MomentumCycles

MomentumCycles Commentary for the open of MONDAY, November 23, 1998:

XAU slightly oversold,still operating under the previously discussed short term sell above 83 a while back.Seasonals normally suggest a high in this index in the next month and a half.We'll know it's likely if we pass 83 without another short term sell signal.

Most reliable repetitive yearly seasonal OEX weakness in December occurs after pension fund reinvestment ends after the first week,into mid-month,coinciding with a period of further tax selling,book squaring,and cyclic selling associated with the futures expiration.But first we must get through November.

On to last Friday's OEX trading and next week...

Choppy with an upside bias was how Expiration week was described a week ago. Because of the perceived level of overboughtness it was decided to wait until the afternoon of expiration to enter a put trade. Friday's quote read, "Then late in the day, sometimes within the last hour to half hour momentum builds into the close. Most of the time the momentum is upward." Admittedly, this writer is guilty of not always following his own advice precisely and tends to err on the side of being premature in the fear of missing a better entry. On Thursday it looked like the December 570 would be the "at the money strike" for reference purposes. The format for Friday came off about as laid out on Thursday except for one thing. The pop on the open was more like an explosion than a pop. The market did go flat into mid-day and then did rally into the close at which time the December 570 put, OEWXN was obtainable for between 9 3/8 and 10. If you happened to buy after the explosion on the open you might have paid 11 to 11 3/4. You've read it here before, the first hour is "amateur hour". First hour buyers were paying a volatility and liquidity premium. The bid /ask spread was still 3/4 until the afternoon when the liquidity built up and it narrowed to 1/4 to 1/2. This might be something to keep in mind at the next expiration. So, what do you do, have another serving at 9 3/8 or wait until next week and make another entry? See option sentiment comments at the end of commentary.

Another fly in the ointment is that the positive holiday bias conflicts with current option sentiment as measured by various put/call indicators. Before dealing with option volume and open interest a revisit of another Friday comment is needed. Friday's commentary gave credit to the big guys for painting the tape for the benefit of retail members prior to holiday periods. You might say this is patently absurd and what does it have to do with trading options. A more valid explanation of the positive holiday bias has to do with who is playing and who is away from their post. Professionals tend to trade both sides, long and short. The public tends to trade predominantly the long side, seldom takes profits, and sells with a loss. Thus with reduced professional short selling participation the public's buy orientation produces the positive effect. Just maybe the Nature's Pulse energy point of 11/24 to 11/27 will work against the above trade..or maybe the pros have left sell orders to distribute more stock. We did see a decrease in implied volatility(VIX) to 21.22 on Friday which implodes option premium and works against both calls and puts. VIX related indicators are armed for a sell but still in buy mode. An increase in the VIX index would be commensurate with a sell signal at this point. Holiday periods can be thin and volatile when special interests move the market. So it is a toss up this time and we are weighing various sentiment and technical indicators more heavily this time than the seasonal bias. It is a discretionary decision whose fate is still unfolding but option sentiment is in favor of a near term correction.

As expected, the MomentumCycles indicators are registering strong Sell Alert signals now after being near the Sell Alert zones all week. Most noticeable are the CODIs which have firmly crossed into the Sell Alert zones. The Modified Option Strategy Spectrum has moved into Extremely Overbought which occurs less than 5% of the time. The AMOSS which is an adaptive form of the same thing has moved within one day's reach of extremely overbought also. The OEX Cone Projection Oscillator has reached the degree of overboughtness last seen at the previous four day correction in early November. One day downside targets for the OEX on the Cone chart are 571 (average down day, green cone) or 567 (strong down day, red cone). Both of these are easily within the realm of possibility and probability. Both are on the centerlines of the short and longer term regression channels and it is reasonable to expect a pullback in prices to at least the centerline of the blue regression channel. Chris Cadbury's option premium ratio {currently .78 at the new Friday DJIA high,with the OPR high of the rally 1.10, at a lower DJIA price,an obvious nonconfirmation}is calling for a 2.0% correction by the close of 11/27/98 and down 3.1% by the close of 12/4/98.It is to be noted sometimes his price targets are achieved more quickly than the projected dates. His partial update is available at http://www.afund.com. A 2% correction from 575 would be 563.50. 563 just happens to be at the larger red cone on Monday and within a few points of the major regression channel centerline. A 3% down move would take the OEX to 557.75 which is closer to the Grey cone and the lower side of the minor regression channel. A 1% move on up days is what is commonly expected on any exchange around the world. Strong down days after a big run up are more like 1.5%.

The expiration has moved the new high relative strength indicator out of the sell zone on the ADHL chart. It also improved the NHNL a bit. The "big however" is the 5 day average of advancing volume on the McOsc chart. It clearly shows a top forming divergence. The McOsc is within the neutral zone of +,-40 and could easily drop below zero in one strong down day. Should that happen it would probably trigger some stops and precipitate more than one down day. MomentumCycles has been searching for a more precise option sentiment indicator and may have found one as represented in the HR OEX.In the past,we have successfully used observations about the Investor's Business Daily put/call ratio{currently .40} and various CBOE equity put/call ratios,as well as the option premium ratio. Please note that our new HR OEX has a major sentiment reading which is followed by significant corrections and a minor sentiment reading which is followed by consolidations or minor corrections. The major equity indexes are now at the major sentiment/correction level.

Here are some charts:

DJIA FIB CHART. S AND P 500 FIB CHART. S AND P 500 PIVOT CHART. INDEXCP CHART. INDU CHART. ANOTHER INDU CHART. NYA CHART. CHART. CHART. OEX FIB CHART. OEX 5 MINUTE CHART. OEX PIVOT CHART. RSISTO CHART. SUPERT CHART. XAU CHART. XAU DAILY CHART.

MomentumCycles commentary for the open of Tuesday, November 24, 1998:

James Dines appeared on Nightly Business Report Friday and contributed to the INTERNET mania Monday {Amex internet index up 5% Monday}.The AOL news helped of course,but an issue mentioned by Dines on Friday with an incorrectly labeled name rose from 4 to 5 in one day,and it wasn't even internet related, although retail buyers thought it was.Symptomatic of a buying panic.Once Amex Internet starts to lose status as the upward leader,the hot air will rush out of the balloon quite quickly.

Equity put/call of 176106/510490 again in an area historically toppy{see put/call comments below}.5 day rate of change at 4% nearing previous toppy +5% area.

On to Monday's OEX action...

Call it holiday bias, call it UC payroll indicator, call it end of month seasonality, whatever the reason, this Nature's Pulse energy point 11/24 - 11/27 is real. If the market is rallying into the energy point, then a downtrend follows. We have been following the seasonality cycles vs the technical indicators. You can see for yourself what happened today by reviewing the charts, but here are a few pertinent comments. First the option sentiment, HR OEX, Equity CP, TXCPV have all peaked and turned down. This pivot has preceded price turns by a day or two previously. Second, the breadth indicators, ADHL, the intermediate term system is vindicated by holding on to its buy mode. Yet divergences remain between the indexes and the McOsc (on the edge of its neutral zone) similar to last summer. NHNL, is struggling to prove that the bull is still alive. SuperT is confirming this rise but is lagging a bit. There is a subtle point on the MOSS chart where the yellow timing indicator has made a knee in the exteme opposite zone from the OEX indicator. This knee is a hint of a nearby trend change in the OEX. Moving on to Monday's Cone chart we see we had a crash up day as the OEX reached the Grey cone. Note that the OEX reached for the intersection of the short and long regression channels. In chaos theory this is a powerful attractor, a point at which prices accelerate towards, and may reverse trend. Also note the Projection oscillator is now at max overbought. See Tuesday's Cone chart for Tuesday's support/resistance levels. The INDU, DSP8Z, OEX fibonacci charts show the indexes reached all the way to the upper weekly resistance levels. CODI's have moved deeper into the Sell Alert zones.

AMOSS CHART. S AND P 500 PIVOT CHART. INDU CHART. ANOTHER INDU CHART. NYA CHART. OEWLQ CHART. OEWXN CHART. OEWXQ CHART. OEX 5 MINUTE CHART. OEX PIVOT CHART. OEX P AND F CHART. RSISTO CHART. SUPERT CHART. XAU CHART. XAU DAILY CHART.

MomentumCycles commentary for the open of Wednesday, November 25, 1998:

XAU still working the results of the short term 83 price level sell we mentioned a while back,closing at 76.18.We are still expecting a rally somewhere soon topping in about a month and a half. XAU short term turns should be looked for about 12/7,12/26,1/6,1/13,1/25,2/4,2/11,2/23. Notice the recent price compression on XAU -usually a prelude to high volatility.

DJIA money flow turns could be looked for about 11/28,12/14,12/25,1/11,1/21,1/28,2/25.

FNM making a new high with an eventual mid 70's target.

Market sentiment at a recent historical extreme with 59.8% bulls in Investors Intelligence.These levels have in the past 6 or more years coincided with short term tops.

Levels of bulls in the 60% or higher range were last seen decades ago.

On to Tuesday's trading and the pre-holiday session...

One day does not make a trend. OEX and DSP8Z did close at levels that puts them in a weakening position below tomorrow's pivot on the open. That means the pivot is first resistance and if the trading is weak then S1 is first support. McOsc dipped back into the neutral zone. New highs dropped back from 126 to 107 forming a minor double top in the NHNL chart. NYA breadth was negative all day. OEXWM stopped just above its first dynamic support level. A failure of this level implies a test of the next one below, just as in the classical pivots. MOSS and AMOSS are working beautifully with pivots and zone crossings. A true rapid index trend reversal would have these indicators trending downward across the zones rather than sideways in a zone. CODI's are also making sell pivots. This technical scenario is contrary to the seasonality expected at this time and and is where short term traders get tripped up. About all you can do is place your trades with appropriate stops and go with the technicals until the seasonality weighs in.

Here are some charts:

ADHL CHART. TUESDAY'S CONE CHART. WEDNESDAY'S CONE CHART. DJIA FIB CHART. S AND P 500 FIB CHART. EQUITY CP CHART. HR OEX CHART. INDU CHART. ANOTHER INDU CHART. NHNL CHART. OEWLQ CHART. OEWXN CHART. OEWXQ CHART. OEX FIB CHART. OEX 5 MINUTE CHART. OEXPF CHART. RSISTO CHART. SUPERT CHART. TXCPV CHART. XAU CHART. XAU DAILY CHART.

MomemtumCycles commentary for the open of Friday, November 27, 1998:

We said the a move to the mid-70's was inevitable for this market bellweather,FNM,once 71 was exceeded.Notice how the chart target {short term }of the 75 area is about to be tagged.Intraday Wednesday high was 74.25.

XAU now at the lower 3.5% trading band,with momentum of 7 versus 35 days rising ,STOCHASTIC 5 not confirming the price drop,and STOCHASTIC 15 still working its move to the lower oversold area.Price is compressing for a breakout.We would buy a breakout{if it occurs} above 80 for a move to 84.5,then possibly 87.If the breakout is to the downside,no trade is recommended due to the oversold position of price.

OEX Bullish evidence-Amex Internet index still outperforming the market,NASDAQ relative to DJIA outperforming,3 day breadth and volume still rising,BKX up 1%.Bearish evidence-length of rally,59% bulls in Investor's Intelligence,put/call recently at .38 in IBD.

We continue to recommend a 1.50$ stop loss below the entry price of any purchased option,and/or a trailing 1.50 profit stop.

On to Friday's action...

Technicals appear to be in consolidative mode as seasonality develops. New highs have dropped from 126 on Monday to 107 Tuesday to 76 on Wednesday. NYA breadth was flat in a nontrend inducing mode. McOsc is still flirting with the zero line. Even if new highs develop next week, the topping divergences will continue. Three day EquityCP ratios have peaked as they do when price peaks. The bottom line is technicals say price has run out of steam, seasonality says money will flood in Friday, Monday, Tuesday. If we get some very heavy volume days without a commensurate increase in index levels, then the long awaited forecasts by some well respected gurus will come to pass. One is even beginning to look for a 50% correction of the rise from the October lows.

Here are some charts:

ADHL CHART. AMOSS CHART. CODI CHART. CONE CHART. DJIA FIB CHART. S AND P 500 FIB CHART. S AND P 500 PIVOT CHART. INDU CHART. ANOTHER INDU CHART. MCOSC CHART. OEWLQ CHART. OEWXN CHART. OEWXQ CHART. OEX FIB CHART. OEX 50 CHART. OEX PIVOT CHART. OEXPF CHART. OEXWM CHART. RSISTO CHART. XAU CHART. XAU DAILY CHART.

MomentumCycles commentary for the open of Monday, November 30, 1998:

XAU still operating under the sell from the secondary 83 high,now with stochastic 5 at 10,very short term oversold,ready for a bounce,and Stochastic 15 at 15,almost ready for a bounce,with price below the lower 3.5% trading band,under the influence of tax selling.We would buy a close above 80 for an initial target of 83-84.Look at the recent series of descending tops on the XAU charts.An upside violation of the descending tops is bullish.Price is presently 74.61

EquityCP, TXCP, and HROEX Call/Put ratios have peaked at extreme levels and turned down as they do at significant price peaks.Notice the IBD put/call ratio hit .33 on Friday, a 5 year low,and Investors Intelligence and Market Vane are showing extreme bullish levels{57.9% and 73%}.The Greenspan model shows the market 10% overvalued.Extreme declines are historically seen at the +20-30% level. McOsc is flirting with the zero line. NHNL is peaking at a low percentage level similar to last summer. ADHL is an intermediate term system and remains in Buy mode, but will be late in generating a short term Sell signal so a trendline or other money management stop should be used. New Highs are heading back to sell mode. The 5 day VIX RSI system has generated a sell a few days ago, however previous sells have just been minor consolidations. MOSS and AMOSS have made a zone crossing to the down side indicating the uptrend may be nearing an end. CODIs are in sell alert territory. Relative Strength, RSISTO, is crossing into sell mode. Cone Projection oscillator has peaked in overbought. OEX and DSP8Z pivots have a very narrow support and resistance zone for Monday due to the shortened trading day on Friday and low volatility. Here are the OEXWM, XAU 10 MINUTES, XAU DAILY, and INDU CHARTS. The battle between seasonality and technicals is coming to a decision point early next week. We may soon see the beginnings of a December trend. Looking back over some historical charts, December tends to correct some October and November excesses. There is always a lot of hype in the media about year end rallies, perhaps we have seen it in the large caps already. The year end seasonality trade is to short the blue chips and buy the secondaries. It appears the setup has been engineered perfectly for this. Bull markets tend to fall faster than they rise, but it is hard to imagine one that could fall faster than the rally from the October lows.

Here are more charts:

CYCLE CHART. DJI FIB CHART. S AND P 500 FIB CHART. INDU CHART. NYA CHART. OEX FIB CHART. OEXPF CHART. SUPERT CHART.

MomentumCycles commentary for the open of Tuesday, December 1, 1998:

When they leave the hot stuff,they leave in a hurry! Amex internet index -7.02% just today.Those still playing momentum stocks on the long side were warned this weekend ,with 45 minutes at the start of Monday a.m.to exit before the decline started in earnest.With a 5 year one day IBD put/call low ratio of .33 Friday{see 4th paragraph for more detail on put/call figures}Monday was inevitable.

With the XAU,our strategy recently was to wait for this index to take us into the long side on STRENGTH,rather than buying weakness.We noted the recent descending tops,and were looking for a breakout above 80,as a rally was due soon in this time frame of last quarter.We noted the Stochastic 5 reading of oversold and the Stochastic 15 of 12 and Stochastic 20 of 17{short term very oversold,longer term almost but not quite wiped out}.The breakout didn't happen,and if this 70 area doesn't hold ,next support seems 63-64.Momentum is still dropping on 7 versus 35 days and 5 versus 21 days.No trade yet other than the previous sell at the secondary 83 high,which looks pretty good.

Money flow short term XAU trend change dates were mentioned before as 12/7,12/26,1/6,1/13,1/25,2/4,2/11,2/23, with 12/7 and 3/12 as more important price /time 'hits'.

DJIA important dates were mentioned before as 11/27,12/14,12/25,1/11,1/21,2/8,2/25.The 11/27 seems to have worked out pretty well...On to Monday's action...

High equity and index call to put ratios gave several days of advance warning of a pending index drop. EquityCP and HROEX both peaked and turned in advance of the indexes. EquityCP is still showing excessive optimism so we should expect more downside eventually, if not in the next few days then after the positive seasonality works its way through the system by 12/7. McOsc tripped on down the lower side of the neutral band. NYA breadth shows just how negative it was today. SuperT dropped down to the consolidation level, so at least price and breadth are back in synchronization. Ideally we would see them continue down until we get another divergence with breadth leading price back on the upside. For a real intermediate bottom the McOsc would drop closer to -100, however the seasonality may just permit the McOsc to test the zero line from the lower side before heading to points further down. CODIs are in sell trend and have reached the whipsaw centerline which means the odds of calling the direction become more of a dice toss. VIX is still on sell trend with a bit more to go before tagging a projection band and associated oscillators are oversold. Now this is a real short term perspective and does not discount the possibility of a longerterm downtrend occurring. It just is in agreement with a bit more selling and allows another rally cycle attempt. This next rally attempt, if it fails, might just be the bigger one you want to trade on the short side. The projection oscillator on Monday's CONE chart is now oversold, and can remain there for days if a downtrend develops. Monday saw the OEX hit the lower grey cone, which classifies as a "crash" type day. This is a 5% or less occurrance. Tuesday's CONE chart shows the support levels for Tuesday using an implied volatility look-ahead technique. OEX PIVOT and DSP8Z PIVOT show the support levels for Monday using a historical one day lookback period. Both show we could see some big point moves before support is found. INDU shows a close inside the +3% band with the 21 day average just below 9000. Note that on the way up buy signals were generated when the INDU crossed above the 21 day, again when the 21 day crossed above the 50 day and again when the 21 day crossed above the 200 day. In time we should expect the INDU to test the 21 day, then the -3% line and then the 200 day average. On Balance Volume appears to be peaking again as it failed to reach its upper band and occurs just as the INDU breaksdown. This is what should happen when the tape is in synchronization. Cycle chart is shaping up like August '98 with all components in the lower zone. At the moment the OEX and US dollar index are still in the overbought zone. OEX on the Cycle chart is breaking out of a regression channel to the downside. The MOSS and AMOSS indicators peg the OEX in the neutral zone above zero. In a really weak market with a trend change that carries through over a period of 16 to 20 days would place the indicators in the oversold zone before a reversal. Since we are expecting some positive seasonality to exert itself this week, the current move may stop here at neutral after a bit more washout on Tuesday. OEX Point and Figure chart did generate a sell on Monday.

Clyde Lee does it again with an extension of his Swing Indicator so that it now produces Andrew's Pitchforks. Here is a view of the OEX using daily data. It has some downside projections on the smaller magenta pitchfork and also has the beginnings of a larger wider ranging green pitchfork. The wider ranging one would fit in with that of the brokerage firm that called the top last summer and the low this fall. The same firm is now calling for a significant retracement of the rise off the October low. Another point of significance is that the OEX has broken out to the downside of the average true range channel produced with the yellow dashed lines.30 minute pitchfork is looking at 574. That would also pull the green pitchfork more horizontal.

Here are some charts:

ADHL CHART. DJIA FIB CHART. S AND P 500 FIB CHART. INDU CHART. OEWLQ CHART. OEWXN CHART. OEWXQ CHART. OEX FIB CHART. OEX 5 MINUTE CHART. RSISTO CHART. XAU CHART. XAU DAILY CHART.

MomentumCycles commentary for the open of Wednesday, December 2, 1998:

XAU Sto 5 at 15,Sto 15 at 12.Momentum of price 7 versus 35 days,and 5 versus 21 days still declining,getting more oversold.We will go long this only at the break above the recent downtrend tops {80} with a 76.5 stop,or if buy signals are given below 70{they haven't been yet}.This should bounce soon.

AMEX Internet index has congestion between 510-520.Off only 20 from the all time high{540.61},the recent low of 480 is critical support.As this index measures the confidence of hot money,a serious breakdown in this index will presage a return of fear similar to September/October.All traders should keep an eye on this index for an up to the minute measure of fear or confidence.

CBOE equity call to put ratio is still running at elevated levels. Once the beginning of month seasonality passes by Friday or Monday, this indicator may have more influence on market direction. HROEX reflects a reduction in overboughtness and dropped to basing/rally levels. ADHL new highs are dropping back towards sell mode and the new lows line is beginning to squiggle upwards,with no intermediate term sell yet. NYA breadth had negative followthrough in the AM but ended the day in balance as did the NYA volume. This has the feel of a delayed beginning of month seasonality and may lead to more upside on Wednesday. SuperT bounced off the Correction level indicating the selling may be temporarily over. CODI Dynamic has reached the Buy Alert band. A pivot downwards through the magenta line would cinch a buy signal. McOsc is still in neutral at -30. We could very well get a move back above zero on Wednesday bringing in some more buyers. But, remember last week we were looking for clues early this week for price action during the normally positive seasonality. So far it looks pretty weak. VOLATILITY VIX ended the day near its low after a peak soon after the open which also supports the notion that the selling wave may be temporarily over. Cones show we had a minus red day after the minus grey cone day on Monday. Tuesday's OEX low tagged the center line of the regression channel. Also the projection oscillator has turned up to test the 50% line from below,and this should happen on Wednesday with a follow through rally. I guess we should point out that the regression channels are still pointing upward and are containing the OEX. We have been getting cycles of about four days of consolidation and seven days of rally off the October lows. Thirty minute Pitchforks (gratis Clyde Lee) are headed towards 585 on the magenta fork and 590 on the green fork. A breakthrough the magenta fork implies a move to the green one. RSISTO has reached oversold and retracement levels. Also the INDU low today tagged the 21 day exponential line. OBV has actually been going sideways as price dropped,and this is somewhat encouraging for price to move up again. WinMidas support/resistance levels on the OEX 5 MINUTE, XAU10 MINUTE, XAU daily, and INDU continue to surprise this trader. OEX and DSP8Z open on Wednesday above their pivot lines after testing S2 and S1 early Tuesday morning. This action was in synchronism with the NYA breadth that started out negative and improved all day. This has the appearance of a seasonality trade. You might want to go for an at the money or one strike in the money call option for a trade that might last through Friday. Keep your stops close enough so that you can sleep at night.

CYCLE CHART. DJIA FIB CHART. S AND P 500 FIB CHART. MOSS CHART. NHNL CHART. OEWLO CHART. OEWLP CHART. OEWXQ CHART. OEX FIB CHART. OEXPF CHART. OEXPF 30 CHART.