MomentumCycles

Momentum Cycles Update for the open of Monday, July 6, 1998:

We had looked for a pension fund driven money flow rally from June 24 to July 2,followed by a pullback,and that was pretty close to the recent point action in most equity indexes.We had looked for an XAU rally on light volume with a low June 23 and a short term top June 30, and that was exact.XAU fell another 2.7% Thursday.

See the comments at the bottom under the OEX trades section for the current OEX position.Stop loss advice on the OEWSL chart below.

Strategy for exiting the existing position on a probable short term reversal next week is given in the astrocast section.

Second week of month equity cycles often provide a retracement.

If the summer rally can continue to even higher levels of commitment by institutions, we could well set up for a late July/early August top and mid-fall low.Dare we mention a possible October low this early?

We have been working on a new trading system using neural nets. Trained on data since 1992, this system was correct with an error of .5% in the last year. On July 2, the system generated a short term sell. This system is presently untried in real time, but we are using it as an addition to our already successful systems.

The following chart shows the weekly balance and support and resistance levels. The following paragraphs are an explanation of the color codes on the chart.

Weekly Balance Level.

This is the horizontal red dashed line. It is the level from which the fib levels are measured and price may find retracement support and resistance at. A break of this line implies a move to the nearby fib support or resistance.

Weekly Fib levels and zones.

The weekly Fib levels are the Blue horizontal lines and act as support and resistance during the week. The Fib zones are the shaded areas above and below the first Fib Resistance and Support levels. These are the most probable resistance and support levels during the week. They make good shorting and buying targets. Usually price will stall out or base at these levels. Strong trends will push through them to the extended or outer blue fib support and resistance levels.

The Triple Switch Daily:

This is the Red Stair Step trendline that works like a stop loss and trend reversal for uptrending prices. It is also the Green Stair Step trendline that works like a stop loss and trend reversal for downtrending prices.

The Triple Switch Weekly:

This is the White dashed line that acts like a trendline reversal and weekly stop loss for uptrends and down trends.

The Fib Ratio Oscillator:

This is the red and green oscillator at the bottom of the chart. Overbought is above the 75 level and Oversold is below the 25 level. The 50% level acts as a retracement level where short term pullbacks and reversals may occur during trends. That trend fails if the 50% level is broken. Prices will remain at or above the 75 level in sustained uptrends. They will remain at or below the 25 level in sustained downtrends. It behooves a trader to look for profit taking of longs and entry of short sales when the Ratio Oscillator is at 75 and or turns down. If the mkt has just begun a bull trend then additional longs may be entered at the 50% level on pullbacks. Covering of short sales and long entries are done at the lower Ratio Oscillator levels of 50 and 25.


Current Analysis indicates that the DS8U is in an uptrend and overbought as prices are pushing on the upper weekly fib resistance levels and the Ratio Oscillator is tracking the 75 level. The daily stop loss is beginning to reverse from red(up) to green(down)as the DS8U peaks. The values on the Blue lines and White Zone are where trades are best entered and exited. Note that next week has a narrow range between the upper and lower fib levels compared to previous weeks. This means that it will be easier for price to break support (or resistance). A longer term position trader would look to enter shorts at the upper fib levels and hold until the ratio oscillator gets oversold or he is stopped out. Alternatively he may place sell stops below the mkt at the fib levels or red stair step or at the red weekly balance line. The red and green lines will change daily, but the weekly fib lines and zones and balance line remain fixed for the entire week.

Trend:

ADHL strengthened its current buy mode. NHNL eased back into the consolidation mode by its drop back to zero. OEX regression channel still has a few points to go to reach its upper nearby attractor at 565.99. That is only 1.18% above the OEX close on Thursday and risk is increasing for longs. As traders we should prepared for a reversal at any time now. Note the length of the candles at the beginning of the rise starting in Mid June and then note how short they have been in the last few days. Also note the length of the candle stick above the body. Tops are made with probes into resistance. If price does not "stick" then the candles have bodies on the lower portion of the stick. DJI closed above the 50 day average against an On Balance Volume running into resistance. The Stochastic Momentum remains up but is approaching a resistance level of ~30% where failing rallies occur in bearish modes. A failure could occur next week. SPX RSI is working the upper band with a long ways to support at the midband and lower band. SPX SMI is in overbought and hasn't lost momentum yet as it is a longer term indicator. RSI will turn down before the SMI. Here is the Snapshot chart.

Astrocast:

Astrocast is forecasting a very choppy, cyclical market with an upward bias throughout July. This would be in keeping with a topping market in a summer rally. The modus operandi for option traders should be of the hit and run variety with profits taken on 37% or more gains with at the money puts and calls for July. As expiration approaches the gains should increase, that is if you are on the right side.

Breadth:

NYA breadth was in a nontrend mode with both Advances and Declines above 1200. McOsc issue, volume, summation are in an uptrend albeit at overbought levels. OEX lows are following an uptrend line whose Monday low is at ~555. CODI is on a Sell trend and at the critical acceleration or reversal white dashed line. This too has Monday support{ 3 day trend support} at 555 with 21 day support at 548 making a July 560 put worth 5 to 12 bucks plus time value.

Volatility:

Zone Timer continues to trend in the Extremely Overbought Zone. The summer rally started on 6/15 from 522 and peaked so far at 560 this week for a 6.8% rally gain. A 520 call option, OEWGD, has increased from 18 to 40 for a 122% gain. Now then, no one in their right mind believes this rate can continue with any fundamental justification on earnings growth or further stretches into overvaluation. The only thing that can push it higher is pure mania as is evidenced by the 40 month rate of change chart. The situation is rather analogous to the '29, '37, and '87 precrash markets. Decreased option activity is showing up in a lower Implied volatility reading and has entered the sell mode alert on the MVI regular. MVI adaptive is in neutral which really means the OEX is at a potential inflection point.

Fibonacci Zones:

The most important features of the charts for the DJIA, SPX, OEX, and NDX are the length of the recent trend mode, the jamming into weekly fib resistance, and the overbought level of the Ratio Oscillators. The red stair step is the daily trendline and the white dashed line is the weekly trendline. Next week begins with the indexes near the weekly fib resistance. We could still see a few days of minor point gains before seasonality ends at which time we would have a perfect indicator setup for some pullback.

DJI NDX OEX SPX TYX XAU

OEX Trades:

OEWGD and OEWGF are peaking out along with the OEX. This week we have been trading the OEWSL July 560 put on a short term hit and run basis as it expires in two weeks. Time decay, theta, and gamma are the two biggest influences in front month options as the remaining weeks of life unfold. VIX has dropped to a mouthwatering 18 so we will get a double whammy on price movement along with volatility expansion if we in fact do get a drop of any kind into mid July. August options are more suitable for position trading as was pointed out in the June vs July series for the June expiration. The mechanical models reported in June for Momentum, Trin, Volatility bands, RSI are all flat for July so far. These models will not trigger put trades unless the mkt falls below the default 200 day average or unless we shorten that up for more active trading. The OEX Cone and Pivot chart illustrate one day forecasts of OEX price movement for support and resistance. The Cone is forward looking and is based on the keyline plus implied volatility derived from OEX options. The Classical Pivot is based purely on a one day historical lookback. Its levels are in widespread use by the floor traders, by off floor pros and more or less sophisticated traders. There is no question that the Resistance and Support levels are significant and can be used for targeting entries and exits.

Stocks of Interest:

ASTN long term holders have positions from 2 to 2 15/16 ,close 3 5/16. CMR.TO is working the lower end of what may well be a complex triple bottom in the 1.00 area, with cobalt production still on track for mid-98.Small speculative positions taken from 1.65 to 1.00.

Momentum Cycles Commentary for the open of Tuesday, July 7, 1998:

Narrow rally in high priced stocks.Low volume pushed prices one day past where we thought seasonal money flow would likely end.Short term multiple non-confirmations of DJIA price occured today.

The new neural net system still has a short term sell in effect.

Trend:

OEX regression channel is still shooting for 565(6)channel line. Note the CODI center regression line is intersecting at the same price. ADHL trend remains on a Buy. NHNL is looking really sick and not confirming this price rise at all. This single indicator has a heavier weighting than most others when it comes to forecasting prices. Likewise On Balance Volume is not following the DJI index upward and is stalled out below its resistance. An expected retracement level on the DJI SMI is in this neighborhood. This is what tops are constructed of: nonconfirming breadth.

Astrocast:

Astrocast pegs Monday as a high. Thursday is a significant energy point.

Fibonacci Zones:

Take a look at the DSP8U fibo chart and note that the high for Monday was right on target of 1169.90. In case this is broken then the Monthly Fibo DSP8UM can be looked at for extended targets. The monthly shaded zone and the weekly upper level are coincident. Other index fibos are running with the Ratio Oscillators maxed out. This trend will end.Note that the OEX weekly fib resistance is at 565,and that is why we are targeting put purchases at this level. Also interesting is the XAU fibo with both the daily and weekly Gann lines making bottoms.

DJI NDX OEX SPX TYX XAU

Breadth:

NYA breadth was positive but not really great as declines were over the magic 1200. CODI made a pivot at the white line as mentioned on the weekend update. This can be a temporary change in trend. It can be as short as a day. McOsc issue and volume oscillators appear to be losing upward momentum.

Volatility:

Zone Timer is still tracking in Extremely Overbought which really means the OEX has been in trend mode. MVI is making noises about the trend ending. An upward reversal is needed here in the MVI and a downward pivot in the Zone Timer. This could happen any day.

Momentum Cycles Cone:

Projection oscillator on the Cone is neutral which means the odds are 50/50 for direction. The open and low were below the recent regression channel line, meaning a change of direction may be near.

Pivots:

R1 is between 565 and 566 where we hope to enter put positions on the July 560, OEWSL. Of course if the market blasts through, then hold off. Here is the OEX pivot chart. Here is the September S and P 500 chart.

RSI, SMI:

SPX RSI changes direction each day compared to the smooth move up from the lower band. The bands are quite wide now providing room for a large down move. SMI has been pretty strong and will turn down after the shorter term, more responsive RSI.

Stocks of Interest:

ASTN is holding in the region between 3 and 3 1/2. Long term holders are holding from prices between 2 and 2 15/16. Short term traders bought at support near 2 and sold at prices near 3 5/8. CMR broke the double bottom near $1 and is now trading at about 95 cents. This one will probably start to move once the cobalt production figures are announced.

OEX Trades:

OEWGF and OEWGD are still hanging onto their gains from the June expiration. These will fall like a rock if we get a downturn in here of any significance. They will fall at least point for point with the OEX. The OEWSL is proving slippery as the OEX hangs around 560 to 565. Maybe Tuesday AM will provide some pre-expiration week excitement on the downside. Generally pre E week has some weakness as those in control push the index around by manipulation of its components to their advantage.

MomentumCycles Commentary for the open of Wednesday, July 8, 1998:

In a strongly trending OEX move off an oversold bottom such as February and June of this year,the position at the upper 3.5% trading band and multiple nonconfirmations serve only to postpone an advance,not stop one.Presently many of the technicals including RSI and STOCHASTIC are showing nonconfirmations of Tuesday's high while price is close to the upper 3.5% trading band.

Characteristic of a new bull uptrend is a run above the upper DJIA 3.5% trading band with an IBD option premium ratio well above 1.00. Last published reading was 1.27.Corrections in this scenario are brief and are followed by new highs.

Price and breadth in the next couple of days will tell the story.The upper trading band accompanied by multiple nonconfirmations often turns back price, and this week is the likely time for such an event.If however, weakness intraday tomorrow is the extent of Tuesday's nascent mini-correction,and new highs follow in most indexes the rest of this week, we might instead look for tradeable strength into about the 17th of July,and tradeable weakness in the post options period.

Price compression and astrocast{see below} both suggest nimble daytrades may be a wise way to go for the next 2 weeks.

Trend:

ADHL remains on its intermediate to long term buy. NHNL chart was incorrect the last two days due to data entry errors and when corrected is more supportive of the recent rally. DJI SMI has reached the retracement resistance as the index reaches the +3.5% band. The On Balance Volume is representative of distributive action as the index rises as it has stalled out as price continues to rise. OEX neural net has generated another sell signal for Wednesday. Please keep in mind that this new neural net trading system is quite experimental.

Astrocastchart:

Presenting the astrocast version of weak and strong days this month.

Breadth:

NYA breadth was increasingly negative as the day progressed. CODI made a continuation sell pivot. McOsc issue and volume oscillators are rolling over, price should follow if they continue to deteriorate. Snapshot shows an increasing TRIN from the morning on through the close. The last two hours had a negative TICK.

Volatility:

Zone Timer appears to be rolling over and about to make a zone change which is a signal for shorting and put entries. MVI also made a sell pivot near the oversold band and fixed 30 level.

Fibonacci Zones:

Equity Fibos continued to find resistance at the upper weekly fib resistance. XAU looks like it is headed for higher levels as does the TYX as it is about to break the green downtrendline and the red weekly balance line. Here is the S and P 500 futures chart.

DJI NDX OEX SPX TYX XAU

Momentum Cycles Cone:

Projection oscillator decided to head lower in projecting more selling.

Pivots:

OEX ended in a slightly weakened posture by closing below the Keyline and on the hourly trendline. The day session of the S&P ended on the Keyline.

RSI, SMI:

SPX RSI appears to be saying the trend has lost strength. SPX SMI is losing upward momentum after a strong runup. Take a look at the TYX RSI. It is indicating that T bond yields are headed upward.

Stocks of Interest:

ASTNcycling around 3 1/2 in a fairly strong internet related group.Resistance previously at 4 made us take short term profits{for shorter term traders} at 3 5/8, while long term holders are waiting for the placement of multiple exchange trading systems. CMRat 1.00 ,attempting to confirm the bottom of the recent trading range.Projected cobalt production figures could come any day now.With a firm agreement and some estimated pricing figures, this issue may be attractive to institutions who want exposure to an oversold base metals producer with a lock on extremely high % quality North American cobalt resources.A small position was suggested between 1.00 and 1.65 for longer term holders.

OEX Trades:

OEWGF and OEWGD are peaking and OEWSL is bottoming. OEWSL could have been had for 4 to 4 1/4 today.

It's Murphy's Law. Our local access server could not be connected to, and the nearby college server was down also. We heard third hand that the local Bell Atlantic connection was damaged. Anyhow, we tried to post this all night and all day, and only were able to do so just now. Sorry for the problem. When things don't work, they all don't work simultaneously!

MomentumCycles Commentary for the open of Thursday, July 9, 1998:

In pre ex week often a reversal occurs in the Thursday-Friday period , where traders try to shake out longs in preparation for ex week's normal upside bias.

Swing Machine:

DJI Swing Machine says the odds of a short term pullback are high. Trend:

ADHL remains on an intermediate term buy. A cautionary note is that New high and New low strengths are beginning to turn and the ADRS is near its sell band. NHNL did not confirm today's rise in the equity indexes. A nonconfirmation can lead to a correction in a day or two. Most peaks of any strength have to be lead by a nonconfirmation in the NHNL. DJI On Balance Volume has not confirmed this move to the +3.5% band either. DJI SMI has made it to the 50% retracement in sync with the move to the +3.5% band where the odds have increased for a reversal.

Astrocast:

Choppy is the outlook with an upward bias.

Breadth:

NYA breadth began to increase positively as the latecomers were sucked into the party mid-day. The declines were over 1200 again. This really does matter as a strong market will have them below 1000. CODI made another one of those "whipsaw" pivots off the center white line. Snapshot was looking pretty good until right near the close when the PREM dropped into sell program territory. It looked like some kind of setup for Thursday. Of course, we know what Thursdays bring. Wednesdays have a way of making the high for the week.

Volatility:

Here is the z timer.

Fibonacci Zones:

Some of these charts are getting congested since the monthly fib zones had to be added. Consensus is that the upper side of the monthly fib zone was the nearby target once the weekly fib level was penetrated. This really would make a decent place to reverse. Here is the S and P 500 futures chart.

DJI NDX OEX SPX TYX XAU

Momentum Cycles Cones:

Cone 1 shows this was a 1 std dev day. Cone 2 has the regression channel redrawn and the projection oscillator is testing the 50% line from below. Typical behavior would be for it to tag and then continue down to the oversold level.

Pivots:

OEX and Sept S and P 500 futures close quite a bit above the hourly trendline. Thursday is a cycle day, for whatever that is worth in trading. Some seem to think it coincides with an energy point, a change in trend point.

RSI, SMI:

SPX RSI is in trend mode, but note the up one day down the next. SPX SMI is quite strong.

Stocks of Interest:

ASTNhas resistance at 3 1/2.Support presently at 3,then 2 1/2. CMRbasing at 1.00, awaiting the cobalt production figures.

OEX Trades:

OEX finally reached the 565-566 level and made it as high as 570.24. As you know we have been looking to enter a put position and the suggestion was the July 560 if the OEX was not too strong. If it was strong then a higher strike would be selected. Today was that kind of day so the OEWSM July 565 at 3 3/4 was the choice as the CBOE Put and Call Trins were maxed out and the VIX made a double spike bottom prior to the close. In addition to or alternatively the August 560 OEWTL at 8.5 might just work out better like the calls did from June to July. OEWGD and OEWGF are showing us what deep in the money calls look like that were entered in the June expiration and exited below current levels. OEWSL shows what happens to July puts as the OEX rises. Here is the OEWSN chart.

To quote from Thursday's commentary:

"It's Murphy's Law. Our local access server could not be connected to, and the nearby college server was down also. We heard third hand that the local Bell Atlantic connection was damaged. Anyhow, we tried to post this all night and all day, and only were able to do so just now. Sorry for the problem. When things don't work, they all don't work simultaneously!"

MomentumCycles Commentary for the open of Friday, July 10, 1998:

LME stocks of base metals show further drawdowns in supply, while the popular hedge fund strategy of "short all commodities" trades are increasingly likely to be risky due to short covering of oversold positions in most CRB related instruments.The lower the CRB goes{and the recent oversold rally and present decline is an example},the sharper and more violent the countertrend rallies will be.CRB Tick low was 212.27, next significant area 210, then if broken ,198, the 12 year low.We guarantee the CRB will not hit zero!

Last paragraph on the page discusses OEX strategy for Friday and into ex-week.

Trend:

ADHL is in a transition. The relative strength indicator is below the sell line and the new high,new low indicators are rolling over. We don't have an intermediate term sell yet, but this bears watching. The NHNL is more advanced and leads price down. DJI is failing at the +3.5% band as the On Balance Volume is not confirming this 15 day rally. OEX regession channel projection oscillator is still pointing down and is not oversold yet.

There are day to day trends and intraday trends. Taking a look at the intraday CBOE Put and Call TRINs helps to decide intraday whether to be in calls or puts, long or short futures. For example in thisCBOE TRIN chart we see that there was basically an up and a down trend in the OEX on Thursday. Once the Call TRIN crossed above 1.0 and trended there, the OEX headed down. Once the Put TRIN dropped below 1.0 the downtrend in the OEX and S&P futures was assured. Puts and shorts could be held with confidence as long as these TRINS remained in this spread configuration. Also note at 3:00 that the final hour trend began when the OEX bottomed simultaneously with the VIX peaking. For those who are not familiar with it, the VIX is a composite implied volatility of 8 OEX put and call options with a constant 30 day maturity.

Astrocast:

Choppiness with upward drift for four weeks means short term trading is the modus operandi for speculators.

Fibonacci Zones:

Weekly fib resistance is being tested for support now. Here is the S and P 500 futures chart.Note how close the DSP8U is to dropping below its daily stoploss trendline. This is the red stairstep line at about 1164.66 on Friday. A daily close below this is serious business.

DJI NDX OEX SPX TYX XAU

Breadth:

McOsc issue and volume are in full scale retreat at least back to the zero line. A pause at zero or a slice through will tell the true character of the market. NYA breadth was decidedly negative all day as Thursdays often are. Snapshot does show a mixed picture in the final hour with improving TICK but a deteriorating TRIN and a premium that dropped to sell program levels. CODI made another sell pivot at that center line.

Volatility:

Zone Timer is making a zone change which is construed as a sell signal. MVI also made a sell pivot.

Momentum Cycles Cones:

Projection oscillator has further to go for a decent oversold position.

Pivots:

OEX and DSP8U closed below their respective Keylines and hourly trendlines. If more selling is to occur, then a typical pattern would be for a rise to the hourly trendline and or Keyline soon after the Friday opening. Selling would then resume to test S1. If S1 fails then additional selling should take them to S2 and likewise to S3. There would be backing and filling as buy the dippers are taken out on failing rallies to the recently broken S level. Since this is a Pre-Expiration Friday there may be short covering in or before the final hour as there was on the Snapshot above. Don't confuse day trading and assume the final hour trend will continue into the next day. It is caused by trading forces of a different time frame.

RSI, SMI:

SPX RSI is on a sell. SPX SMI is losing momentum.

Stocks of Interest:

ASTN not reaching previous resistance of 4, buyers near 3, sellers near 3 1/2. CMR attemting to hold bottom area near 1.00, awaiting cobalt production news.Institutions are often restricted from buying non-producers, and CMR will soon be a producer.

OEX Trades:

July options are beginning to show the GAMMA influence. These can be day traded. Sometimes holding a core position and a trading position works out in choppy markets that may begin to trend. August options can be position traded. July calls entered and exited in June are OEWGD and OEWGF. We have continued to monitor their price action as an exercise in what happens to deep in the money calls vs index movement. Also they illustrate that trading the current month is highly risky and the next month out provides additional time to be right. With the VIX at recent lows, going out another month is not a bad idea to buy time. July puts are OEWSL, OEWSM, OEWSN. Yesterday's advice was to go out in time to the August OEWTL, 560 put for position trading instead of the OEWSL that we had been targeting. The index shot too high and put the July 560 too far below the keyline. This isn't to say that July options cannot make you wealthy, as they can, but you really have to be on your toes to get a ten for one move. Now we are entering that expiration period where a "buy the Friday close" has worked many times. So put holders may want to take profits on weakness Friday, IF they did not already do so on Thursday. Traders would look to go long the mechanical call(or futures) trade on Friday close. This is becoming so popular it is subject to drawing down more than a few accounts. Personally, holding July puts over pre expiration week is hazardous to your wealth and it is more adviseable to wait for Monday to test the waters. Premium stripping occurs on the Friday close and the Monday open. Expiration week has more opening fakeout moves in the first fifteen to thirty minutes than at other times of the month and the ensuing moves are of strike price range shifts. So there is ample opportunity to day trade options in "E" week.