MomentumCycles

MomentumCycles commentary for the open of Friday, July 2, 1999:

Now we ALL know what beginning of month seasonality means.{First day of the month is up about 80% of the time.} The OEYGP is a good example of it. Various forms of this seasonality occur at the end and beginning of each month, with slight end of quarter variations. The trick is to get on board at an advantageous price and not to be shaken out until it's over. You might even get lucky and have the option go deep in the money, so the delta approaches 1.0. That is when the option moves one point for each point in the index. Say you got in at ten and it went deep in the money from a delta of 0.5 to a delta of one. The index may move 5 to 10 points in one day, and, of course, the option is moving by 50% and 100% from the entry point if the entry was at ten. There were a number of reasons why we tried to get on board the OEZSA (July 705 put) today. One is that the CODI entered the Sell Alert area. Its BRMomentum oscillator is pretty extended and should slow to a rollover within days. CODI now needs to turn up to generate a red sell signal. That could happen on Friday, unless the market is playing like a skyrocket. Of course, we all know what happens when the powder burns out. The EquityCP and Sentiment have peaked and turned down as the index made new highs. This has been a prelude to price turning within a day or two in the past. INDU is hitting its +3.5% band, its Force Index has turned down, its OnBalanceVolume is nearing its upper band, Moss is overbought, VIX is at recent record lows, SuperT is beginning to roll over, and the Pitchfork is "full". Now, we do have the ingredients for some pullback, but we are still in the positive seasonality until mid- to late next week. Also there have been some technicals that defy gravity, such as price moving above channel resistance. There is truth in price movement. There is truth in breadth, although the declines were a bit high. There is a tendency for option traders to be trigger-happy in their contrarian anticipation. Lately, the fibzones and cones have been reached each day by late afternoon, but the seasonality has kept the buying coming in so the pros don't sell it. Next week we should see some give up.

Note that the rate of change of price indicator,which we used to call the May 23 high and June 1 DJIA theoretical low before they occurred,suggests a short term DJIA high about July 5.So this indicator is within the approximate window of a pension money reinvestment seasonality high.

Cone Projection oscillator for 7/02 is peaking.The OEX closed on a short term regression channel line where we would normally expect resistance.

Let's also examine some charts and compare them to their oversold position back at the recent lows.CMGI,a good example of an internet hot money favorite,has STOCHASTIC 20 at a reading close to those seen at previous short term tops in early March and early April{90+}-perhaps its no coincidence we are approaching early July.FNM rallied from 62.5 to near 69-from lower band to above upper band.FNM is a fairly predictable cyclical stock,and tends to trade well within the bands.STOCHASTIC 5 is 100,STOCHASTIC 20 is at 79.These are overbought readings which are usually followed soon by short term price pullbacks.

These sample charts are radically different from the readings at the recent lows.They suggest we are near a short term top in some individual issues as well as the averages.At the very least,long reentries in these and similar issues should be made after a post seasonality pullback.

CODISYS CHART. CYCLE CHART. DSP9U CHART. INDU DAILY CHART. INDU WEEKLY CHART. MCOSC CHART. MOONTIDE CHART. NYA CHART. OEX FIB CHART. OEX FIBRET CHART. OEX WEEKLY CHART. OEYSQ CHART. TYX CHART. VOLATILITY CHART. XAU CHART.

MomentumCycles commentary for the open of Tuesday, July 6, 1999:

Since the markets are pushing on the old highs, I thought it would be interesting to revisit the Barnes risk and valuation model at http://homepages.together.net/%7Ewbarnes/stockmarket.htm. The Barnes Risk and Barnes Fair Value charts look more ominous than they have at any other time since 1980. Explanation of the 54% overvaluation of the S&P is at the site. Additional balancing in fundamentals is found at http://www.martincapital.com. It has charts, economic data, release dates, and interpretations.

MomentumCycles technical work says that a peak is in the making and alerts are being set. We could go through all the charts in detail, pointing out items of significance, but we will be brief and just mention a few. CODIsys generated a Sell signal on the close. These can be early, so be careful with it. It is hard to imagine another week passing without some correction. Seasonality can produce a rounded top for a few more days. EquityCP and Sentiment now have the 3INDX crossing with the indicators peaking and turning. Stochastic Momentum, SMI, is next to cross, and that is when puts start to pay off.

We should be fortunate enough to have a put go deep in the money like the OEYGP did. CONE projection oscillator is trending in overbought, and it's due to turn down sometime next week. INDU is right on the +3.5% band, and the OBV is hitting its band as the Force Index peaks and turns down. VOLATILITY chart is in trend mode above the springtime consolidation channel, and VIX has dropped below 20. Note also that the 5 day historical volatility (cyan line) is dropping towards levels seen at market peaks. In sequence, 5 day is below 20 day, 20 day is below 90 day, and VIX is between 90 day and 20 day. It's all in concert as the market rolls up into a summer high. In a way, this is confirming the price rise, but it is also set up for one heck of a selloff with a minimum of a ten point rise in volatility. This will give the bonus kicker to put holders, where the volatility component will add 33 to 50% to the premium. So, with VIX in the teens, it is making the purchase of puts and calls more affordable. SuperT is still rolling over in divergence from the rise of the last three days. So, we now have some fundamental and technical flags waving at this patriotic time in US history. It has been said that it's unpatriotic to short the market, but rationality says it is sheer folly to ride the rocket into the clouds. Speaking of the stratosphere, the summertime target for the DOW is 11,988 within 58 trading days on the DJWM chart. Now, it could come much sooner than that because there is a volume assumption in the calculation. If we have above average volume ahead of us, then the target date will be reached sooner. Hope you had a safe and sane 4th. Keep your assets protected from an inflationary spiral in equity prices. Save them for the bargain hunting in the fall and an occasional option trade.

Since we have a long weekend, we thought you might like to see what has been going on in the research and development category. Trying to trade OEX options on an end of day basis has its pitfalls, since the signals are generated after the close and entered the following morning. That really leaves the trader at the mercy of being taken to the cleaners. That hasn't deterred us from trying to develop such systems in spite of the pitfalls. Our suspicion is that if end of day systems could be made profitable, then the entries and exits and stop losses might be fine tuned with real time versions of the same models. Attached are three charts with four models for three time periods: Jan 1, 1985 to June 30, 1999, Jan 1, 1999 to June 30, 1999, and June 1, 1999 to June 30, 1999. Each trade was with one contract one strike in the money, and commissions were excluded. Each model can be independently tweaked for Total Profitability or Profit to Drawdown ratio. These results are for Total Profitability, so the drawdowns are a bit higher than the P/D ratio results. We hesitated in posting these because of the concern about arousing future expectations, but our intent is to post these purely mechanical trades once the real time enhancements are completed. That should be sometime in the 3rd or 4th quarter.

The joys of a long weekend provide additional surfing time to see what other sites are up to. Two interesting ones are http://www.ttheory.com and http://www.decisionpoint.com. Decisionpoint has a nine month fixed cycle chart like this DOW forecast chart. It is looking at a 9 month cycle low on July 9 to the 9400 level. 9400 would not have to be reached to create a "cycle" low. Any price that has higher lows to the left and higher lows to the right would suffice.

Interestingly enough,using our rate of change of price indicator,we had looked for a short term high about July 5 and a possible reentry long about July 13.This indicator is sometimes off by a day or two or three, but often can mark turning points quite well.

Some of the equities we examine and make comments on are showing similar short term overbought charts.We remarked on this on Friday's commentary.Rising trading bands are normally bullish,so perhaps price in these cases will only retreat to the upper 3.5% band,being far above it.FNM,CMGI,and XAU/ABX are all showing similar short term overbought conditions.

Here are more charts:

5 DAY ADVANCING VOLUME CHART. CODI CHART. CYCLE CHART. DSP9U CHART. INDU DAILY CHART. INDU WEEKLY CHART. MOONTIDE CHART. MOSS CHART. NYA CHART. OEX FIB CHART. OEX FIBRET CHART. OEX WEEKLY CHART. PITCHFORK CHART. TYX CHART. XAU 30 MINUTE CHART. XAU DAILY CHART.

MomentumCycles commentary for the open of Wednesday, July 7, 1999:

Optimism reigns eternal for equities when pockets are full of cash, and gold has finally been relegated to the recycling junkyard next to steel. Well, one of the tricks is to measure this optimism with the EquityCP and Sentiment charts, and their associated 3XIND and SMI indicators to identify a trading opportunity. Having the CODI system generate a sell on Friday close meant that Monday was looked at as exit day for the OEYGP. Or, as we have seen in the past, the CODI system gives plenty of warning, and we could still have a few more days of positive seasonality this week.

John Bollinger presented his Seasonality chart on CNBC today. It pretty much agrees with our Volatility chart. His message was that summer markets rise with the temperature and roll over into a chilly fall (paraphrased). Points of interest on the charts tonight include a stupendous tag and reversal by the INDU weekly fib on the weekly fibzone resistance. This was a red cone day for the OEX. Using these target tools, you could have exited with nice profits. This miraculously coincided with a bounce on the upper band of the INDU on balance volume. It's almost like the synchronized clock. Did you ever notice that market turns sometimes come the same day that a public figure like RalphA or AbbeyC or ElaneGarz makes outlandish forecasts? However, today's year end forecast was not really that shocking: 12,500 to 13,000 with nearby resistance of 11,500. That leaves more room for a summer choppiness, fall correction, and year end rally.

Something new tonight is the System Equity indicator that we modified this morning to include a BuyNHold line to compare with the system trading results. This will be on all future system charts. It can also be used to compare systems with a system equity to BuyNHold ratio. Perhaps that will be an indicator for tomorrow. When trading, there is always the choice of stop and reverse or stop and go flat. You always have to expect a break of trend, then a retest and consolidation as the believers change religion or lose religion. This might be that spiritual week.

Remember that several days ago we mentioned a likely short term DJIA top using the rate of change indicator in the July 5 vicinity.{July 5 was a holiday of course.}This indicator tentatively looks for a long reentry on about July 13.We will have to see if the other technicals agree at that time.

We mentioned FNM and ABX/XAU looked quite overbought on short and longer STOCHASTIC measures since last Thursday/Friday,being well above the upper trading band.Today ABX fell 6%,and XAU fell from well above the upper band to the moving average.FNM fell from above the upper band to close below the upper band,as predicted.

CMGI however,although quite overbought,closed up on the day.High 126,low 115 close 117.5625.Does look like a possible reversal.

Here are the charts: 9 MONTH CYCLE CHART. CYCLE CHART. INDU DAILY CHART. MOONTIDE CHART. MOSS CHART. NYA CHART. OEX FIB CHART. OEX FIBRET CHART. OEX WEEKLY CHART. OEZSA CHART. PITCHFORK CHART. SUPERT CHART. TYX CHART. VIX CHART. XAU 30 MINUTE CHART. XAU DAILY CHART.

MomentumCycles commentary for the open of Thursday, July 8, 1999:

What does seasonality have to say about Thursday, 7/8/99? To me it says that 7/8 is the 5th trading day of the month and the official end of seasonality, but Monday created a holiday effect, so the seasonality could be extended a bit.{Remember that the rate of change indicator looked for a short term top in this time frame.} Thursday always brings with it the premonition of a down day with rising implied volatility, as measured by the VIX index. And if it is the Thursday in the week prior to expiration, the premonition is even bigger. The change in seasonality shows its hand in things like the EquityCP and Sentiment, along with the 3XIND and SMI crossovers, as price is peaking. It shows its hand in put option premiums firming up and call options not rising as much. It shows up in divergences between the index and the 5 day advancing volume rollover and in oscillators such as the McOsc. Seasonality inflection points also show up on the NYA breadth chart. Price eventually follows the breadth trend. There are two times of the month when the marketing arms of the industry bring out the heavy promotion. This seasonal week is one, and the other is the high leverage week of options expiration. Promotions, earnings, takeovers, and market forecasts are timed for release for maximum benefit to the movers and shakers of the business of markets. This week we had the 13000 end of year forecast that helped goose the OEYGP right into the CODIsystem exit signal. Fortuitous? Measured and timed with precision? That enthusiastic forecast was tempered by John B's seasonality, so the public really got confused and the volume dropped off.

Market observers have noticed that equity daytraders are taking some big lumps now. Choppy markets will do that. Congestion can take over as trend ends and the future becomes cloudy. One expectation is for a test of the breakout point. On the OEX, that might be back down around 690 if it drops down to the upper side of the regression channel from where the breakout occurred.

Occasionally we take a look at an intermediate term chart like the ADHL that is based on an advance/decline relative strength as well as new high and new low relative strengths. The picture we have for the close of Wednesday is one of the ADrsi touching the sell alert line and the New High strength(blue line) turning down and the New Low strength(red line) turning up from a higher low. This has happened just as the SPX has made a new high. You might read this as a nonconfirmation of the high.In addition,3 day cumulative smoothed breadth has been falling.

It looks like we have the seasonal and technical setup for a put trade, and the nearby strike would be the OEZSD and OEZSC. The OEZSC July 715 put close on Wednesday is between 6 and 6.5.However,the OEZSD is the July 720 put and is the closest to the money as of Wednesday close. Its delta is a bit higher than the OEZSC and should be the preferred choice. The Cone projection oscillator is still overbought. Downside cone targets for Thursday are 715 for an average day and 710 if we get more of a pre-expiration pre-positioning washout.

SuperT oscillator continues to roll over indicating underlying deterioration in the breadth components. Ideally we would like to make some coins out of a put trade as the SuperT drops to the Correction level or maybe even the Crash level. At that point we would want to switch from puts to calls as those levels make great short term buying opportunities.

XAU/ABX fell as predicted-to within the trading bands.CMGI,however,has shown recent relative strength which may presage a further eventual rally well above the upper bands.

Here are the additional charts:

5 DAY ADVANCING VOLUME CHART. CYCLE CHART. DSP9UPD CHART. INDU CHART. INDU DAILY CHART. INDU WEEKLY CHART. MOONTIDE CHART. MOSS CHART. NYA CHART. OEX FIB CHART. OEX FIBRET CHART. OEX WEEKLY CHART. SUPERT CHART. VOLATILITY CHART. XAU 30 MINUTE CHART. XAU DAILY CHART.

MomentumCycles commentary for the open of Friday, July 9, 1999:

2 out of 3...We had recently noticed and commented on distributive action in 3 charts we follow-FNM,ABX/XAU, and CMGI.FNM saw a predicted rally at the recent lows from oversold at 62.5 up to near 70-at which point we recently called it overbought,above the upper 3.5% trading band,and likely to see a decline to at least the midband.FNM closed today at 66.375.ABX,the blue chip in the XAU index,was oversold a while back at a STOCHASTIC 20 reading near 10.We called for a rally and then proclaimed the index and component overbought when XAU hit resistance from 66 to 68,well above the upper 3.5% band,and ABX closed near 20.ABX closed today at 17 11/16;XAU closed today near the lower 3.5% trading band at 61.53.CMGI we recently called overbought at 116 to 121,but it has exhibited excellent recent relative strength.CMGI closed at 119.875.We follow these particular charts because they are representative of important sectors-CMGI/AOL as a "hot money" flow indicator,FNM as interest rate sensitive and often predictive of the T bond moves,ABX/XAU as a representative of financial insecurity.On to OEX action...

The question is, "Do you see a freight train coming down the tape?" Or, as the promoters would have you believe, love is eternal when it is a bull who is the object of affection. The bulls that run through the streets of Barcelona prove that bulls can trample on afficionados. That said, let's look at a microcosm of indicators. First, let's deal with the unseen seasonality that officially ends this week and the expiration bias that kicks in on Friday close (or earlier in the day). Usually these two don't occur in the same week, so it complicates things since they have an opposite directional bias. The former brings in weakness, and the latter brings in strength. Now then, looking at the tape with a microscope, we see that the TRIN closed on the Sell Tomorrow line of the Buy/Sell indicator. McOsc is within striking distance of dropping below zero in an institutional sell mode. It may also bounce here. Bets are it will trade below zero for at least part of Friday. Moontide is on a level 4 sell and could easily drop into a maximum level 6 sell on Friday. CODI system is still on a sell, and CODI is pulling up into the whipsaw zone in sell mode, which could construct a sawtooth pattern in the charts over the next week. One of the most interesting formations we have tonight is on the AMOSS chart. Note how AMOSS differs from MOSS in that the AMOSS is forming an ominous triangle. This is where the brokerage firms have to bring out the big guns to salvage the deteriorating condition and avoid ending up in the worthless certificate department. Oh, did you notice how the heavy volume was proclaimed to be good today on TV? Well actually it was terrible when you include the price action that behaved as though a top were being put in place. This choppiness is characteristic of a transition point. Coming into the apex of the AMOSS triangle, we have a deteriorating situation, not an improving one. Generally, we expect the week prior to expiration to have the opposite trend of the expiration week. On a few of our charts, there is a dotted yellow line paired with a cyan line that runs through the price bars. The PitchFork chart illustrates what is being pointed out here. Note that during the last uptrend, the low of the price bars and the cyan line were both above the yellow dots. On Wednesday the Low tagged the dot and on Thursday the Low dipped below the dot. In both cases the Close was above the dot and the cyan line, except on Thursday the Close was essentially on the line. Today's line is where tomorrow's yellow dot will be. Now it is very possible that if we get a little bit more selling tomorrow, taking the cyan line below the dot, then computerized selling could feed on itself. Just something to watch out for. Take a bead on the Buy/Sell/Fairvalue levels and note where the Premium spends most of its time. Also keep an eye on the TICK and see if it spends more time above zero or below.

Note how the VIX bands are pinching up. That says we are in for some exciting times. If VIX moves up through its center line, the bands will begin to flare, and you will know a market accident is in the making. While we are speaking of volatility, it might pay to take a look at the Volatility chart and compare 7/8/99 with 7/98. It sure looks like a repeat. The Historical volatility ratio is looking threatening at its low level, as is the 5 day historical in the plot just above.

TYX flag holds the key. If it breaks support, then the market train will continue on track and the derailing will be held up until the PPI, CPI,and Humphrey Hawkins reports in the next two weeks. Why not avoid the stress and just cash out and take a real vacation?

There, you have it for tonight. Hope you can avoid a train crash.

Here are the additional charts.

5 DAY VOLUME CHART. CONE CHART. CYCLE CHART. DSP9UPD CHART. EQUITYCP CHART. INDU CHART. INDU DAILY CHART. INDU WEEKLY CHART. NYA CHART. OEX FIB CHART. OEX FIBRET CHART. OEX WEEKLY CHART. OEYGP CHART. OEZSC CHART. OEZSD CHART. SENTIMENT CHART. XAU CHART.