MomentumCycles

Momentum Cycles Update for the open of Wednesday, February 11, 1998:

Closes above flat tops can run in many shorts, as explained yesterday.The next normal weakening part of the monthly cycle would be in the Thursday, February 12 to Monday, February 16 area.

Stop losses must be based on each individual trader's entry price and risk level.We had predicted the highest probability for weakness to take place in the Thursday February 5 to Monday February 9 area.2 of the 3 days were tradeable intraday on the downside, profitably.Thursday had an intraday 40% profit for one of the recommended put strikes.

Once the time elapses for a scheduled weaker part of the cycle that coincides with the entry of CODI into the indeterminate zone,traders should be alert for whipsaws and price spikes.

If readers have not subscribed for long, it might be adviseable to read the previous commentaries on the index page.We have repeatedly suggested several viable profit protecting techniques in past commentaries in addition to the proper allocation of total % of trading capital for each specific trade.

Logically, no system or trading technique can be flawless.If that was possible, in a very short time the owner of such a system would own ALL the financial assets of the entire world.

Breadth:

NYA breadth flipped back to positive after one day of being negative. The McOsc of issue and volume continue to form a divergence from the indexes. This is common at peaks prior to trend changes. CODI was in the indeterminate region yesterday where whipsaws occur. This is purely a momentum move and not a valuation move. The DJIA Price Earnings Ratio reached 21 and the SPX reached 25. There just might be another element at play here. With the Persian gulf showdown to occur next week it just might be that unwinding is occurring this week under "controlled" conditions rather than in the midst of a conflict. This is of course pure speculation, but unwinding of hedges does sometimes occur in pre E week if the opportunity avails itself.

Volatility:

Z Timer has closed in the extremely overbought zone where outright puts are preferred over spreads. MVIs are not really where you would expect them to be as this has been a DJIA rally and is not reflected that much in the OEX, surprisingly. Even the VIX, OEX volatility index, is quite untouched by all the fanfare. At least for now it is.

RSI, SMI:

XAU and TYX are pulling back. SPX RSI is peaking and SMI is rolling over.

Fibonacci Zones:

Remember, this week started with the indexes near the upper weekly Fib Resistance Zone. After two days, the index closes were in the zone or below it. There are three days left to work down to the balance point or lower. Ratio oscillators are tracking in overbought so a trader has to be alert for a reversal of this trend. DJI NDX OEX SPX TYX XAU

Stock of Interest:

CMR War can be bullish for base metals, especially high grade cobalt, which has been extremely strong recently.Preliminary drill results from Maskwa are positive.The most recent trading pattern has been large block buying and smaller lot selling.

Pivots:

The DJIA had a zone 6 close and the others had a zone 5 close. All have a zone 4 open anticipated. Statistically a zone 5 or 6 close and zone 4 open has 73% probability of support being found in zone 2. Zone 3 has a higher probability of being reached than zone 2. Zone 5 has the highes probability of resistance. The KeyLine for the OEX on Wednesday is 485.35. The Feb puts have a strike of 480 and have lost nearly half their value. We had such a good trade on the calls coming into February that this is a small give back. However, discipline does demand a stop loss, either an intraday trendline stop as as been discussed previously or a percent stop loss. Those who went with the March options should hold them, the Febs are running out of time although they are within striking distance. SPX

Momentum Cycle Cones:

The redline cones provided resistance at one standard deviation move based on implied volatility. This is the most expected on a strong day. Weak days are confined to the grey cones and crash up or down find resistance or support at the green cone.

Momentum Cycles Update for the open of Thursday, February 12, 1998:

We are still holding one long position in the March OEX puts, since traders that did not liquidate at the end of Monday weakness were stopped out with a loss in the February series.The next most probable short term weakness will most likely be in the Thursday to Monday area.It is notable that the 10 day moving average of up volume turned down today from a very high reading, and the 10 day moving average of down volume turned up.MACD chart formation is similar to that before the December 5-8 short term top.There is a minor nonconfirmation of the recent DJIA high on the shorter term Stochastic.

The Sunshine Mining {silver proxy}chart looks as if will fill the gap or test the breakout.Silver may well be a great buy on the retracement.

The DJIA has run powerfully above the upper 3.5% band.When this happens, the longer term eventual result is most often higher highs,but corrections can still interrupt the uptrend.

Breadth:

NYA breadth narrowed today with advances and declines ending over 1200 and keeping a lid on prices. McOsc for issues and volume continue to diverge from the index as so often happens at tops and trend changes. CODIs are mixed, with one in the sell alert and the other indeterminate. OEX has not broken its uptrend line yet.

Volatility:

Z Timer is defining the state of the OEX as extremely overbought. MVIs are working their center lines with the MVI adaptive having crossed to the lower side with narrowing bands. A volatility expansion is expected soon.

RSI, SMI:

XAU and TYX have pulled back to the 50% lines on the RSI charts. SPX RSI has become super extended into overbought.

Fibonacci Zones:

Weekly fib resistance is holding with ratio oscillators overbought. DJI NDX OEX SPX TYX XAU

Stock of Interest:

CMR has 40 lots bid at 1.17 and 49 to sell at 1.18.The unequal distribution of bids and asks appears to be narrowing, with more large lot buyers.

MC cone:

Straight up day after day into expiration would be statistically improbable.

Pivots:

Here is where we see some excitement potential tomorrow. All three charts have an extremely narrow range between the lower and upper bands. This sets up the conditions for a gonzo move either way by stop running. This could be one of the most interesting days so far this year. DJI OEX SPX

To quote from the Momentum Cycles Update for the open of Thursday, February 12, 1998:

"We are still holding one long position in the March OEX puts, since traders that did not liquidate at the end of Monday weakness were stopped out with a loss in the February series.The next most probable short term weakness will most likely be in the Thursday to Monday area.It is notable that the 10 day moving average of up volume turned down today from a very high reading, and the 10 day moving average of down volume turned up.MACD chart formation is similar to that before the December 5-8 short term top.There is a minor nonconfirmation of the recent DJIA high on the shorter term Stochastic.

The DJIA has run powerfully above the upper 3.5% band.When this happens, the longer term eventual result is most often higher highs,but corrections can still interrupt the uptrend."

"Here is where we see some excitement potential tomorrow. All three charts have an extremely narrow range between the lower and upper bands. This sets up the conditions for a gonzo move either way by stop running. This could be one of the most interesting days so far this year. "

Momentum Cycles Update for the open of Friday, February 13, 1998:

The pros ran both the buy and sell stops Thursday,buying at the extreme -881 tick at the lows early in the day and selling at the +756 tick at 2:45 and at the +625 tick at 3:15.We have had 2 +400 closing ticks 2 days in a row.Predicted and tradeable Thursday weakness should have been seen to be transitory when the steep intraday downtrend line was violated at 1:10 p.m.at 483.75.{This link also shows the status of those still holding the March puts.}DJIA closed sitting at the lower end of the intraday upchannel.

There are still many nonconfirmations of the recent highs,since the 5 day rate of change at +3% is not confirming the new highs, and the 10 and 21 day moving average of up volume is dropping.Asia is weak again early this p.m.Has correlation been forgotten?

Still, the recent close above the 3.5% trading band is comparatively rare;higher highs in the next several months are the usual result.

Traders are entitled to use tighter stops than the 50% rule.We use the 50% rule only for mechanically benchmarking the trade. Stops really are a personal choice.One can also draw intraday trendlines, which for daytraders Thursday would have closed the OEX puts at about 483.75.

For bears, probability says even the 480's have a chance. By looking at the OEX pivot chart and the OEX cone chart you can get an idea of just what can happen. Tomorrow has a very wide spread. Note the S3 level and note the red cone on the cone chart. March is a long way off when it comes to measuring options. Last weekend we had the two option decay charts showing the curvature.

Breadth:

NYA breadth really was not anything to crow about today. The A/D line(intraday)turned down as the indexes flirted with new highs. This is not confirming action. McOsc issue and volume are still diverging from the index. CODIs ended back in the sell alert region. OEX penetrated its trend line and bounced. If you compare the price action this week with that of expiration weeks you get the feel that this is an E week and today was E week Friday. Let's speculate for a minute and assume unwinding is occurring this week. What happens next week? Post E weeks tend to reverse the action of E week. Enough of that, now back to the facts.

Volatility:

Something has to be said about the VIX, volatility index for OEX options. Since the DJ futures and options and DJX index options have been created, and the OEX has split, the VIX has been rather subdued. Also the DJIA has been having these 50 and 100 point daily moves. Now it has to be said that half the volume on optionable stocks has to do with hedging of option and future positions by the professionals. Half. This has a big impact short term on index direction. As this rally makes new highs the Z Timer is warning that it is overbought. As we have seen this does not mean to buy puts immediately and the trigger is when the Z Timer pivots down and makes a zone line crossing. Which really means there is a price/volatility trend change. The MVIs are not going along with the rally at all and continue to reflect a neutral to bearish view. These option indicators tend to be contrary in nature and premature. They won't always work, but have worked a very high % of the time.

RSI, SMI:

SPX is in the most overbought state and on the RSI chart is even losing strength. See charts for the XAU and TYX which both appear to be inching upward as though just maybe the economic outlook is not immune to some inflation. This stock rally today was not led by bonds, another nonconfirming sign.

Fibonacci Zones:

NDX is the weakest -closing between the fib zone and weekly balance. DJI has been flying on jet fuel now that futures and options trade on it. It nearly reached the upper fib line. This is a two way street. DJI OEX SPX TYX XAU

Stock of Interest:

CMR has good bids at $1.15.It would be logical to expect good results soon from either{or both} Maskwa and Binco. CMR's chart has been building a base with improving technicals now that it has been picked up by several analysts and has news pending. Watch the daily volume for early clues of pending price movement.

Pivots:

Superstitious? Friday's Classical Pivots have a wide spread between support and resistance due to the wide range on Thursday. With computers driving system trading off of pivots, we could see another day of wild moves. DJI OEX SPX

MCcone:

The redline cones give the probability for prices to be contained on a strong day. There is a 68% probability that prices will be contained within the red cone and 32% that they will fall outside of it. This cone is based on what the OEX options are implying where the OEX could range between now and expiration. It is best used as a one day look-a-head similar to the pivots above. Note that the cone projection oscillator has crossed below the 50% line. This also does not confirm the apparent smoke screen being televised by gurus marched in front of the camera.

Momentum Cycles Update for the open of Tuesday, February 17, 1998:

One of the tools we use are ratio relationships of the option premium ratio and DJIA prices.On Friday, the DJIA closed at an almost unchanged reading {+.50 points} after a rally of over 200 points.In addition, the last three OPR readings were .78, .92, and .80 .This particular reversal formation culminating in an almost unchanged day generates several sell relationships.Interestingly, the last appearance of this was also on a Friday, although admittedly not before a market holiday, which might possibly distort these ratios.

Those still holding the March puts may see some daylight soon.

Commercial hedgers are net short the bonds and S&P.

We are seeing low VIX readings for recent trading, accompanied by the 10 day moving average of up volume dropping, and the 21 day moving average of the a/d line dropping for 3 days from a short term peak.

This overbought position should{at the very least}caution traders from taking short term OEX call positions. After a pullback to within the upper 3.5% trading band,we will work off some of the extremely overbought readings.The market normally makes such a pullback after rising above the band.

As of 11 p.m. Sunday eastern, Asia is undergoing another bout of chicken flu, but Europe was strong.

If strength manages to continue through this week in OEX,as one would normally expect to see in an options expiration cycle, we could look for a short term top in the February 18-19 area.Those who are trading calls intraday in spite of overbought conditions {using the pivot and fib charts shown below} should be especially cautious of long OEX call positions after February 18-19.

When we do get a pullback, the exceeding of the 3.5% trading band normally does imply higher highs down the road.

Breadth:

Let's get real now. There have been four days of declining NYA advances and four days of increasing declines, and the equity indexes are beginning to hang onto thinner and thinner air. The divergence between the OEX and the issue and volume McOsc continues. The divergence can continue for a number of days. The McOsc chart is useful for comparing the first week of December with the first week of February. One big difference is the level of the volume oscillator this time. Issue oscillator topped out at the same level. For downside projections, take a look at the OEX regression channel chart. There are a number of regression channels that contain prices for extended periods of time. The dominant one extends back to January of 1995. The channel lines continue to provide support and resistance. A few smiley faces have been placed at possible reaction levels. CODI is in the sell zone.

Volatility:

Z Timer and Z Score are both warning of the short term overbought nature of the OEX. MVIs continue on their way down in sell mode. Usually the OEX will start dropping after a failing test of the +2 band. Here they are all the way down to the center line. What this means is this up cycle has been extended in time. On Friday the VIX dropped below 20 after a long spell between 20 and 30. It tends to make a low at market tops, not to imply Friday's reading was the THE low.

RSI, SMI:

SPX RSI and SMI are finally beginning to show some degenerative character.

Fibonacci Zones:

The dominant features on the NDX, DJIA, OEX, SPX are twofold. One is the rolling over of the Ratio Oscillator. Second is the daily stop loss(red stairstep) in close proximity to the weekly balance(dashed line)along with Friday's closing prices near the middle of next week's zone spread. Note the NDX has an extremely narrow zone height. TYX XAU

Stock of Interest:

CMR has found nickel in the early BINCO drilling {as we had predicted months earlier}.Only 3 holes have been drilled so far , showing .22% nickel where no nickel had ever been found before.Sulphides similar to the Thompson belt geology were found in the 3rd hole.Further winter drilling will likely bring more and more news from both MASKWA and BINCO.Click here to read the complete press release.Large institutional investors are starting to look at base metals as a value play{see Barron's page 32 this week}.

Classical Pivots:

We have tighter pivots for Tuesday than on Friday, and the indexes are starting on the Keylines. This really sets up a 50/50 situation. It is as neutral, wait and see as can be. DJI OEX SPX

Momentum Cycle Cone:

The OEX starts next week with the projection oscillator in sell mode below the 50% line.

Momentum Cycles Update for the open of Wednesday, February 18, 1998:

Normal money flow cycles would see relative equity price weakness starting intraday Friday, February 20 into Tuesday, February 24.The last week of February would normally see the transition from end of month weakness to reinvestment by pension funds with new month money.In the period Wednesday ,February 25 to Friday ,February 27, we would expect to see a low before the new month rally gains strong momentum.

From the OEX high of February 10 to the close of February 17, the net change has been 1/2 OEX point.It has been a daytrader's environment; only those able to draw intraday trendlines and make quick exits and entrances have made money.

Click here to see the current March put price for the strike price we have been charting.

10 day moving average of up volume is still dropping, that of down volume still rising.A huge multi-day breadth and volume expansion is neccessary to have a powerful extension of the bull leg.

Breadth:

NYA A/D line is not confirming the last three days of index rise. The early morning rise was short lived. McOsc issue is within one day of crossing below the zero line. McOsc volume is trending down as the index makes new highs. This is not a positive sign. CODI remains in a sell trend with the OEX on the verge of dropping below its trendline.

Volatility:

Z Timer has made a convincing sell pivot on Tuesday by crossing a zone boundary to the downside. MVIs remain in sell mode.

RSI, SMI:

SPX RSI and SMI are rolling over. See charts.

Fibonacci Zones:

Upper weekly Fib resistance was tested and failed with Ratio Oscillators rolling over. TYX is sitting on lower Fib Zone.

DJI NDX OEX SPX TYX XAU

Stock of Interest:

CMR made a spike low to retest the recent lows and closed at 1.13, with apparently good bids in the 1.13-1.15 area.Resistance was still seen at the top of the trading channel.Fundamentals are improving daily, with new drill news very positive.

Pivots:

NDX was the weakest of the four equity indexes. The others met with selling at R3A after the early morning pop. Breadth deteriorated rapidly and price could not hold the gains. Tuesday looks like a weak day. DJI NDX OEX SPX

Momentum Cycles Cone:

Projection oscillator is still in sell mode. A new feature on the cones is the cone for the previous day that shows where the high and low were contained for reference purposes. We have had two days that were contained by 0.5 standard deviation moves. We should expect a volatility expansion rather soon.

To quote from the Momentum Cycles Update for the open of Wednesday, February 18, 1998:

"Normal money flow cycles would see relative equity price weakness starting intraday Friday, February 20 into Tuesday, February 24.The last week of February would normally see the transition from end of month weakness to reinvestment by pension funds with new month money.In the period Wednesday ,February 25 to Friday ,February 27, we would expect to see a low before the new month rally gains strong momentum."

Momentum Cycles Update for the open of Thursday, February 19, 1998:

As we edge higher here, the 10 day moving average of up volume is still dropping, as well as the longer 21 day moving average of advances versus declines.The 5 day rate of change at +2% is not confirming the new highs, and shorter term RSI is at an extreme.

Breadth:

NYA advances continue to run over 1200 and the declines just slightly under 1200. The short term A/D line is not confirming the latest price rise nor are the McOsc issue and volume oscillators. In fact the issue oscillator has snuck below zero without a lot of fanfare as everyone is too busy looking at the index prices. Do we dare say Thursdays have a bad reputation, or is that asking to be proved otherwise by the market?

Volatility:

MVIs are testing their centerlines from below. In normal times a failing tag of this line is a continuation of a sell from the upper band. Well, the question is, why are the MVIs dropping when the index keeps going up? The answer is the MVIs are a combination of index and volatility and are designed to be early, but the present length of the rally is statistically unusual. The indicator could be fudged by increasing the cycle length, but that is just when the cycle would shorten and leave you hanging in sell mode. So, what other clues do we have here? The bands are making an unmistakable narrowing. This is a prelude to a volatility expansion. Volatility expands when markets drop. Z Timer is trending in the overbought zone and made one dip yesterday and recovered part of it today. There is a Golden Ratio cycle date coming up on 2/20 +,- one trading day.

RSI, SMI:

SPX RSI is weakening and its SMI is peaked out at 100% in trend mode. It is guaranteed not to continue forever.

Fibonacci Zones:

NDX is the weakest of the big four, SPX, OEX, DJIA. All are working in or around the upper weekly Fib resistance zone as we coast into expiration Friday. XAU Ratio oscillator is a mimic of what the Ratio Oscillators for the big four will look like once their daily trends turn down. TYX is working the lower Fib zone as big bond traders dump bonds triggered by technical trading.

Stock of Interest:

CMR is reworking the lower end of the trading lows while fundamentals improve daily.

Pivots:

Sure looked like we were going to get a close below the keyline. Between 2 and 3 PM the cumulative volume and issues were in sell mode right along with weakening price when the market got goosed with positive statements on a popular TV channel. Sure seems like someone wants this market at super high levels before an unpopular war starts. Longterm trendlines and moving averages have to be protected. Don't put it past the brokerage house war rooms to manipulate something of this nature, or even the government. It was once said that the public has the opening hour and the professionals have the closing hour. The trouble is that there is that one day when the pros don't come in on the close and leave you holding the bag. DJI SPX OEX

Momentum Cycles Cone:

Lately the daily range has been contained within a half standard deviation based on implied volatilty. We know there have been times in the past when prices reach the red and green cones. Don't get lulled into a false sense of security with the tight containment. The March puts have now lost half their value. There are still 4 weeks left and the strike price is only 14.xx points below current levels. The issue of stop losses should be readdressed. This really is an individual issue based on risk aversion but does need some money management. We have been spoiled in the last year with a statistically very high percentage of consecutive good winning trades and it is beginning to look like too much was risked on the Febs and maybe the March's. To be safe in the future it would be adviseable to use a stop that lets you sleep at night. The market has a certain volatility level and you really don't want to be more than a standard deviation away from the index in order to have a reasonable delta(point change that the option moves with respect to the index). As the decay charts showed last weekend premium erodes rapidly in the last few weeks of an option's life.