MomentumCycles

Momentum Cycles Update for December 10, 1997:

Our Z timer has been warning since last Thursday and Friday that there was a risk being long equity indexes. Coincidentally, the nonconfirmations of bonds at the 6% level gave us at the minimum, a likelihood of a bounce from that level much of last week. Simultaneously, we pointed out last week that Friday was the last day in the monthly money flow cycle and that a short term turn was due December 8. Statistically, if we look back many years, the highest probability of rally takes place from about December 23 into the first week of the New Year.That's not to say Santa can't come earlier-it's just when it usually kicks in with steam.

We thought that since we often focus on value or mispricing of perceived value we should look at prices from a longer term perspective.Here are some basics from 1924:

  1. New House: $7720
  2. New Car: $265
  3. Loaf of Bread: 9 cents
  4. Gallon of Gas: 11 cents
  5. Gallon of Milk: 54 cents
  6. Gold per Ounce: $20.67
  7. Silver per Ounce: $1.09
  8. Life Expectancy: 54.1 years
  9. Dow Jones Average: 100

Hm..well, house price increases in much of the country{sorry Californians!} have been a bargain compared to car prices.Silver seems a bargain- after all,it's an industrial metal used in photography as well as a historical store of value.On those digital cameras- my photographer friend tells me the 15$ silver based camera still takes better pictures than the $7000 digital job, so Uncle Harry still is going to snap away with the cheaper version for the near future.Silver isn't technologically obsolete quite yet, and long term, it seems"low"- it's only up 5x the 1924 price.Anyway, just some musings on longer term values.

Breadth:

McOsc issue and volume oscillators continue to rollover and index price stalled at resistance. Price/trade facilitation is the name of the game. If buyers won't pay up, then price drops. NYA advances were atrocious and declines overwhelmed the Net Flow Rate which spent a lot of time in the negative region on Tuesday. CODI is still in the Indeterminate region working on a minor sell trend. Pre-Expiration weeks tend to have a downward bias until Friday when another classic options and futures trade kicks in.

Volatility:

The Zone timer has started to drop from the extremely overbought zone. The MVIs are in sell mode. The crucial event will be what happens at the -2 band. Support could be found on Wednesday where there is a rally attempt. The %b and RSI are saying it is time for more than just a few points and a few down days.

RSI, SMI:

YIELD RSI and SMI are really kicking in gear. SPX RSI is showing signs of dropping down the chimny with Saint Nick. Loss of momentum is gradually appearing on the SPX Stochastic Momentum plot. XAU is going to hold out until the last seller is totally frustrated. You could expect nothing less with an emotional sector that defies logic. $285/oz is claimed to be fair value for the yellow metal considering various methods of production and supply and demand. The first quarter of next year should see it at $320 to $340 if the pundits are correct. Some improvement in the XAU fibonacci chart is needed before making a serious commitment here.

Fibonacci Zones:

It seems like these zones work better on the more volatile indices. That is, volatile in daytrading. The INDU and the NDX hit the hourly fib zones with regularity and the end of day charts tag the weekly zones with accuracy. The INDU is resting right on its Daily Dynamic Trio(redline). The DDT is a composite of time, price and momentum. A close below this line has serious consequences. The NDX did close below its Triple Switch, another type of price momentum used as a stop loss mechanism. SPX is sitting on its Triple Switch as the Ratio Oscillator says to sell. T Bond yields have closed above their weekly balance line and just under their upper Fib resistance zone. All in all Monday and Tuesday are painting a short term bearish picture. In order to manufacture a rally up the north pole some retreat had to occur. Price just did not have the support of issue and volume as overhead resistance was kissed in the McOsc chart. The afterburners ran out of fuel and it is time to go gift shopping for the holidays. The market needs a holiday.

Of Special Interest:

Canmine(http://www.canmine.com)is likely to have some trouble getting above 1 5/8 unless some more good news is delivered to the public. A nice Christmas present would be to have some more positive drill results to induce another volume/price impulse above the AIQ channel. This would get some attention and break the longer term downtrend.

Momentum Cycle Update For December 11, 1997:

This is why you are subscribing!This was posted at the close of December 4, in plenty of time to take long index profits for short term traders.Those traders who went short into the Friday-Monday strength knowing it was the end of the money flow cycle and that a short term turn was due on December 8 were given a perfect roadmap of the last cycle's price behavior.We also gave a week's advance notice of bond non-confirmations at the 6% level {"sell with both hands"},which tagged a tradeable move to 6.175 within days of our signal.You've got to admit many of these cycle calls have been pretty amazing.And we're glad so many of you have signed up to subscribe.Knowing where the markets are going can be very addictive when all your non-subscribing friends are tearing their hair out with wrong way trades!Getting the direction right is more than half the battle.Winning the war is staying with oextrader long term.

Breadth:

Issue and volume breadth continued to deteriorate. McOsc issue oscillator is sitting on the zero line. Volume osc crossed below zero. Odds are we get at least one bounce here near the zero line. Question is, does it come on Thursday or from some level below zero on Friday or some day next week like Monday. Thursdays have become "blood donation" day on the street. VIX has a 70% chance of ending in the high end of its daily range. Friday near the close should see the pre-expiration week crowd going long. CODI is very close to the Buy Alert line. Recently this line has provided resistance and a short multi-day rally has occurred. Ideally we should have one to three more days of selling to get CODI above the Alert line and other oscillators in better shape to support an uphill XMAS sleigh ride. NYA advances, declines continue the {predicted!}pre Xmas liquidation party. Flow Rate indicates the worst damage occurred mid-day and set up a divergence with price the remainder of the day. This could be the beginning of the bounce we expect to see on the daily chart of the McOsc.

Volatility:

MVIs are trending down and the bands are flaring to make room for increased price movement, i.e. volatility. Support was found at the -2 level intraday as the MVI penetrated the -2 line and then closed inside. In a really weak market it would have closed below. %b has not become oversold and RSI is about to cross zero. The Rubber Band indicator says a bounce would be expected here in an effort to preserve institutional profits. Z Timer is on the edge of the neutral/overbought zone. Z Score is on a sell pivot/trend. Question is, are the paper profits going to be preserved by not selling, or is greed going to overrule and self destruct in the process. Cyclical studies peg December 15 as a "high energy day". The previous pattern indicates this would be a low meaning expect three more weak days. OEX P/C ratio is at 1.33. Above 1.49 is a buy alert. Below 0.99 is sell alert. It is therefore in neutral.

RSI, SMI:

XAU RSI finally looks like something substantial is about to happen. The Homestake CEO said today that the cash cost of production industry- wide for gold is $267/oz and for his company it is $230. The total cost considering "shipping and handling" is $310. Overall, forward selling by mining companies has not been a contributing factor to lower gold prices this past year. SPX RSI and SMI are weakening. Yield RSI dropped to the 50% level just as yield SMI picks up momentum. SPX RSI and SMI still look weak.

Fibonacci Zones:

INDU - daily trend changed to down, weekly zones have not been challenged yet. NDX - daily trend changed to down, two more days are needed to concluded the weekly is down. SPX - daily trend changed to down. TYX - weekly balance line(cyan) provided support today. Weekly Fib Zones not challenged yet. XAU - we have a close above the Triple Switch changing the daily trend to up.

Of Special Interest:

Canmine Resources(http://www.canmine.com) continues basebuilding. Here are the pivots for today.

Momentum Cycles Update for December 12, 1997:

Cover short index equity positions and sell puts near the open. Let me tell you about a friend- let's call him Tim.Tim has been telling me for over 10 years,"I'll never sell my bonds".He's very conservative,and,I might add, a very successful investor,although he's not happy unless he's always beating the S&P return of buy and hold.He just sold his bonds.I asked why."You said you'd never sell!" That 6% was just too tempting of a capital gain."They might go to 5.5% Tim!" You don't understand ,he said.I bought some of these when yields were 14% and have reinvested the interest ever since. My credit card is 5.9%-same rate as 30 year T-Bonds?Just something to think about..

Special Saturday, December 13 update:

Traders who acted on last Friday's and Monday's advice to sell long positions saved approximately 4% on the Dow and 6% on the Nasdaq. Traders who went short last Friday or this Monday and covered near this Friday's open made approximately the above amounts as profit. Traders who chose to buy index puts on the OEX or the Nasdaq last Friday or early Monday morning and sold them as advised near this Friday's open made approximately 15 OEX points and 90-100 Nasdaq points.

Breadth:

The race for the exits is on. Breadth-wise Thursday was one of the worst of 1997. See the McOsc, NYA, FlowRate charts for details. It is beginning to look like the way to preserve annual profits is to sell before the next guy. As long as the market keeps going down it is never too late to sell. There is an echo of irresponsibility in the air. This one-sided breadth today pushed CODI up to the Buy Alert line. It would make a much better buy signal if we had one or two more days like today, and then the classic pivot we love so much. Since pre-expiration week Fridays see a reversal of downtrends late in the afternoon, opportunity is at hand. Cycle work says 12/15 is the key day for an energy point. Don't get too optimistic about that statement as between Friday, Monday, Tuesday a lot could happen to define the pivot point. It is hard to believe the market would reverse overnight and be up Friday morning as many indices(see Fib charts) now have daily downtrends, with the weekly soon to be classified as down if we get another day like Thursday. Traders come in to work on Friday with key pivot points/Zones lower on Friday than on Thursday. Price closed Thursday below the keyline for Friday so it is very possible for the keyline to be tagged before additional selling drives price down to S1. It is an unwritten rule that overnight buy orders get filled prior to the sell orders in weak markets. In strong markets the sell orders get filled first.

Volatility:

Z Score and Z Timer have hi-tailed it to the middle of their neutral zones. That is only half the battle, their trends are still bearish and they often go to the other extreme. So, the move is only half over in statistical terms of price, time, volatility. They would have to turn horizontal to be truly neutral and that just won't happen. The market abhors neutrality as wealth is created through change. The Modified Volatility Indices both closed below their -2 line. This is significant not so much in the sense that we should expect a reversal,as instead we may be experiencing a true trend change in the market that could last into the first half of 1998. Don't forget, we have been lead to believe in a global market as a prop for our own. Implications should be obvious. Now that half or more of the global economies are(or will be)in economic turmoil we cannot suddenly stay airborn like cartoon roadrunners. Roadrunners do come back to earth. { By the way, you know that roadrunners are a desert bird that runs fast enough to get airborne and then glides to a landing. We should be so lucky!} Even more relevant to recent global equity action is the West {governments and bankers} advising Asian nations to bite the bullet, declare bankruptcy,close"inefficient" businesses, and open up their borders and sell out to the west. Periodically in economic history there is a shift of wealth from nation to nation. What are defined as stores of wealth change ownership with the cycles. So much for the causes of volatility, on to the other technicals.

RSI, SMI:

XAU RSI and SMI are shaping up. Yield RSI and SMI are back to the take off points. SPX RSI and SMI are still ominous looking.

Fibonacci Zones:

Daily trends are down for INDU, NDX, SPX, TYX(yields). Weekly trends for the INDU, SPX, NDX are on the verge of being declared down. One more day like Thursday and it will be so. XAU is holding its own very close to the weekly balance (dashed red line). It could easily turn up on a weekly basis this week or next. TYX has seen a wide ranging path as the weekly Fib zones calculated on last week's data forecast. Volatility does increase at change in trends.

Of Special Interest:

Canmine Resources(http://www.canmine.com)is working the 1.5c level. It seemed to be unaffected by the rest of the world today except for having the volume drop.

Pivot Zones are price ranges where an index will find support and resistance. The general rules are to buy at support and sell at resistance. This is easy to say and difficult to implement without the use of some additional trend and oscillator information. A breakout of a zone may find price seeking the sanctum of the next zone. The yellow dotted line in the center is a key line which price is likely to move towards initially in indecisive mkts before heading for S1 or R1. Very weak markets like on Thursday will see price drop through S1 and S2 all the way to S3 and S4. Strong markets move the opposite direction through R1 and R2 up to R3 and R4. It is possible to use these price levels when planning the next day's strategy for entry and exit. Here are the pivots for SPX for tomorrow and DJIA for tomorrow.

Special Saturday, December 13 update:

Traders who acted on last Friday's{December 5} and Monday's{December 8} advice to sell long positions saved approximately 4% on the Dow and 6% on the Nasdaq. Traders who went short December 5th or 8th and covered near Friday December 12th's open made approximately the above amounts as profit. Traders who chose to buy index puts on the OEX or the Nasdaq last Friday or early Monday morning and sold them as advised near this Friday's open made approximately 15 OEX points and 90-100 Nasdaq points.

Momentum Cycles Update for Monday, December 15, 1997:

Some of our indicators are deeply oversold.These include shorter term DJIA RSI, and CODI which finally entered the eagerly awaited buy zone.A CODI pivot is most likely for Monday or Tuesday- we are on a CODI buy alert,awaiting that pivot.That is why being short into Monday would have been highly risky, regardless of the actual price action that will take place Monday.

The shorter term RSI readings on the DJIA are similar to the readings of mid-December 1996,the end of January 1997,the end of August 1997, and mid-November 1997,where tradeable short term rallies took place.

The 5 day rate of change is- .04, which is deeply oversold.We have had 5 down days in a row to an option premium ratio of .58,which is highly unusual.A reading of .56 or lower Friday would have been ravingly bullish.

December seasonality is normally bullish after the midmonth lows.Since 1900,when the Dow in December falls three days in a row { -.33% or more each day}the market winds up higher 18 days later close to 100% of the time.

Breadth:

Friday saw a major improvement in issue and volume breadth on the NYA chart. Both the issue and volume oscillators were pretty much unchanged from Thursday. CODI ended the week well into the Buy Alert zone. This will likely lead to a buy signal early this expiration week. Speculators took the buy on Friday,having learned the"buy the pre-expiration Friday close,sell into the first early strength expiration week " strategy we've discussed here many times previously.

Volatility:

Both the Zone Score and Zone Timer have moved to the bullish side of neutral. The Modified Volatility Indices are poised for generating a buy signal within one day.

RSI, SMI:

XAU RSI and SMI is looking up. Yields are looking down. SPX RSI has dropped below the 50% line. It can drop to 40% and maintain the uptrend. It would have to move up in the next few days to keep the trend up. SPX Stochastic Momentum is rolling over indicating loss of upward momentum.

Fibonacci Zones:

OEX came close to changing the weekly trend to down by crossing below the weekly Triple Switch indicator and penetrating the lower weekly Fib level.

XAU Fib chart has a good chance of changing the weekly trend from down to up next week.

TYX ( interest rates} looked like it was going to change its trend to up earlier in the week. It met stiff resistance at its upper weekly fib zone and plunged through its lower zone. Longer term, conservative investors may possibly be lightening up on long bond positions{selling into strength} although yields are still falling.They realize they may not catch the exact bottom.

NDX looking for a rally next week.

SPX and DJIA not quite oversold yet.

Of Special Interest:

Canmine Resources (http://www.canmine.com) is shown with two additional indicators. Some trades still occur between 1.35c and 1.5c. A close above 1.75 would make its chart look a lot better. Most of the tax loss selling has been absorbed at these low levels. With the selling pressure decreasing over the next two weeks and additional good news pending, a close above 1.75 should be a conservative estimate short term(weeks to months). Five and above is attainable in months to a year if Binco is indeed the northern extension of the Thompson nickel belt.Drill results from Binco will begin to come in during January.

OEX Pivot Zones:

OEX pivot zones for Monday are slightly below those for Friday meaning that the daily trend is down until we get a close above the Keyline. That could come on Monday as Friday's close is slightly below the Keyline and Friday looked like the setup was completed for an expiration week rally. The blue shaded zones are where the OEX is expected to find support and resistance as shown for Friday.

SwingMachine had 24 patterns for current pattern. A very high percentage said Friday was a bottom. A very high percentage says 770 is a target for expiration day.

C. Lee

Momentum Cycles Update for December 15, 1997:

Readers of this site know we study the cycles of options week to determine where a high probability of success can occur for a quick one day trade.Such an opportunity was discussed before Friday's update;that is, the "buy Friday near the close of pre-expiration week, sell into the first burst of strength early in expiration week."Traders who were late to the party got another chance near today's open when the OEX traded down to Friday's late afternoon price.The obvious exit was near today's close at DJIA +100 late afternoon before daytraders and pros took their one day profit and went home happy{like our readers!}.Here is the result of this strategy.A Merry X-Mas to all of you!

Monday experienced minor improvement in NYA breadth with advances exceeding declines. The difference was not enough to change the intraday A/D line to up from flat. Issue and volume oscillators did turn up and OEX price broke out of the five day downtrending regression channel. The four day momentum oscillator did turn up after having the Buy Alert armed late last week. Net Flow Rate improved all day and was positive all afternoon except for the last half hour(not significant). Basically this is a positive picture.CODI has been in the buy zone for two days. The caution is that expiration week can be choppier than other weeks.

Volatility:

MVIs generated a buy signal on Monday. MOSS and Z Score both generated buy pivots.

RSI, SMI:

XAU stopped sinking. Yields are working on a new low. SPX RSI bounced just below the 50% in an attempt to keep the uptrend intact even though the SPX Stochastic Momentum has given an initial take partial profits signal by a cross over of the cyan and red lines. RSI can drop to 40% and SMI can remain above the 40 level and still have the SPX considered in an uptrend. In other words the short term sell from December 5,8 ended on 12/12 and the intermediate trend is still up. The OEX P/C ratio for Monday closed at 0.989 which is very close to a sell alert.

Fibonacci Zones:

OEX closed on its weekly balance line and the ratio oscillator has given a buy signal. TYX daily trend is down and weekly trend is down. XAU daily trend is up and weekly trend could change to up with a close near 72.

Of Special Interest:

Canmine(http://www.canmine.com) is stuck at 1.5c. The lows of late November and early December have not been revisited.

This chart shows that SM is expecting prices to continue. Using 1 bar smoothing, it saw today as a turn and has new estimates for extensions.

Clyde Lee

OEX Pivots:

Keyline and Pivot Zones are higher for Tuesday than Monday. Since Tuesday Keyline is below Monday close, there might be some early morning pullback to the key line or one of the support lines. Since most of our indicators are "bullish" very short term, the plan would be to look for that pullback to a support line or zone for an entry. Note Monday as an example where the Keyline was tested several times before "liftoff" to the R1R2 target zone late in the day.

Momentum Cycles Update for December 17, 1997:

11:50 a.m.update Sell half your postion in OEX long calls from Friday's entrance { or your entrance on CODI entering buy zone or pivot}.

Many traders have expressed the wish that we discuss some techniques for identifying major and minor equity index bottoms, such as those we identified this year as cycle lows in March and April, and recently in late October.The recent apparent minor bottom after 5 down days in a row is another example of a minor cycle low normally seen mid-December.There is sometimes another pullback seen after the post-mid-December low rally into expiration, prior to the end of year{ post tax selling and lack of new stock issues} rally.In late January, the new issues in the pipeline draw a lot of money, so a period of vulnerability often occurs late winter-early spring associated with the change in the weather cycle.We will post a new link button for subscribers only on our index page called "Identifying major and minor equity index cycle bottoms".It will be a secure link.Taking a position trade at cycle lows is something subscribers often think about,and we will discuss this.

Breadth:

No clear sailing yet on the breadth front. NYA decliners are still over 1200 even though advances were strong at 1735. A strong equity index rise that holds its gains at the end of the day needs to have a greater spread between advances and declines and really needs the declines to be below 1000. The McOsc of issue and volume inched upward and the issue oscillator is approaching one of those breath holding moments of truth. Will it cross the zero line again or reverse to the downside? A cross above the zero line brings in institutional buying, a drop below zero brings out hungry bears that are starving in advance of a winter hibernation(meaning this is when year end rallies are born). Net Flow Rate turned negative in a strong way mid- afternoon on Tuesday.

Volatility:

The Adaptive Modified Strategy Spectrum is dead center neutral as is its cousin the Zone Score. MVIs are still on a buy but are closing in on resistance at the mid-band. Caution! the OEX Put/Call ratio has been dropping and is on a Sell Alert.This gives some reason to be more than usually watchful about recently initiated long positions from the CODI pivot. Put Call ratios are not precise timing indicators. Not only is the level important, the trend is also. The more significant levels for the OEX are bullish near and above 1.49 and bearish near and below 0.99. It is used in a contrary fashion as most option trading indicators are. I.E., the more bullish the public is, the more bearish the index option trader is and vice versa. In the current situation the P/C ratio has been dropping from 1.48 on 12/11 to 0.879 on 12/16. This means the ratio peaked at 1.48 on Thursday after 1.33 on Wednesday and has been trending downward to 0.79 on Tuesday 12/16. This means more calls relative to puts have been purchased in a downtrending fashion for the last three trading days. Any other quarter of the year we would be expecting the market to take a spill on the day following a reading below 0.99 which sets the Sell Alert. Then we wait for the downtrend in the ratio to reverse and turn up to generate the Sell Signal. This week we have Options and Futures expiration and tax implications for the year which distorts the reading. We've also had a rising market for two days which brings out the call buyers. They can be right for a short while, but the point is, the majority cannot be right long enough to collect on the bet, otherwise the CBOE would not exist. Thus, reversals in the OEX should be expected at extreme P/C ratios.

RSI, SMI:

There was little change in the XAU, TYX or SPX to report.

Fibonacci Zones:

OEX did close above its daily triple switch reversal line changing the daily trend from down to up. Its weekly trend remains up. Weekly and daily trend is still down for T Bond yields. XAU daily trend is up and ran into resistance in the upper weekly Fib Zone.Some traders had in mind multi- year lows in this price range as a buy zone,so it would be normal to see the recently slightly broken support temporarily become resistance.

XAU Swing Machine is forecasting higher lows, meaning the trend is up.

C. Lee

Of Special Interest:

Canmine Resources(http://www.canmine.com)holding under 1.5c. The advice here has been to accumulate it with below market bids until the end of the year. The rationale is that its lows should be made in this quarter due to tax loss selling that is masking the increasing reserve asset base its management is developing.

OEX Pivot Points:

The OEX found resistance at R2A today and then backed off in the afternoon to close at tomorrow's Keyline. Sometimes the OEX will be "drawn" towards the keyline on the close or on the open of the following day. You can make a keyline calculation in the last ten minutes on your own simply by dividing the day's High + Low + Close and dividing by three. If you are trying to decide to exit a position on the current day, this information might be of value as a price target. For example, if tomorrows keyline is below today's index value just prior to the close and you are long, then the odds would be for a lower opening. That should be spelled ODDS, because it isn't a 100% rule. The opposite situation holds also. The important point is that the keyline being an average of the previous day is a price balance point that many traders and software indicators make decisions on. Wednesday's keyline is virtually on Tuesday's close so if the rule holds tomorrow, the open should be a bit confused and oscillate about the keyline until heading towards R1 or S1. This first movement can happen in the first fifteen to 30 minutes.

To quote from the Momentum Cycles Update for December 17, 1997:

" 11:50 a.m.update Sell half your postion in OEX long calls from Friday's entrance { or your entrance on CODI entering buy zone or pivot}. "