MomentumCycles

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Update for the close of trading 9/22/97:

The OEX pushed back up to tag the upper MVI band accompanied by a tag of the upper regression line on the McOsc chart. Issue oscillator did not confirm this upthrust. The AMOSS chart now has the 20 and 90 day components in extremely overbought zones while the VIX Z score dropped lower into its sell zone. The scales for the AMOSS components, left Y axis, and the VIX Z score, right Y axis, are inverted for visual clarity. What we are looking for here is a reversal in the VIX Z score to accompany a drop in the OEX. This could come on Tuesday. It would be even better if the five day component were also in the extremely overbought zone. Maybe we will have to wait more than one day for this reversal to occur. CODI is on a sell alert, which will be actualized on a reversal. The early morning rise on post expiration Monday gave way to profittaking in the second half of the day. The TDAC did not confirm any of the rise and the TICK vol is laboring under a multiday downtrendline. These two charts are supportive of the MVI and AMOSS view that some price retracement is probable. The NYA chart shows a steady allday increase in declines, @ND, from the open right up to the close. The advances had a typical Monday morning pop and then went flat the rest of the day. Had trading lasted a few more hours the net difference would have been negative. Perhaps this trend will continue over into Tuesday give a negative tone to price.

RSI update for market close of Tuesday September 23, 1997:

Of course nothing grows to the sky, except for the Russell 2000 index, which seems headed for the edge of the galaxy, or beyond. Today's pullback, in most major averages, actually began in early trading yesterday, as the post unwinding of SP500 futures contracts proceeded as expected. Yet even in today's weakest action, the consolidation has been extremely mild. The previous support level, which this observer suggested as a fail-safe stop point for the SP500, 934-935, is way below current price levels. So save for an 'out-of-the blue' sharp selloff, the market appears fully ready to brace itself, for jittery fed meeting time, now only a few days hence. Then, there will probably be more time-marking, until the first significant third quarter results are reported. Meanwhile, the transportation average, also beginning its profit-taking pullback from its shooting star rally, cut its biggest losses of the two day drop, when other airlines did not suffer the slashing that DELTA did, announcing its earnings warning. Other market intrigue of the day focused on the potential takeover target for TRAVELERS, as last week's rumored mergee, BANKERS TRUST was edged from the limelight. As regards the above mentioned Russell 2K index, John Bollinger, noted west coast technical analyst, and creator of the well known Bollinger bands, said the 'silly season,' while possibly beginning, is nowhere near it's final stages. By this he meant that speculative blowoff excesses, typically seen near the ends of major market advances, are not yet upon us. However, he regards the recent straight-up run in the Russell 2K, as an indication of the inceptive stages of this situation. The summation index, the smoothed function of the McClellan oscillator, reached its downtrend line, from the May peak, today. Assuming no severe selloff in the next few days, this index should now cross above that line, and then, begin a retracement test back to it. This picture of breadth momentum would coincide with the current gradual consolidation of price momentum. Daily momentum of the DJIA, which has been rising and is now positive, should also begin to subside, coincident with this consolidation, and possibly reach another slightly negative low, nearing earnings time.

VIX update for the close of trading 9/23/97:

The VIX Zone score made an upward pivot early today generating a sell signal. Our Modified Volatility Index, MVI also dropped away from its upper band as anticipated. Both of these indicators were accompanied by declining issues over 1200 and advancing issues under 1200. The intraday advance/decline line had a steady decline all day. There was a short pop in the advances and the NYA near the close. After being down all day this sort of behavior is expected and would need follow through tomorrow to be significant. The issue and volume McOsc both continued their deterioration as price reluctantly gave ground. A bigger divergence is possible here. Price could rise and penetrate the upper resistance line while both of these oscillators head towards the zero line. The hourly tick indicators are still in downtrends. CODI has pivoted upwards from its sell alert area. A word of caution here is that seldom do markets turn on a dime. Testing and retesting of resistance and support occurs. What is looked for during this testing are divergences that reflect internal deterioration until a larger breakdown in price occurs. Tick is showing the possibility of last hour short covering on Tuesday's trading. Cycles at the end of a calender quarter often show strength related to portfolio window dressing, which can occur at the very end of the calender month.However , there is still October.

VIX update for the close of trading on Wednesday September 24, 1997:

The sell signals from CODI, MVI and AMOSS 9/23 remain in effect for 9/25. If the issue and volume trends continue on Thursday 9/25, the OEX could drop further from its upper regression(resistance line). Perhaps the three times failing penetration over a five day period is sufficient to convince traders that support below now needs to be tested. The hourly cumulative tick indicators have the TDAC locked in a downtrend and the TICK VOL X still working on its downtrend line. In all fairness the TICK VOL X does have a higher low on the intraday chart although it is still in negative territory. We have to be careful in drawing conclusions from intraday charts vs end of day charts. The NYA advances and declines put on an educational show today as the declines flirted with the often mentioned 1200 level. Years back the critical level used to be 1000 and with the addition of new issues the balance point has raised to 1200.

RSI update for market close of Wednesday September 24, 1997:

What was one of the worst kept takeover secrets recently, was confirmed, as TRAVELERS announced its acquisition of SALOMON. Today's process rewarded billionaire Buffet with a nice gain on his 'shaky' investment. It also relieved him of his longstanding management misery of the former freewheeling type firm. Rewards were not as easy to come by in the rest of the market, unless you owned other brethren brokerage stocks, several of which, including CHARLES SCHWAB and A.G. EDWARDS hit new all-time highs today. The T-bond market raced further ahead, but significant renewed weakness in the dollar, and a breakout of crude oil prices, finally put enough pressure on equities, to cause most major averages, to close near the lows of the day. This was certainly not unexpected. These comments have focused since late last week, on the post expiration weakness/consolidation, now being seen. The McClellan oscillator retreated somewhat, again today. It is now breaking through the sharp uptrend line established from the most recent lows in mid-August. Whether the current price reversal increases in intensity, will depend on 'seismic' pre-readings of the fed meeting next week. With the bond market responding well to the 5 year note auction, it's hard to imagine, how the fed would want to counter an interest rate environment, that has now reached its lowest levels, in many months. The DJIA, in today's action, was again turned back from its 50 day moving average, **not typically** a positive situation. The Dow utility average continues to build another step, in the bullish 'piggyback' pattern mentioned many days ago. With still little guidance from earnings, or pre-earnings announcements, the program traders seem to be gaining control of quick swings in the market, as evidenced by the today's last hour. This saw trading curbs instituted shortly after 3pm edt, removed, and reinstated, as if the volatility of futures expiration still lay ahead, rather than being finished. The daily RSI readings of both the DJIA and the SP500, which had been **bearishly** diverging from recent price highs, are not yet at oversold readings, which would signify an end to the current decline. It is more likely that the selling pressure will intensify, before this current correction is over.

Cycle comments:

Many precious metals cycles align in early October.A low may be made near then followed by a rally.Many gold secondaries and tertiary issues are sold down to levels where buying has appeared before.Conceivably,a bond and S&P short term top would precede the early October metals low.WE WILL CAREFULLY MONITOR THESE 3 MARKETS IN THE NEXT 2 WEEKS FOR SIGNS OF THESE ALIGNMENTS.

VIX update for the close of trading on September 25, 1997:

AMOSS and MVI indicators remain on sell signals for the open of 9/26. AMOSS components are entering the neutral zones and could continue their current directions or reverse inline with the endof/beginning of month seasonality for the next 8 trading days. Put positions and or short positions should be scaled out of due to the risk of sharp rallies in the next three or four trading days. Besides, you've already made 40% in one day. :-) This is one of the times of month when seasonality influences are weighted heavier than technical indicators. CODI remains on a sell and the McOsc oscillators are flirting with the zero line. How convenient for the McOsc zeroline to be tested at this time of month. Past experience shows that a slight breach of the line or a bounce can occur on the first encounter. This is then followed by some retests. NYA advances and declines gave another performace about the 1200 line with declines ahead of advances. TICK and TDAC are strongly suggesting some rally potential on 9/26. Thus the advice to close put and short positions. Longs could be lightly scaled into over the next three trading days. The NYA agrees with the previous analysis. Caution: if end of month- beginning of month seasonality is weak after the initial start,October could be dangerous- watch the RSI charts in the next comments below each day.

Cycle comments:

For the past 3 weeks or so we were looking for an increase in relative strength in XAU versus S&P and bondsin this time period. It's nice to know these things a couple weeks early, isn't it?

NYA advances had a fast start out of the gate and exceeded the magic 1200 level within 15 minutes. Declines never made it up to 1200 this session. With this kind of action the McOsc of issues should have bounced off of the zeroline and it did. CODI is now in the indeterminate region. Yesterday's overrulling of the MVIs and AMOSS by the seasonality cycle indicator as predicted here proved to be fortuitous. TICK and TDAC indicators are partial to more price upside next week. There is a lot of media attention being given to similarities between the '97 market and previous periods with similar price patterns. Rather than making these comparisons we will go with what the current indicators and cycles are telling us. History may be full of examples to learn from- one lesson is to not expect history to repeat itself exactly. The monthly cycle is a strong one and if the next week does NOT pan out as expected, there is legitimate cause for grave concern.Strength is supposed to extend until October 7 or so, so longs should be liquidated into strength during the early part of this time cycle.Weak seasonality, that is, rally failures after the first day of October should be a warning flag. The price, breadth, volatility, and cycle analysis should lead us through this period. End of quarter institutional portfolio adjustments can make this a choppy period. DOW Index Trust adjustments can cause wide intraday swings to the benefit of nimble intraday traders. Two areas that concern longer term buy and holders are the current readings of commercial hedgers on bonds and S&P. Currently these large hedgers are net short somewhat the S&P and quite short the bonds.At the lows in 1994 , the commercials were hugely long the S&P while the public was short.Guess who was right? After the projected seasonal rally in S&P as seen on the charts, we could get continued strength in XAU, which is cyclical due to the coming gold conferences.We should still allow for a possible final gold low in early October . The status of gold stocks and bullion as a financial or crisis hedge have in large part been replaced by financial futures over the last decade. This does not mean they don't have anticipatory and reactionary responces. Gold is recognized as real money in many foreign countries despite governmental efforts to discredit it in favor of paper currency. Individual gold stocks will trade on their own fundamentals, but as a group there are a few things to be aware of. There are basically three tiers, producers(large and small), developmental companies with known reservers, exploration companies looking for reserves. There is actually a fourth category called a "shell" with no known reserves or assets, yet companies in this category have symbols and trade in teenies or smaller. Gold and gold stocks used to be sensitive to economic and international crises. They still are to a degree. The pattern is that of a hedge. Hedges are not meant to be long term investments. They are put on in anticipation of need and taken off in the midst of the crisis. For example, in past market crashes gold and gold stocks have run up in anticipation of the equity or currency meltdown. Then in the midst of the meltdown they take on the behavior of their class as the hedges are removed. The moral of the story is if gold stocks or mutual funds are being bought as a short term hedge against a market collapse, then be prepared to dump them within days of the collapse. They have to be monitored closely with dynamic stops. Sustained inflation, sustained decline in a currency, are fuel for the hard asset crowd. Another equally important factor that moves gold stocks is the promotional cycle. This has changed somewhat as the US and Canadian environmental demands have encouraged development of latin american deposits. It goes something like this. Gold stocks seldom if ever pay dividends. All earnings are plowed back into exploration and development. Gold stocks simply need promotion to exist, primarily the exploration and development companies do. Mark Twain said, "a gold mine is a hole in the ground with a liar standing next to it." So, as the promoters leave the frozen tundra of the north in the fall and circumnavigate the US on the promotional tour, beware of what you are buying. It may be company treasury stock or stock in float. Gold stocks tend to have a run up in the months preceding the gold conferences. The next one starts on November 30, 1997. Relative comparisons are on production costs per ounce of gold and on proven and probable reserves. If you are buying a gold stock as a hedge against the unknown, then you want a producer with large reserves that preferably does not forward sell its gold production.

RSI update for market open of Monday September 29, 1997:

Very seldom do continuing new highs in the market's overall breadth, unaccompanied by new highs in the broadest major averages, lead to big equity price declines. There is currently little reason to believe the current situation will be different. Since lower cap issues have benefited from the current lack of enthusiasm for large cap, DJIA type issues, it is reasonable to assume that extra liquidity may be building on the sidelines, waiting for some signal to rush back into its favorite 'waters.' There could be more hesitation on Monday, and early Tuesday, pending the fed 'non-announcement.' This will go on, at least until the reaction to the Friday employment report. If the bond market continues to hold, at or near its current high level, and the dollar can end its downtrend, even moderate earnings reports, which begin after this coming week, should not dampen investor avarice. The daily momentum of the DJIA is positive, but starting a slight decline. The summation index of the McClellan oscillator continues to rise further, past the downtrend line previously mentioned. The DJIA macd continues its rise also. With daily RSI and stochastics somewhat off the most recent highs, there is still good potential for these indicators to rebound once more, before any noticeable divergence warns of more than short-term profit taking pullbacks. Continued strength in the dollar will be the key to confidence in large cap U.S. equities.

The market, and many analysts, seem to be taking a 'who cares?' attitude toward tomorrow's fed meeting. Perhaps, from a contrary point of view, there's much danger in that. This observer would like to separate himself from that large group, just because of that possibility. Yet, there's no logical information on the macroecon front, that indicates any fed movement on interest rates. Still, incipient inflation factors are stirring again. Gold, and especially silver have begun up moves. Although silver had a huge rise today, much of it can be attributed to technical delivery factors, regarding the reassaying of bars to meet contract specifications. The very startling three day 'pole' move, in crude oil prices, should be enough to worry even the most sanguine inflation dove around. But the fed cannot control oil prices. Even trying to dampen the effect with higher interest rates is something they don't do. The mid to late summer of 1990 is the case to point to. Short term rates were actually declining, by the time of the Gulf War oil price surge. The T-bond market *reaction* to Friday's employment report, and the October inflation numbers shortly thereafter, will hold the key to even more gains for the small cap issues, and eventual new highs for the DJIA. Nearly all readings for breadth and price momentum indicators still show **increasingly positive numbers.** The DJIA five day rate of change had been just about 5%, at last week's highs. This was unsustainable in the short run. Now, it is back to zero. If it is to rebound again to the plus 4 or 5 percent area, soon, new highs will certainly be established in all major market averages. Western Digital, a present 'darling' of some aggressive fund managers, fell nearly 20% in afterhours trading, following an earnings warning. This weakness could affect the rest of the tech sector quickly. Still, there are no significant bearish divergences in the overall market technical indicators. A sharp break, that WDC price weakness might bring, looks more like another buying opportunity, than a "sell all signal."

To quote from the cycle update for the close of trading on Friday September 26, 1997:

"Traders had a perfect road map of the last 3 days action , being told to scale out of short positions Thursday for a 40% 2 day profit.This advice was reinforced by a cover remaining shorts for Friday's open, leaving remaining OEX puts sold on the open for a 20% profit. Longs entered on Friday should use a tight stop slightly below the recent lows as risk.Secondary support is at 7849. Placing a stop at or slightly below Thursday's close for short term long positions might be logical since seasonal strength is due to start Monday.The next VIX update will be Wednesday P:M,as I am moving.The other writers of this page will continue nightly updates.

As projected here 2 1/2 weeks ago, RSI for the XAU has been turning up. Stochastic is also showing signs of strength. If Friday's rise in the FTSE 100, past a short consolidation pattern, is an example to U.S. equities, the most recent basing pattern for the DJIA, just above its flat 21 day moving average, and just below an equally flat 50 day m.a., should cause our markets to follow suit, in short order."

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