MomentumCycles

MomentumCycles commentary for the open of Tuesday, March 9, 1999:

Traders were informed near the XAU 62 level late last week{see above} that XAU had made a Stochastic 20 crossover, which is often the prelude to a tradeable rally.Prior to the weekend commentary, we had a confirmation on the XAU chart with a green up arrow, again conveniently near the 62 level. Traders are recommended to take profits tomorrow if they went long the XAU index with a representative call, as we have now tagged the upper XAU 3.5% band of price. Note that XAU Stochastic 5 is now in the oversold region of 90. Longer term XAU Stochastic is only at the 40 level. A representative XAU option gained 39% on the day Monday. {We are using XAUDM as a representative XAU call.} Traders that bought on Friday saw the option close at 3 1/2. Traders that entered Monday, again near the 62 1/2 level, probably netted about 35% on the day, depending on the entrance. We will close the trade near tomorrow's open. Why are we closing this trade at this point? The XAU index was up 4.56% Monday, surprisingly second only to the AMEX Internet index in percentage gain. We have learned that when indices make a 5% move on the day, you take your profits on the next day's open. Here is the XAU 5 day price action.

Traders were informed late last week that Fannie Mae (FNM) was showing downside nonconfirmations, which actually preceded the bond rally{see above}. You will note that interest-sensitive issues such as FNM and the banks often move the day prior to a significant economic report, in such a way as to predict the market's reaction to the upcoming report. We would not dare to suggest that the big money knows the results of the report a day early, but this pattern has been observed so many times by us that it is obvious that there are a lot of psychics among the big money players. For this reason, we suggested covering the bond short near Thursday's open as an FNM rally was imminent concurrent with a bond market rally. FNM is now between the 21 day moving average and the upper band. Short term traders who bought FNM for a quick trade at any price near the recent lows should exit into strength tomorrow morning. This will work out to be a 2 to 4 point move in several days, depending on the entrance. Although FNM is not extremely overbought in price, it is an issue that often tracks the DJIA closely. Notice that the 5 day rate of change of the DJIA is now at +5%,after a reading of +6% the previous day.Short term non-confirmations of the recent DJIA highs,which allow for some price retracement this week,most probably Wednesday into Thursday,and overbought Stochastic 5 at 85 and RSI 5 at 90 make short term profit taking logical.Second week of month mid to late in the week cycle is often prey to profit taking after a strong move.

To quote from the MomentumCycles commentary for the open of Tuesday, March 9, 1999:

"Traders were informed near the XAU 62 level late last week{see above} that XAU had made a Stochastic 20 crossover, which is often the prelude to a tradeable rally.Prior to the weekend commentary, we had a confirmation on the XAU chart with a green up arrow, again conveniently near the 62 level. Traders are recommended to take profits tomorrow if they went long the XAU index with a representative call, as we have now tagged the upper XAU 3.5% band of price. Note that XAU Stochastic 5 is now in the oversold region of 90. Longer term XAU Stochastic is only at the 40 level. A representative XAU option gained 39% on the day Monday. {We are using XAUDM as a representative XAU call.} Traders that bought on Friday saw the option close at 3 1/2. Traders that entered Monday, again near the 62 1/2 level, probably netted about 35% on the day, depending on the entrance. We will close the trade near tomorrow's open. Why are we closing this trade at this point? The XAU index was up 4.56% Monday, surprisingly second only to the AMEX Internet index in percentage gain. We have learned that when indices make a 5% move on the day, you take your profits on the next day's open. Here is the XAU 5 day price action.

Traders were informed late last week that Fannie Mae (FNM) was showing downside nonconfirmations, which actually preceded the bond rally{see above}. You will note that interest-sensitive issues such as FNM and the banks often move the day prior to a significant economic report, in such a way as to predict the market's reaction to the upcoming report. We would not dare to suggest that the big money knows the results of the report a day early, but this pattern has been observed so many times by us that it is obvious that there are a lot of psychics among the big money players. For this reason, we suggested covering the bond short near Thursday's open as an FNM rally was imminent concurrent with a bond market rally. FNM is now between the 21 day moving average and the upper band. Short term traders who bought FNM for a quick trade at any price near the recent lows should exit into strength tomorrow morning. This will work out to be a 2 to 4 point move in several days, depending on the entrance. Although FNM is not extremely overbought in price, it is an issue that often tracks the DJIA closely. Notice that the 5 day rate of change of the DJIA is now at +5%,after a reading of +6% the previous day.Short term non-confirmations of the recent DJIA highs,which allow for some price retracement this week,most probably Wednesday into Thursday,and overbought Stochastic 5 at 85 and RSI 5 at 90 make short term profit taking logical.Second week of month mid to late in the week cycle is often prey to profit taking after a strong move."

MomentumCycles commentary for the open of Wednesday, March 10, 1999:

Traders that sold the XAU near the open from 9:30 to 10 had prices ranging from 65.62 to 66.5. The high of the day was 67.43, the close of the day was 64.93, and the low of the day was 64.93. Admittedly, we did not nail the exact high of the move, giving up between 1 and 1.5 points of profit. We now have an official short term sell signal on XAU. We would treat this as a sell long, not a sell short. The XAU is longer term very oversold on price, so we're hesitant to short it at this level regardless of trading signals. On our sample option, XAUDM, the previous close was 4 7/8, Tuesday's open was 5 1/4 to 5 1/2, the high was 6 1/8, the low was 5, and the close was 5 1/4. After Monday's gain of over 39%, traders made at least another 7.69% Tuesday - likely more. As of now, we are officially out of the XAU long position.

Well, this trade did not work out as well as we had hoped. FNM rallied during the day and closed near its high, due to another effort of bonds to reach yield support of 5.5%. Again, 5.5% has held with the 30 year T bond high yield of 5.634%, a low of 5.518%, and the close of 5.533%. Fannie Mae the first half hour had prices ranging from 71 5/8 to 71 15/16. High was 73 5/16. Traders who entered at prices near the lows at the start of the predicted rally had prices of 69 to 69 1/2. Therefore, 2 to 3 points were made on the trade. Fannie Mae has now tagged the upper 3.5% band of price, which is a good short term sell point.

DJIA is now overbought in terms of price. Stochastic 5 is 87, Stochastic 20 is 89, RSI 5 is 85, 5 day rate of change is +5%, CODI is overbought. Traditionally, second week of the month Wednesdays into Thursdays tend to be cyclically weak. Equity call/put the last three days is at median levels, so on this indicator, bullish sentiment is not extreme. The best shorts, regardless of the time of the month, occur when equity call/put reaches multiple days of 3 to 1 or more. For this reason, we are not recommending a short OEX position regardless of the cyclical probabilities.

MomentumCycles commentary for the open of Thursday,March 11,1999:

Another short term sell arrow appeared on the XAU chart at the retag of the upper 3.5% band of price Wednesday.Again,we had recommended this as a short term sell long rather than a short, as the 60's on this index has been an oversold area rather than an overbought area this year, and the index is overly out of favor longer term.FNM is also overbought short term ,having tagged the upper band of price as well,along with the DJIA.Perhaps this goes along with the 30 year T bond still finding yield support at 5.5%.

DJIA STOCHASTIC 5 at 86, STO 20 at 90,RSI 5 at 92,RSI 15 at 74,5 day Rate of Change +6%,CODI in overbought area.Second week of month, week- ends tend to be seasonally weak.The only neutral indicator is the equity call/put ratio,which is still at median levels,with Wednesday's reading at 2.536.

No trade is recommended for Thursday.Price retracement in the equity indices is overdue.

So far this week,we closed the long XAU position entered Friday or early Monday into strength Tuesday near the open for an approximate 39-48% gain for the sample option XAUDM,and the FNM long postion from about 69.5 ,closed at 71.25 to 71.9375 near Tuesday's open,more if closed later in the day Tuesday.

MomentumCycles commentary for the opn of Friday, March 12, 1999:

Normally at this stage,retail traders would be buying equity calls like mad.Thursday's equity call/put ratio was an astounding 2.1448,near basing levels.{The total CBOE put /call ratio was more bearish at .54.Some traders who use the total ratio take some longs off at .55 or under.}We are very overbought on price,which sounds like an endless tape loop,of course.With price indicators past the upper band,and STOCHASTIC,and RSI 5 jammed overbought,it's hard to recommend calls here,in spite of the usual"buy the Friday pre-ex close,sell the first signs of strength in ex-week" strategy.Of course,nevertheless,be aware that the "buy the pre-ex Friday close" strategy has worked about as well as the typical end of month long trade we use.The last end of month long trade recommended occurred on the cycle low of February 26,and was closed out successfully into March 5,and in spite of its faltering and delayed nature,worked out well.So traders who decide tommorrow to purely follow the mechanical model "buy the pre-ex Friday close"should be aware that price action going into Friday is at this point not typical behavior for a week end of pre-ex week.Thursday and Friday's market sentiment of the second week of the month is usually manipulated into dispair by the specialists;by driving down price they are setting up for the maximum surprise price action to the upside into the options expiration of ex week,to their own benefit,of course.At this point,the second week action looks like an attempt to kill the shorts,not drive away the longs!What that suggests for expiration at this point,especially if Friday continues to rally,is that the third week pattern may well be atypical.

MomentumCycles commentary for the open of Monday,March 15,1999:

One of the technical tools we look at is the option premium ratio,which appears at the end of the "A" section of Investors Business Daily.The premium ratio is the ratio of price premiums on ALL puts and calls and is collected and analyzed by various market technicians.Certain premium numbers have very often led to tradeable rallies or selloffs.Notable among these are the peculiar bearishness of readings from .83 to .85 on unchanged or slightly neagative days on the DJIA after a good rally.Friday,the reading was .83 on a -21 DJIA point day-to-day change.Admittedly,the premium ratio numbers give much better bottoming signals than topping signals,by sometimes leading traders into only marginal intraday declines in strong bull legs.And other evidence,such as Friday's basing day in the equity call/put volume ratio,contradicts this short term bearish reading.But be aware that a short term violent downward daily or intraday thrust Monday or Tuesday is warranted by this indicator's Friday reading.If I wanted to confuse the retail public before expiration,an early week decline this coming week would serve well in that regard.Traders who bought the "pre-ex" Friday close long OEX call trade know that,in contrast to many pre-ex weeks,the end of the last week except for Friday was fairly strong ,and by no means oversold.Professionals more easily drive the retail public out of calls with 2 or 3 days of declining prices in the end of pre-ex weeks.The ensuing early ex -week rally has just that more "snapback".Last week's pattern was atypical,so perhaps the pre-ex games were postponed till Monday or Tuesday.

Another good call on the XAU,as we said multiple days of short term sells were occurring Wednesday and Thursday at the upper 3.5% band of price.The sample option XAUDM we used to describe price action for the correct strategy of closing long positions on last Tuesday's open {with about a 35-45% gain}fell Friday by 24.39% {Thursday close 5 1/8,Friday's close 3 7/8}.

The short term sell of the interest rate sensitive FNM near 72 early last week after the multiple buy near 69.5 the previous week's Thursday/Friday was also correct, as this Friday saw a 70.75 close.