reduced to a minimum during the crash. Consequently, the classical fundamental valuation approaches and the traditional pricing models worked well...The generality of the conclusion, that economic models and other theories in social science may work better under catastrophic situations, is an important empirical question and should be studied further." Why is Momentum Cycles belaboring this point? The answer is that markets make rounding tops, i.e. see the Super T and the Indu charts for the ten month view. Then see the OEXWM for the last few days and you get a clear picture of what price and breadth divergence means. The index is going to work its way lower below 7400 as long as the PT or Price Theoretical redline keeps tracking below the index. At some point the margin calls begin to feed on themselves and the program traders accelerate the demise of pension plans across America. The question novice traders will ask is "where did all the money go?" How can valuations change so suddenly? Keep in mind that the stock market is truly an auction market and collectables go through periods of being in and out of fad. When specialists have to absorb massive selling because of a lack of buyers, when fear is in control, their bids find a floor near book value. ADHL is still on an intermediate term buy, but the new highs and lows are weakening as is the djia relative strength. CODI refuses to drop and can indeed accelerate higher. Super T is forecasting lower prices. The volatility of the OEX options is a boon to intraday traders and a major problem for end of day traders.

Here are some charts:

NYA CHART, CONE CHART, INDU CHART, OEX FIB CHART, OEX PIVOT CHART, S AND P 500 FUTURES FIB CHART, S AND P 500 FUTURES PIVOT CHART, MCOSC CHART, XAU DAILY CHART, OEXJP CHART, OEXJS CHART, OEXVR CHART, OEWJA CHART, RSI STO CHART.

MomentumCycles Commentary for the open of Thursday, October 8, 1998:

The last refuge for fear? Today, XAU decoupled from bonds, which previously had been an equal weighting for fear capital. As the dollar has been showing weakness due to prospective interest rate cuts versus other currencies, holding long positions in 30 year treasury bonds for overseas buyers becomes somewhat less attractive. If the dollar drops (and admittedly, it's been in a very long bull market) and gold and silver merely keep the same price, the price will appear to rise denominated in dollars, as it has been rising spectacularly, previously, against currencies such as those from Malaysia and Thailand. XAU hit our secondary target of 86, closing at 86.63 up 7.27%. We had correctly identified the intraday move recently back below the 78 level as an attempt to shake out weak longs.

Another good call on the 30 year treasury bond. We had correctly anticipated the overbought nature of the 30 year treasury bond earlier in the week, and the move back towards the 5% level.Today the treasury bond lost 1.73% to close at 4.826. If confidence is truly suffering, then even 30 year T bonds will lose their status as a refuge for fear capital. Support at 5% seems to be pretty good, as domestic buyers still view this as a safe haven. We would be light buyers towards 5%, but any close in the range of 5.1 to 5.2 would result in rethinking our strategy.

Our previous remarks about the relative strength of the NASDAQ versus the DJIA seemed prescient again today. Notice the DJIA was down 1.29 points, the NASDAQ was down 48.28 or 3.2%, the S and P 500 was down 1.41%. This means that stocks most likely to be in buy programs have been somewhat supported, but stocks in the smaller cap sector not participating in buy programs have no underlying support. These same issues not of the extremely large cap variety are more vulnerable to tax selling. Classical relative strength theory points out that when the NASDAQ is stronger than the DJIA, confidence is returning. The opposite situation, which is occuring now, has continuing bearish implications near term.

We had pointed out also many weeks before that FNM was caught in a trading range between the previous high (resistance) of 65 with 68 as an outside chance of being reached, as ultimate resistance. Support was pointed out as being 56, with a close much above either support or resistance with increasing volume adding to the probability of a large move continuing in that direction. FNM failed, recently, exactly at 65. Today's trading saw FNM with an intraday print below 56, but a close at 57. Traders that shorted resistance at 65 can cover on any print below 56.

Thursday has a cyclical probability of being a weak day for the OEX in the monthly cycle.Also,an almost unchanged day on the DJIA,with a recovery back to slightly negative after being down over 1.0% that day accompanied by a weak bond market historically is short term bearish.

It looks like Globex has become a tool for market manipulators. It moves up strongly overnight and sucks in the buying in Chicago and NY on the open while those who drove it up overnight are taking profits and vice versa. It would be nice to know when a globex move is going to stick long enough to do a trade. The option charts show the effect of that first thirty minutes of deception. Fading such a situation might a better policy than chasing it. Technicals have only continued to worsen. ADHL breadth components are deteriorating and because of that the intermediate term buy mode should be ignored as it is aging. The NHNL chart is headed down at a rather steep slope. This is not a time to be listening to the major brokerage firms espousing to trade their paper for your hard earned cash. Hang on to it for a real washout later in the month for some real bargains. PT is indicating lower prices. McOsc has finished testing the zero line and is now working further negative. We should wait for a deeply oversold 10% component for a decent call trade. With all this negativism you might ask why puts have not been recommended. The problem has been the volatility. Lately you could have made money on either calls or puts, as long as you remembered to take profits in 30 minutes. That is one tough market to trade unless you are sitting in front of a monitor with realtime quotes and with the way globex is jerking traders around you have to be in the options on the close of the prior day. For example we have Terrible Thursday tomorrow so puts would have had to be entered today. Those who have been readers for sometime now should already have been expecting a weak Thursday and then an up close on Friday as its a Pre-E week Friday. That means the puts would be held a day or less. This Yo-Yo market will continue until it gets off balance and moves to an extreme. 7400 is being promoted as a floor, but that is just one floor, 7200 and 7000 are below it. Other launch points were at 6500 and 5500. So there is plenty of room to accomodate a worldwide slowdown. The sooner the TV commentators get off the river denial the quicker the boat will stop sinking, i.e. meaning the quicker the bottom will be reached. In the meantime, the XAU is in breakout mode having penetrated the wormlike resistance lines. CODI has finally made a downward pivot in the buy zone and no one came to buy. We should watch for a another upward move near the 5.0 retracement line.

Let's do a pivot and fibonacci "what if" scenario on the Dow Jones Industrials. The question is just how close is 7400? Since chart aficionados have perspective on historical prices and can see a 9300+ high, 7400 is almost 2,000 points lower, and in time it has happened rather fast. Now then looking at the INDU on daily pivots and weekly and monthly fibonacci zones, just how plausible is 7400 or lower in the month of October? Looking at the daily pivots we see that 7400 is at S3 tomorrow, 10/8/98. Looking at the weekly fibos 7400 is at the lower edge of this week's fibo zone. Looking at the monthly fibos, 7400 is at first fibo support zone. Given the volatility we have seen in the INDU we could see 7400 to 7200 on the weekly fibos in the next two days and 7400 to 7000 on the monthly fibos in the next three weeks. Psychologically, those in denial see 7400 far away, but for mechanical traders it is rather close.

Here are some charts.

OEXJS CHART. OEXJP CHART. OEX FIB CHART. OEX PIVOT CHART. OEXVP ChART. RSI STO CHART. SUPERT CHART. ASTROCAST CHART. CONE CHART. INDU CHART. ANOTHER INDU CHART. S AND P 500 FUTURES FIB CHART. S AND P 500 FUTURES PIVOT CHART.

To quote fron MomentumCycles Commentary for the open of Thursday, October 8, 1998:

"The last refuge for fear? Today, XAU decoupled from bonds, which previously had been an equal weighting for fear capital. As the dollar has been showing weakness due to prospective interest rate cuts versus other currencies, holding long positions in 30 year treasury bonds for overseas buyers becomes somewhat less attractive. If the dollar drops (and admittedly, it's been in a very long bull market) and gold and silver merely keep the same price, the price will appear to rise denominated in dollars, as it has been rising spectacularly, previously, against currencies such as those from Malaysia and Thailand. XAU hit our secondary target of 86, closing at 86.63 up 7.27%. We had correctly identified the intraday move recently back below the 78 level as an attempt to shake out weak longs.

Another good call on the 30 year treasury bond. We had correctly anticipated the overbought nature of the 30 year treasury bond earlier in the week, and the move back towards the 5% level.Today the treasury bond lost 1.73% to close at 4.826. If confidence is truly suffering, then even 30 year T bonds will lose their status as a refuge for fear capital. Support at 5% seems to be pretty good, as domestic buyers still view this as a safe haven. We would be light buyers towards 5%, but any close in the range of 5.1 to 5.2 would result in rethinking our strategy.

Our previous remarks about the relative strength of the NASDAQ versus the DJIA seemed prescient again today. Notice the DJIA was down 1.29 points, the NASDAQ was down 48.28 or 3.2%, the S and P 500 was down 1.41%. This means that stocks most likely to be in buy programs have been somewhat supported, but stocks in the smaller cap sector not participating in buy programs have no underlying support. These same issues not of the extremely large cap variety are more vulnerable to tax selling. Classical relative strength theory points out that when the NASDAQ is stronger than the DJIA, confidence is returning. The opposite situation, which is occuring now, has continuing bearish implications near term.

We had pointed out also many weeks before that FNM was caught in a trading range between the previous high (resistance) of 65 with 68 as an outside chance of being reached, as ultimate resistance. Support was pointed out as being 56, with a close much above either support or resistance with increasing volume adding to the probability of a large move continuing in that direction. FNM failed, recently, exactly at 65. Today's trading saw FNM with an intraday print below 56, but a close at 57. Traders that shorted resistance at 65 can cover on any print below 56.

Thursday has a cyclical probability of being a weak day for the OEX in the monthly cycle.Also,an almost unchanged day on the DJIA,with a recovery back to slightly negative after being down over 1.0% that day accompanied by a weak bond market historically is short term bearish."

MomentumCycles Commentary for the open of Friday, October 9, 1998:

We had warned near the recent bond 52 week high that the 30 year T bond was vulnerable to a move back to the 5% level. Thursday's high was 48.61, the low was 50.14, and the close was 49.88. An attempted stop run was made above the 5% level. Only a move to 5.1 or 5.2 would invalidate or call into question our call for generally lower interest rates,as a result of fear capital fleeing other havens. We might expect to see buyers near the 5% level.

Once 78 or 79 XAU was exceeded, a move to the secondary target above 86 was inevitable. Thursday saw a double top at 87.53. A close strongly above 87.53 targets 92 to 96. The close was 83.43. XAU is forming an easily seen 3 month channel. A close below the channel reinforces the previous down trend. As of now, we'll still give the bullish case the benefit of the doubt. Traders had a chance to exit partially on exceeding the secondary target of 86 at the double top of 87.53 on Thursday. Those who were long captured the breakout above 78.

We had advised for Thursday those traders who had shorted FNM at resistance at 65 to cover on any print below 56. Thursday saw an advantageous short covering opportunity near the open at 49 at the panic low. After that, a strong rally brought FNM back to within the previous trading range. Close was 59. Traders who shorted at 65 and covered at 49 achieved the perfect exit on Thursday as advised.

We had noted the recent tendency, due to buy programs, for large institutions to park their cash in the DJIA and dump their losers in the NASDAQ. In fact, shorting the NASDAQ while being long the DJIA has been an effective day trade since we started mentioning it. NASDAQ versus DJIA relative strength is still bearish. DJIA down .13%, NASDAQ down 2.97% Thursday. It would not be surprising to see a rally into part of Friday due to the DJIA recovery off the astounding 300 point intraday low. However, it is likely that, since many indexes have made new lows in this move, and the DJIA hasn't yet, an implication of an eventual DJIA low below the 7400 previous low is inevitable.

Thursday's refuge for FEAR CAPITAL was the short term treasury bill, showing the greatest percentage gain for the long side. If 30 year T bonds regain their upward price momentum from the 5% level, in spite of dollar weakness, which we have mentioned before by trading the Swiss franc on the long side successfully, that's actually a lessening of fear versus piling into the short term T bill.

Now on to Thursday's OEX action.

What a day. Cone chart for 10/08 shows we had one of those rare Grey cone days that occurs less than 5% of the time. That usually is an encouraging point to cover shorts as an intrady bounce of some sort is pretty assured. Here is Friday's cone chart. NHNL dipped further. McOsc is lower and the 10% component is within trendline range of making a buy crossing. SuperT is projecting 7200 level in the next 7 days but will probably turn up before price bottoms. This projection level can change daily. ADHL is close to generating an intermediate term sell signal as the new highs and new lows are about to cross their magenta sell lines. CODI is really acting strangely as it now has switched to the Sell Alert Zone. What a confusing mess! So what's on tap for the gunslingers? Seasonality says to prepare for expiration week, which means to go long on Friday,{in the past we've advised Friday close} but from what level? Hopefully at a lower pivot or cone. Its hard to be more precise in volatile times like the last few months. There should be no question of the trend into the end of the year. Tax loss selling, mutual fund redemptions, reduced earnings expectations, downgrades, should keep pressure on stocks for a flat to down market. Astrocast chart is in agreement with the E week seasonality.

Here are some charts:

XAU DAILY CHART. OEXJN CHART. OEXVP CHART. RSISTO CHART. NYA CHART. SUPERT CHART. INDU CHART. DJI FIB CHART. OEX FIB CHART. OEX PIVOT CHARRT. S AND P 500 FUTURES FIB CHART. S AND P 500 FUTURES PIVOT CHART.

MomentumCycles Commentary for the weekend of the October 10-11, 1998:

Japanese repatriation of capital by selling 30 year US T bonds and dollars with conversion back to yen has recently caused concern that 30 year US T bonds, in addition to the dollar, may be vulnerable. Additional unwinding of long T bond positions by illiquid hedge funds is adding pressure. A major trend line intersection comes in at about 5.2. So far, the predicted retracement off the 52-week low in yields is merely a testing of this trend line,with 5.2 support after 5% failed. A close much above the 5.2 % line invalidates near term further lows in 30 year T bond yields. At this point, traders are advised to stand aside,and not to short the 30 year T bond. Too soon to say that a major sea change has occurred here.

So far, XAU has merely pulled back to the lower part of the recent up channel, closing at the upper 3.5% trading band,after trading far above it. A lessening in fear on Friday with a selloff in XAU and 30 year T bonds and an accompanying OEX rally is normal into ex week and the end of pre-ex week. Traders were advised to take short term profits at the secondary target of 86 with possible exits late last week at 87.53, 86, 83, and slightly below 83. Another spike in fear may give life to the XAU. The number to pass is now 87.53, where the double top failed mid- to late last week. A long entry on a print high above 87.53 targets 92-96, if the trendline holds here.

We often try to buy OEX calls near the end of pre-ex week. The "E" week trade was facilitated this time by the large selloff on Thursday. The Pivot Keyline was support on Friday and provided a decent trade entry for tape watchers. The Pre E week trade usually ends on Monday or Tuesday with your stop below Friday's high, or Monday's or even Tuesday's if you are lucky. Even though E week tends to be an up one overall, it is fraught with the strike price range shifts in both directions that erode October premiums. The longer term post E week period is still bearish looking, but as we've said before, expiration week has its own dynamics that don't necessarily relate to fundamentals. The common pattern is down in Pre E week and up in E week. We do have the convergence of dynamic time cycles on 10/16 which is also reflected in the Astrocast. So what is new? Not much with implied volatility still in the high 40's. It can go higher and did reach 150 in the 1987 October meltdown. CODI is now clearly in the Sell Alert area and can stay there as the index trends up. ADHL new high indicator dipped into the Sell zone so the intermediate term buy mode is on the verge of failing. New lows decreased and saved the day. The NHNL chart is in bear mode as is the Super T which is forecasting 7200 in 7 trading days. McOsc 10% generated a trendline crossover buy on Friday. This is a very short term signal and occurs when the McOsc is bottoming. The caution here is McOsc bottoms are not usually V shaped and we get multiple 10% TL crossovers. McOsc bottoms are of a more complex nature and form left shoulders, inverted heads and right shoulders. So, if Thursday was the left shoulder, then the head will be lower, perhaps in the post E week period. Another pattern is a "tweezer" bottom and its frequency falls between that of the "V" and the H&S...just some things to ponder over next week.

Here are some charts:

ADHL CHART. CONE CHART. INDU CHART. ANOTHER INDU CHART. NYA CHART. OEXJN CHART. OEXVP CHART. RSISTO CHART. DJI FIB CHART. OEX FIB CHART. OEX PIVOT CHART. S AND P 500 FUTURES FIB CHART. S AND P 500 FUTURES PIVOT CHART.