MomentumCycles

MomentumCycles commentary for Monday,August 16,1999:

Being an OEX trader with a perpetual contrarian bent is as masochistic as it gets. Life is hell if you are blessed with perpetual skepticism and always want to swim against the current. After all, life teaches us there is no free lunch and no one gives money away. When thin air is turned into cash you worry about the air supply being cut off. If you possess this psychological trait, don't feel you are alone in this world. The trick is to be cognizant of it and harness it to your advantage. What I am talking about is the temptation to exit calls and go short when the world around you is having a "knee jerk" reaction under the overanxious desire to forget the recent summer slide in prices. After all, a rising market creates a "feelgood" feeling and separates young and old from their cash. If you possess this blessed curse then you wanted to buy puts at the upper RedCone boundary at 2PM ET,and saw them go in the money a bit and then end out of the money in the last hour and a half. The official Pre X trade is to go long the Friday close of pre expiration week, a very hard thing to do after a 1/3 OEX retracement or a 2/3 INDU retracement in one day. Since this trade has been promoted by at least one well known guru there is some front running earlier in the day. Consequently, anyone who actually buys the Friday close has a hard time making money the following Monday or Tuesday since the flippers are selling into those gains. Probability was behind this trade. In fact, sometimes the expiration week Monday is down hard robbing them of quick profits. The exit is into the first profitable open which may not come until Tuesday. Some say Friday's action was a knee jerk short covering reaction to a benign PPI and post- bond auction short covering. Some say the market will continue under pressure until the FOMC meeting on 8/24, some say the CPI on 8/17 will be as benign as Friday's PPI. Whatever the cause, we need to not forget the reasons the market headed south in July.The first reason is excessive valuation levels{see the link for the BARNES RISK INDEX below}.The second is seasonal influences shown on the Volatility,and Debacle charts. Seasonal weakness always occurs this time of year for tax reasons. And don't forget anyone buying a mutual fund at this point is guaranteed to be buying an immediate tax liability,so call the fund management to find out just how much. The real discipline comes in letting go of the love affair with the illusion of value and remind yourself that money managers like John Bollinger are selling into strength. We survived the total eclipse and are still waiting for Arch Crawford's 1000 point one day drop and wars to break out, i.e.,Nostradamus has one more week to prove himself(humor intended).

When using this "swim against the current" mentality we should examine a few charts for reasons to justify this mode of thinking, and see if the present heady short term optimism is going to be short lived. We see that CODI is now well below the Sell Alert level. The last two CODI Buy Alerts did not work in the bear trend however, and made us question its holy grail status. The Sell Alerts appear to have a better record, but as was stated yesterday, CODI can remain at this level in a sustained price trend. It works best in cycle mode. SuperT is near its upper limit where consolidations and reversals start. Mcosc has come up quite a distance in such a short time, and we expected the Bear to reassert itself when the McOsc hit zero +,- 50. It hit -46 on Friday. AMOSS and MOSS made bullish zone crossings all the way to the Overbought zones in several days. If the market is going to be on hold until the FOMC, then the indicators should return to neutral. New highs were actually less on Friday than on Thursday. The 5 day advancing/declining volume doesn't support our swim against the current thesis. So far, the monthly NSync is pointing down and the NSync30 and NSyncHrly are at sell levels. The OEX has made a 0.382 retracement of the decline from July highs, whereas the Moontide daily has only made a 0.236 recovery. This tells us volume is not confirming price in the same proportion. One technique of chartists is to expect a retest of trendline or channel breaks. So, on the Cone816 chart we have added a new channel. A real test of trendline C would occur at point A 671, a new channel test would be at point B 679. It should be noted that the Projection Oscillator is now at max overbought. Continuing on with doom and gloom we see the VIX dropped to its lower projection band and its RSI dropped to 20.85- deep in sell caution area. VIX BRDot support for Monday is 677.54. A close below that would confirm the knee jerk bounce on Friday. Next week, Tuesday maybe, the front month option components of VIX drop out, and a further out month's are added. This can cause a distortion in the use of VIX for timing, although the common understanding is it is an unnoticeable event. TYX performed pretty much as laid out last in previous commentaries as bonds were shorted going into the auction and covered after the auctions.{We were off by one day on the commensurate FNM/yield sensitive stocks rally}. Yields have dropped back to levels prior to the auctions. Remember this little trick for the next Treasury refunding. Buy puts before the auctions, reverse to calls during the auction and close the calls on the ensuing rally on Friday.

CPI release next Tuesday is more important than the PPI released on Thursday. Ask yourself what hasn't gone up in price, besides computers. The talking heads on the financial news have been forecasting a benign CPI. Contrary thinkers believe it will be a terrible number. The Consumer Price Index is a measure of the average level of prices of a fixed market basket of goods and services purchased by consumers. Monthly percent changes in the index reflect the rate of change in such prices. Changes in the CPI are widely followed as a primary indicator of inflation because consumer spending accounts for nearly two-thirds of economic activity. The CPI is subject to substantial month-to-month volatility so it is better to follow either three month moving averages of the monthly percent changes, or year-over-year percent changes. In addition to following the overall CPI it is useful to track one of the special indexes as well {such as the CPI, less food and energy}. The exclusion of food and energy is not because these items are considered unimportant, but because they are generally much more volatile than the rest of the CPI and, therefore, can obscure the more important underlying trend. This measure of inflation is often referred ato as the "core" rate. In contrast the Producer Price Index (PPI) is a measure of the average level of prices of a fixed basket of goods received in primary markets by producers.

Don of "Bob & Don Moontide" fame sent this end of day two year cumulative volume picture to share with you. It has this "deja vue" feel about it, don't you think? Note that after the summer peak last year and this year, we have had two quick short bounces at points B&C. Additionally, the C bounce is simply technical in nature, not backed by PE's or fundamentals or the reality of increasing interest rates. No, it is from short covering, novice investors, and those still in denial about the cyclical nature of markets,and do we dare say a phoney PPI and CPI? The September and October tax loss plunges at points D & E are still ahead. The sad part about this is all the gains above the summer high of 1998 have been quietly disappearing, and if the gains from the fall of 1998 are challenged, then it will have been to your advantage to have raised cash next week. That classifies as an understatement. A few last points for those to whom it is not obvious... a trendline drawn under the lows from the of fall of '98 through B of '99 has already been penetrated to the downside and the 21 day average has dropped below the 50 day. Thus, from the cumulative volume standpoint, the market is in SELL mode. You know why August is a weak month? You've had clues on the Volatility chart, but really, it is because September has the worst overall record of total points lost per month than any other month. October is commonly thought of as the worst month, but that is because it has the record for days with the most points lost in one or two days, i.e. pain is directly related to how many points per day are lost and memory is directly related to pain.Buyer,beware!

When the McClellan Issue Oscillator declines as far as it did as fast as it did within three weeks of all time highs, probability suggests much lower prices in the following weeks and months. So with the addition of a volume McOsc to the EODCV we can see where the market is in relation to the fall of '98. Remember we said above that we expected the Bear to resume growling when the McOsc got back up to zero(or neutral range for the issues). The Volume Oscillator was 0.34 on Friday. So, that puts us at point C'. Let's see how this plays out in the weeks to come.

Here is the address of the Barnes Risk Index:

~http://homepages.together.net/~wbarnes/stockmarket.htm

that we discussed above.

Subscribers who have been with us for some time have seen the Midas Top Finder chart posted on occasion. In July, you saw how it picked a top around 7/19. In fooling around with the End of Day Cumulative Volume chart, we discovered something interesting that correlates with the Midas chart. There are two key dates, 981008 and 990304, in this setup for EODCV and Midas. Note that these two dates correspond to the Start(S) and Center(C) dates for the Top Finder on the Midas chart and are lows on the EODCV chart. Also note the top date on the EODCV corresponds to the Midas Top Finder Date. March 4, 1999 is a pivotal date in the scheme of things as we will see in the future as the EODCV hunts for support at lower fib and or yellow trendline support.

Taking the cumulative volume lows on 981008 and 990304 and using them for the Midas Top Finder Start(S) and Center(C) points, the Top Finder planted its X at 990719. EODCV peaked out on 990716. Using 990304 as a pivotal date to draw trend lines through originating at reaction points in the fall correction of 98 gives potential support lines for what lies ahead. So far B99 and C99 have had reactions at the trendlines and the EODCV has dropped back to its summer '98 highs. At the moment there is a gross divergence, with price still in denial of cumulative volume. If there were a proportional correlation of price with volume then price would also fall back. The big question is whether it will play catchup and find support at S3 10159(a 815 point drop) on the Midas chart or the summer '98 high of 9337.97(a 1636 point drop),or instead will the INDU take the proportionate route of dropping the same percentage of the range from '98 fall low to '99 summer high as has the EODCV.

(11252 -X)/(11252-7539) =(21607 - 18958)/(21607 - 12795) where X calculates out to be INDU = 10136. That would give us an 838 point drop from Friday just to catch up with EODCV. There would definitely be an additional negative volume slippage so we then get into Arch Crawford's predicted 1000 point drop, but not necessarily in the same time frame.

XAU/ABX pulled back from the tag of the upper 14% band,where we have so often seen short term resistance.Short term momentum is stalling here,as expected.That is why we recommended taking short term ABX profits above 19 1/2.We are still holding HL as a core position.HL saw 2 3/4 intraday.Entry was near 2 a while back.

We had predicted a bounce in the hugely oversold techs near the recent lows,specifically AOL,QWST and CMGI,which we chart on a daily basis as an indicator of general tech/net health.AOL STOCHASTIC 5 is near 100.We would take short term long profits here into strength.CMGI and QWST are not as short term overbought,but the entire sector is playing against seasonal weakness.Advice for those that bought the recent lows in these 3 representative issues...we'd take the money and run.Leave some for the next guy.AOL up 5% in one day,CMGI up 6%,QWST up 9%.

When the hot money leaves these again,and short covering ends...

Here are more charts:

MoCycles. Cone081399. Equity Call/put. INDU. Indu Daily Fib. INDU fibret. Indu weekly fib. Sentiment. XAU. Moontide Hourly. NYA. OEX daily fib. OEX fibret. OEX weekly fib. OEYHP. OEYTQ. Pitchfork. Volatility.

To quote from the MomentumCycles commentary for Monday,August 16,1999:

"XAU/ABX pulled back from the tag of the upper 14% band,where we have so often seen short term resistance.Short term momentum is stalling here,as expected.That is why we recommended taking short term ABX profits above 19 1/2.We are still holding HL as a core position.HL saw 2 3/4 intraday.Entry was near 2 a while back.

We had predicted a bounce in the hugely oversold techs near the recent lows,specifically AOL,QWST and CMGI,which we chart on a daily basis as an indicator of general tech/net health.AOL STOCHASTIC 5 is near 100.We would take short term long profits here into strength.CMGI and QWST are not as short term overbought,but the entire sector is playing against seasonal weakness.Advice for those that bought the recent lows in these 3 representative issues...we'd take the money and run.Leave some for the next guy.AOL up 5% in one day,CMGI up 6%,QWST up 9%.

When the hot money leaves these again,and short covering ends..."

MomentumCycles commentary for the open of Tuesday, August 17, 1999:

Look at Monday's AOL CHART, CMGI CHART,and QWST CHART.No one knows what games will be played in these issues into expiration,but when short term STOCHASTIC gets overbought,taking short term profits into strength is warranted.AOL near the open 98,close 94.9375.CMGI near the open 84,close 82.125.QWST near the open 29.8125,close 29.All up near the open quite a bit from Friday,and quite a ways from our alert last week that these issues were overdue for a tech/net bounce,although they would probably not make new highs this cycle.

XAU/ABX fell from the upper 14% band to tag the upper 3.5% band of the 7% trading bands,as discussed.We are holding HL as a core sector long,from about 2.

On to OEX action... The market is no longer as oversold as it was five days ago, and numerous indicators are now overbought. Expiration weeks are notoriously choppy affairs and rarely trend upward in a straight line from a low on Monday to a high on Friday. Cone Projection Oscillator is max overbought. OEX 686.5 would be a modest corrective test to the new channel line. OEX could easily drop below that line to 683. A drop to C would be a test of the former channel line and help form a more stable "W" type bottom, but maybe that is wishful thinking for a one day move. A three to five day move would be more realistic.

CODI is flashing a Sell Alert in conjunction with the BR_MOM(momentum) above the overbought level.The market is ripe for pullback under these conditions. Channels on the CODI chart suggest a pullback to 680 is a reasonable one.

Here are the charts we examine nightly:

5 DAY ADVANCING VOLUME CHART. AMOSS CHART. CODI CHART. MONDAY'S CONE CHART. TUESDAY'S CONE CHART. CYCLE CHART. EODCV CHART. EQUITYCP CHART. INDU CHART. INDU DAILY CHART. INDU WEEKLY CHART. KELTNER CHART. MCOSC CHART. NYA CHART. OEX DAILY CHART. OEX FIBRET CHART. OEX WEEKLY CHART. OEYHP CHART. OEYTR CHART. SENTIMENT CHART. SUPERT CHART. TYX CHART. VIX CHART. VOLATILITY CHART. XAU CHART.

MomentumCycles commentary for Wednesday,August 18,1999:

Up and up she goes, where she stops only the pit god knows. Talk about choppy days. Of course oscillator based systems will cry overbought with the kind of activity we've been having. If breadth does not confirm then eventually price will retrace some of its movement. Confirmation is a tricky thing as the time period is a factor. For example, on a short term intraday basis we have confirmation, but the further out you go the less confirmation there is. On the EODCV chart, Price(not shown) is way ahead of cumulative volume, which means smart money has been coming out as price tries to regain a bullish stance.Moving averages provide support, resistance and crossover information. The EODCV is testing the downtrending 21 day moving average from below. If the cumulative volume bear is to reassert himself, we are nearing that point in time just as the McOsc of volume is closing in on an overbought level. Even on the MT15 chart, price has made a 50% retracement but cumulative volume hasn't even made a 0.382 retracement. A few charts are flashing the yellow caution flags, i.e. AMOSS has made its little bend over as it does at upper pivots. It has this uncanny knack of doing it a day or two in advance of price, especially be aware of it when the bend happens in the Over Bought zone. Both the Fifteen minute Keltner bands have crossed below the upper and mid hourly bands in a sign of weakening momentum and potential change of direction. Also the fifteen minute bar has tagged both bands and it has yet to prove whether it can make the second tag, if not, then that is a sell flag. Keep in mind that we are talking about a short term sell here measured in days. Continuing with the scare tactics, SuperT is making a sell divergence with the INDU. Super T is a synthesis of issues, volume, and new highs/ new lows. CODI is still hammering out its sell warnings as the BR_momentum records two days above the sell alert. The first time you see a yellow dot on the last data point, you will already know price has turned. Note the CODI mkt thrust has inched above the Sell line too and the OEX RSI in the top plot is agreeing with the sell alerts.

OEX made an upper green cone zone tag early today, then pulled back towards the pivot and then closed at the green cone. This gave a daytrading opportunity on the OEYTS if you had a mind to do such a trade. Eighty percent of the time the day's high or low is made in the first hour or two. Fading that first big move can be profitable, if the move takes price to a red or green cone. Currently the Projection Oscillator is tracking in Maximum Overbought. The lower channel line is not very far from Tuesday's low which means the chart busters could force a sell if they had a mind to. If we got such a sell we should expect the RedCones to be the target since the green cones are right on that channel line. Good luck and good trading.

HL long from near 2 working well as Tuesday saw 2 3/4.Hold.This XAU component has been vastly oversold,and a breakout above the long downtrend,or at least the tag at 3$,seems doable.In 1987,HL was 25$.Buys are often seen when any asset class loses 90% of its value.

Here are some additional charts:

XAU 30 minute. Moontide 3. NYA. OEX daily fib. OEXfibret. OEX weekly fib. OEYHP. Sentiment. VIX. Volatility. MoCycles. Debacle. DSP9U. Equity Call/put. Indu daily fib. Indu fibret. Indu weekly fib. McOsc. 5 day adv/decl volume. Cone 081899. Cone 081799.

MomentumCycles commentary for the open of Thursday, August 18, 1999:

Saved by the weak Dollar/Yen, the OEYTS puts took off. AMOSS, CODI, SuperT, etc., were pointing to an overbought market,as discussed in the last two day's commentaries. CONE channel line and the lower Green Cone set provided support for Wednesday. Follow through on Thursday will take the OEX below the channel to Green cone 687 to 688 or Red cone 679 to 683 unless we have a crash and then 673 is the target. Some interesting activity occurred today on the Keltner and EODCV charts. On the Keltner the OEX closed below both the 15min and Hourly channel mid-bands. This would target 690 at a minimum. The End of Day cumulative volume {EODCV} turned down under the 21 day average we mentioned yesterday as a sign of the return of the Bear. This is also evident on the Mcosc and STIX chart. CODI has just started its sell mode. Channel line on CODI is at 680. Codi should move up into the whipsaw zone before the correction stops. CODI Market Thrust has turned down, and if you note the red OEX candles, minimum downturns are two to four days. The way markets move these days, serious corrections are over in days, as price slips and slides triple digits in the INDU. INDU would be expected to drop back to the 50 and 21 day averages at 10876.85 and 10843.52{~INDUwfib pivot}. That is about another 115 points lower. The Lower 3.5% band is at 10464{~INDUwfib lower suppor}, i.e. 527 points lower. Those moves are nothing special. Please note that the INDU needs to drop 800 points just to catch up with the divergence in the End Of Day Cumulative Volume. This Dollar/Yen relationship is becoming a problem at the same time of year as in 1987. As my OEYTS were dipping below entry I was wondering what the Japanese were going to think about their US assets when the sun fell on mount Fuji.Then on the last stop running rally to the pivot I gave up and went outside, still long the puts and still believing that the charts were not wrong. Fortyfive minutes later truth be told as they had almost doubled. The seriousness of the problem is evident - even if a Japanese owned US stock remained the same price in US dollars in the last 24 hours, it lost 3% in Yen terms!!! Remember where the 3.5% band is on the INDU, for starters. Now, where do you think stop losses are placed on stocks? This sort of thing feeds on itself until stocks reach book value. In the last year Japanese investments in US stocks have lost 20%, yes, 20%, just due to US dollar/Yen relationships. Now you see why the Volatility chart and EODCV charts are important in providing a longer term view. Rallies will fizzle as we go into September and October and follow the Volatility and EODCV charts as they always do in one fashion or another yet close enough to look similar. The problem is additionally magnified by the fact that currencies tend to trend. About all governments can do is to control the rate of the trend. Finally, it looks like Taiwan/China brotherhood is fulfilling half of Arch Crawford's prophecy for war. The other half of his prophesy does not sound so far fetched now, does it? In case you've forgotten, it was a one day thousand point drop in the DOW. It does sound absurd, but who knows. My memories of October 1987 are still fresh.

We have noted repeatedly the tendency of the XAU and its component,ABX,to find serious resistance at the upper 14% band of price.We recommended short term profit taking in ABX above 19.5,when the XAU was 72.XAU fell 5.25% today to 66.11.Price is now at the 21 day moving average,where oscillation usually occurs before a test of the upper or lower bands.We recommended holding HL as a core holding.HL was bought near 2.Wednesday saw 2 11/16,off 2%.We are holding HL.

We saw STOCHASTIC nonconfirmation sell arrows at or above the upper 3.5% band of price in representative net/techs CMGI,AOL and QWST.

Here are the other charts:

CYCLE CHART. EQUITYCP CHART. INDU DAILY CHART. INDU WEEKLY CHART. MIDAS CHART. MT3 CHART. NSYNC CHART. NYA CHART. OEX DAILY CHART. OEX FIBRET CHART. OEXWK CHART. OEYHP CHART. SENTIMENT CHART. TYX CHART. VIX CHART. XAU CHART.

MomentumCycles commentary for the open of Friday, August 20, 1999:

The sell signal suggested on yesterday's commentary from numerous stochastic nonconfirmations in AOL CMGI,and QWST worked out marginally in two of the three and resulted in a small loss in the third.A e mail cover short was sent early afternoon in correct anticipation of a post lunch pre-expiration rally.It appears that the trade would have been much more lucrative if taken one day earlier.

HL,our core long position XAU component,is at new resistance of 2 3/4.Entry was near 2.Hold.

On to OEX action...

The market has had a lot of scare tactics and rumors fed to it this week, especially on Thursday. Most of it is to make news when there is no news and to make stocks and futures move. We won't know how much of it has been to facilitate expiration positioning until Friday close. We do know that the week could still end flat to positive with respect to last Friday. A down Wednesday and Thursday lead one to believe that the game of "corner the teenies" is being played again and the Friday resolution will be to the upside. The one bit of interest rate rumor news fed to the NYSE floor today put a top in the OEYTS puts as they tagged the green and red cones. The contention is that a rate rise will be deferred to some time later and not occur next week. This precipitated the very nice intraday rally and illustrates how dangerous it is to be short. After two 100 point down days, intraday, the market certainly does not have the feel that it is ready to roll over and let bears have a field day. These two days are feeling more and more like a wave two correction off of the wave one move up from recent lows. Wave threes are longer than wave ones. If you let your imagination run, it looks like an hourly double bottom was put in place on the MT3. Also the NYA had a steady rise in Advances all through the day including periods when the indices were dropping. Many of our indicators that were overbought are now back in neutral, sort of like the kind of retracement you get in an ongoing rally. Support was found thoughout the charts and lends support to the possiblity of a resumption in the rally. Bulls are defending breadth at the zero line on McOsc and Stix and SuperT. AMOSS and MOSS have dropped back to neutral zones. We've been making a big deal out of the seasonality influences on the Volatility chart and just want to caution not to expect things to play out quite the same. In fact, with the resiliency in indexes to bounce back, it feels like the old highs could be challenged again before the September and October influences take hold.

Cone Projection oscillator has dropped back to the neutral line as the OEX closed right on the Pivot for Friday. A close on the Pivot for the next day following two strong down days gives even odds to a move up to at least the upper Green Cone set.

Thursday's intraday low satisfies some retracement requirements for rally resumption on the INDU and OEX. If the Tuesday and Wednesday highs are tested then that would be a Red cone move to the upside at about 699... not unheard of during expirations, but 695 is the more reasonable target. We are trying to see some positive things short term here in spite of the longer term negatives.

The Keltner view shows a fifteen minute buy signal and possibly an hourly band bounce buy signal. If these have follow through, then 692.61 is an early day target followed by 695, and if that is surpassed, then hold your breath for 700 or higher.

Here are the remaining charts:

CODI CHART. CYCLE CHART. INDU CHART. INDU DAILY CHART. INDU WEEKLY CHART. NSYNC CHART. OEX DAILY CHART. OEX WEEKLY CHART. SUPERT CHART. TYX CHART. VIX CHART. XAU CHART.