Market Clues

A subscriber asked Thursday afternoon, as the market was showing no signs of turning, "Any chance that the May first inflection point on the Bradley might be a bottom and not a top?" Indeed it might. We had been thinking that we would get a brief rally into that turn, but we are in that time frame where a turn is expected and the market seems to be wanting to form a bottom here, having shown great weakness since early this month.

One of the puzzle pieces which had not fallen into place (literally) was the spread indicator we track that has done a fabulous job of telling us when the market is ready to rally and also when it is ready to decline. For new readers, a brief summary of how this indicator, our VLE-DJ spread indicator, is computed:

The indicator represents the theoretical cash value of the Value Line Index (VLE) minus the cash value of the Dow Industrials Average (DJ). The Value Line measures the broad market by equally-weighting each of over 1600 stocks, while the Dow Industrials price-weights 30 top blue chip stocks. When the VLE is stronger than the DJ, the market is generally strong, while when it is weaker, the market is generally weak as well. The actual computation of the indicator is (VLE × $100) - (DJ × $10) and is plotted on our Daily Spreads Charts page as VLE-DJ.

Over the past few years, we've found that this indicator forms "channels" within which it regularly bounces. Using our polytrend support and resistance lines, we have had excellent results trading the intermediate swings in the market.

From the low of March 24th, VLE-DJ ran up to the top of the channel and stalled out. Whenever the indicator hits the top of the channel, we expect it to wend its way down to tag the bottom of the channel. These trips to the downside have been pretty irregular, but once the indicator hits that channel support line, the market generally does bottom and commence a new rally phase — which is a good time to be investing for a trade.

Since the last closing high on April 5th, VLE-DJ has been moving irregularly lower, as you can see on the chart above. But, it has yet to tag the bottom of the channel. On Thursday, however, it made good progress toward that goal as it fell $1700 by the close (it had been down about $2000 intraday). That support line is sitting at about $53,000 for Friday's session, while the indicator closed the day at $53,870, so in terms of distance, the indicator is rather close. In a way, the carnage in the market over the last few weeks has been setting the market up for a good rally back.

It's very important that the market turn up from somewhere in this price area because that low will enable us to confirm exactly where the support polytrendline is. It's critical because our projected polytrendline says that the broad market is rapidly losing strength and will continue to do so for the foreseeable future. That doesn't mean we can't have some great trading rallies, however.

The sentiment gauges are near the territory we like to see them in for a trading bottom as well. Friday's market is important. If we get a reversal low, we'll have our roadmap tuned up for the rest of the year.

Bonds

Rates for the 30-year Treasury Bond broke through resistance Thursday. However, don't jump to the conclusion that the 23-Year bond bull market is over yet. If this is a fourth wave upward correction in rates, a "throw over" the line is pretty much standard behavior. This may just be setting up a better-than-expected buy signal!

After giving a timely sell signal in the bond market just at the recent high (which was a low in rates), we are now seeing strong evidence that bond prices are getting ready to rally back. The key has been the long term downtrendline in rates. This line starts at the interest rate high of 1981, so it's a 23-year trendline:

The stock market retested last week's low on Wednesday, the last day before the Monthly Buying Spree ("MBS") kicks off on Thursday. Although the broad market was relatively weak, the last trading day of the month tends to see it close up about 70% of the time. The first official day of the MBS — Thursday — is a transition day, but even if it's down, it should be the day of the low.

The trading range the market is traversing here was established right at the end of March, following the significant low of March 24th and the strong rally of the next week. So far, it's holding at the bottom of the range. This test of the bottom of the trading range could be a great setup for a nice rally in the MBS this month. After this next rally, though, we should get a larger decline phase. But, we'll cross that bridge next week most likely.

One of our lead dog indices, the SOX (Semiconductors), should be bottoming in the current timeframe. It held up pretty well on Wednesday, falling in line with the Dow (which is bullish because SOX tends to be more volatile than the blue chips).

The FTSE-100 has been giving warnings about the market and continued to accelerate to the downside on Wednesday. We would expect a retest of the recent high should Wall Street circle the wagons and rally back (which we do expect to occur).

The Fed, as you may have noticed on our FRBREPO chart on the Daily Index Charts page, is pumping a lot of funds into the market here — the most since January, as a matter of fact. In the past, the Fed pump has done a good job of priming the stock market into rally mode, at least for a while (until they take the punch bowl away).

Out in the Atlantic Ocean floats a two million square mile mass of sargassum weed. Ancient sailors feared their ships would be ensnared by the plant. And, on Wall Street, stocks float a sea of neutral trend, waiting for a spark to send them soaring or plunging.

Or, perhaps, both. There's a typical Election Year pattern of a low in May, followed by a rally into the Election. Even though the market trend is neutral, we could get some nice trading moves over the next few days, weeks and months before any real long-lasting trend reasserts itself (that long-lasting trend should be to the downside, of course, as the next leg down in the secular bear market asserts itself).

We're almost to the "Monthly Buying Spree" where stocks tend to rally into the third day of the new month. Thus, it's more likely that we will see stocks continue higher for the next few days. After that, we have the April Employment Report to look forward to next Friday (the 7th of May). Angst associated with that report could send stocks careening down to the bottom of the trading cylinder:

We are now in the timeframe for turns in several important markets, including Semiconductors (bottom) and the US Dollar Index (top). There's no confirmation that a turn has taken place yet.

Stocks traded within a narrow range Monday, staying mostly within Friday's range. This is the time of month when the monthly seasonal we like to call the Monthly Buying Spree gets set up. Now, the Monthly Buying Spree isn't always an up period of time, but it has the best odds of being an up market of any stretch of days in the month. It begins Thursday, the next-to-last day of the month, and ends next Wednesday, the third trading day of the next month. So, this period of time which immediately precedes the Spree might be called the Blahs because it generally is weak, especially compared to the days which follow.

We are entering the midyear doldrums:

The gold stocks are still consolidating around the lows of last week, which argues that further moves to the downside are likely. This is in line with our weekend comments.

As we move toward the second half of the week, we suspect there will be some pickup in activity, especially if the US Dollar Index confirms its expected turn to the downside.

Despite the best that Alan Greenspan could throw at the market last week, it came roaring back to finish on an up note. While the blue chips weren't stellar performers, the lead dogs certainly were.

When we talk about "lead dogs", we're referring to the NASDAQ-100 and to the Value Line. The NASDAQ-100 Index, ticker symbol NDX, often turns up (or down, as the case may be) a couple of days before the rest of the market. That makes it a great leading indicator. And, strength in the Value Line (relative to the blue chips of the Dow Jones Industrials (DJ) and the S&P 500 (SPX)), which is an equally-weighted collection of the 1600 biggest stocks in the market, is indicative of a strong underlying trend in the broad market.

We got strength last week in both of those lead dogs:

Confirmation of the uptrend was given by the successful test of that support polytrendline in the NDX-SPX chart above.

We even saw a turn up in our Accumulation-Distribution study of the Dow Jones Industrials Average, something that had been badly lagging the rest of the market:

We remain fully invested in the stock market (except for gold stocks).

The hair-raising drop Tuesday couldn't break support and the market turned around to the upside Thursday. The breakout above the previous swing high confirms that our prior labeling of the end of wave D was premature. This wave should unfold in three internal waves and that point was well made by one of our subscribers (LVB) this morning. The market seconds the notion:

This modifies the intermediate term picture only slightly, however. The May Day high is still probable, followed by a very large wave E decline. But, near term, we could easily hit a new all time high in the next few days. Since this is a wave c within the wave D rally, it's likely to unfold in five waves up.

Always keep a trailing stop loss under the market as it rallies to protect profits. Never let a profit turn into a loss.

S&P 500

S&P 500 Index is heading up for a test of 1163 now:

London

The London market is bumping into overhead resistance here:

Remember, the London market is often a good leading indicator for other world markets.

Dollar Index

The US Dollar Index appears to be forming a diagonal triangle on the rally. That kind of pattern is a terminal one which leads to a minimum of a complete retracement.

Once the top is in, gold, bonds and other commodities will be released from the bearish pressures they are operating under right now. That top is likely to come in the next few trading days.

A Mutual Fund To Consider

There is a mutual fund which invests in:

• Euros
• Gold & Gold Stocks
• Swiss Francs
• US Dollar
• Hong Kong Dollars
• Singapore
• Danish Krone
• Swedish Krona
• Norwegian Kroner
• Canadian Dollar
• New Zealand
• Australia

It's the Prudent Global Income Fund. This is a fund which we think is positioned well for the intermediate to long haul.

The weekly chart of the Gold BUGS Index (HUI) shows support is close at hand. This looks like an excellent buying opportunity coming up — once that support level is reached — to put that sidelined cash we raised recently to work buying gold stocks:

The chart suggests a low could be in place as early as the end of April.

Broad Market

We got a bounce in the market on Wednesday from bargain hunters. Our VLE-DJ spread, which measures the strength of the broad market versus the Dow, jumped over $1300. However, internal measures of the market remained bearish. You may recall that the last leg down (which ended on March 24th) saw some pretty substantial rallies against the downtrend. This is one reason why we think that this market has one more big leg up following this one down. The rally following that last low sent the broad market straight up with no retracements whatsoever. That's the sign of a very strong underlying trend. So, we expect the next low to produce another of those great buying opportunities. But, we still do expect some big down days to precede that low.

The market could consolidate upwards here, but faces a load of bricks from selling pressure coming in by the end of the week and for all of next week unless some key overhead resistance trendlines are broken.

The Fed Chairman dropped a bombshell in testimony before Congress Tuesday as he hinted that rate hikes are nearer than they appeared to many observers. That led to a sudden rush to exit stocks, sending the markets sprawling. But, that brought the market pattern into clearer focus.

We have been comparing the Value Line to the blue chips for the past four years as we noted that on a large scale, the Value Line was not only leading the whole stock market into new high ground, it was doing so in a rare pattern some call a "Megaphone", so named because it resembles a cheerleader's megaphone. We had also noted that the current wave 4 correction in the Value Line was also potentially forming such a pattern on a smaller scale. Tuesday's sharp decline confirmed that pattern:

As you can see from the chart above, the pattern legs are labeled A-B-C-D-E as in the more common contracting triangle, which exhibits decreasing volatility within a narrowing trading range as it marches toward its conclusion. The "megaphone", also called an expanding triangle, exhibits increasing volatility. According to our polytrendline studies, the support curve beneath the Value Line has already rolled over its peak and is heading down. This is consistent with a final leg down within the pattern (wave E) moving to a lower low than wave C. Wave E should unfold in five clear Elliott waves down, as terminating waves within corrective moves almost always do.

It's also consistent with the VLE-DJ spread indicator, which is forecasting that the broad market's spectacular 4-year bull market is fading fast:

The implications for the blue chips are that a retest of the March 24th low is very likely ahead — and that test could come before the end of the month. The implications for the Value Line are that it has about 6% of downside risk here. But, once the Value Line does bottom in wave E, it should come back to life in a very big way, along with the rest of the market. That's because, like its cousin triangles, the "megaphone" transitions into a thrust in the same direction it was entered. In the current market, that direction was up. And, since the pattern is one of expanding volatility, the force of a thrust coming out of a megaphone is typically much stronger than the thrust out of a contracting triangle. The higher target of 1850, representing a measured move, may be reached within the next three months. But, first, a rather scary dip is underway. This is a market which takes few prisoners.

If you're trading this market, you should have a stop loss in place, either in the market or in your head. A retest of the March lows, and likely lower lows in some indices, should setup a good place to buy back in within the next few weeks.

Monday was a good day on Wall Street as the market rally which started last week picked up steam to the upside. The broad market and NASDAQ led the way higher as the Dow, which had held up well last week, lagged. Our VLE-DJ indicator gained strongly on the day after slipping badly last week, indicating that this wave c rally we've been expecting has a good leg up.

The market appears to be worried about the Fed raising interest rates — if you listen to what the media claims the market is worried about. Forget that notion. The Fed has been following market moves for years — except when they've been desperately shoveling money into the market to restart the economic engine or influence the elections. And, our temporary funds gauge shows the Fed is sitting on its hands, something it apparently decided to do in January. With no money being shoveled into speculators' hands, the stock market is on its own now. The thing stock investors should worry about is the bond vigilantes, who have already pushed rates up to near highs last reached in August. In other words, the bond market is setting interest rates and they are telling stock market investors that the headwinds are blowing strong against growth in stock prices.

Last week, the rise in long term interest rates continued as hedge funds unwound their "carry trades". With short term money available for borrowing at 1%, long term bonds had provided a great, risk-free investment return of at least 3% per annum. Now, realize that hedge funds are getting about ten times that return due to low margin requirements in the bond market. There's far more money invested in the bond market than in stocks — bonds are truly the 500-pound gorilla compared to stocks!

But, since the bottom we called in long term rates, the bond market has driven rates higher, making the "carry trade" a big loser from a capital loss viewpoint, exacerbated by the huge leverage available. In other words, capital losses are outweighing the benefits of the carry trade. That has sent bondholders into the market to dump their holdings, sending rates soaring to move close to a test of the long term resistance line:

<img src="http://66.69.204.208/img/tyx20040416.gif">

Although we think the rise in rates is overdone — and very similar to last year's leg up — we got out of bonds right at the recent bottom in rates and are not considering buying back in unless the market can tell us it is resuming the long term downtrend. The big test of that long term downtrend is likely to occur in fairly short order.

The rise in rates is putting a great deal of pressure on dollar-denominated commodities, as well as the stock market. This helps the US Dollar rise against the major currencies. We've been telling you to look for one more rally in the US Dollar Index — the end of the rally is coming, but not quite yet.

Real perspective on the market's moves comes from standing back from the market to survey the long term landscape.

Since the bottom forecast by our short and intermediate term polytrendlines, interest rates have been on a tear in the upward direction. This rate rise has helped the US Dollar and hurt many dollar-denominated commodities, including stocks.

Our weekend Detailed Comments for subscribers will be published on Saturday with a look at what to expect in the Dow Industrials, as well as many other markets.

The blue chips of the Dow Industrials (DJ) advanced after making a short term low on Wednesday:

At the same time, both the broad market and the NASDAQ, both of whom brought us to these heights, continued to falter. This sent our VLE-DJ spread indicator still lower:

Once this transition, or "rollover", process is more mature, this spread is expected to grow increasingly negative, signaling an end to the bear market rally we've seen since the March 2003 low.

Gold Stocks

Stocks: A 50% Retracement

The dip Wednesday morning on a fairly high rise in the Consumer Price Index stimulated additional selling pressure in the market. But, that selling pressure was not equally distributed: money flow into the DIA ETF was fairly strong, while money flow out of the QQQ ETF was strong as well. And, the sentiment numbers showed QQQ traders were too bullish and the OEX traders too bearish. So, we have a mixed market environment.

The broad market continued to sell off and our VLE-DJ Indicator continued to fall sharply. Although it fell "only" about $900 (after falling about twice that much on Tuesday), this is in line with the daily spread chart which shows that after the stunning rally from the March low, the broad market was running up against some long term resistance at the upper channel line. A trip to the bottom of the channel, currently running at about $53,300 is possible; however, this could be a 50% retracement with another rise to test the top of the channel. This uncertainty in the outlook for the spread is keeping us on the sidelines after some stunning profits in the futures equivalent over the last year. The current correction sent the indicator right into the middle of the channel:

In the rest of the stock market, the dip here would be expected to retrace about half (50%) of the preceding rally — and that's exactly where it seems to be headed. There are Time Ratio turns due (nominally, lows) on Thursday afternoon. If the market is showing strength into those turns, it probably will indicate the beginning of the next leg up in the rally which started on March 24th. For the moment, we'll call that first leg up wave a, this dip a wave b and the next leg up wave c. According to Elliott Wave, this wave c rally leg should unfold in five clear internal waves.

According to several timing indicators, this next rally is likely to end around the end of the month. Now, realize that there is a monthly "seasonal" tendency for stocks to rise from the end of month period into the first few trading days of the next month. So, while we are seeing selling pressure here, the next few weeks are often a good time to be invested in stocks. The problem comes after May Day, however. Owning stocks from May to October is historically a very bad time to be invested. In fact, if you simply buy at the end of October and sell at the end of April every year, you'll do far better on average than simply holding throughout the entire year.

This year, the rising US Dollar is putting extreme pressure on stocks, bonds, as well as many commodities. This was expected, of course. The most likely date we have projected for a top in the Dollar's bear market rally is now the 27th of April, so these dollar-denominated markets could remain under pressure until the Dollar does top out and resume its major trend lower. Of course, that date also happens to coincide with the beginning of (monthly) seasonal strength in stocks!

Given the outlook, we're remaining basically fully invested in the stock market, expecting one more rally that will provide us an opportunity to sell stocks. We're in cash in the gold stock part of our portfolio, looking for bargains to buy as the US Dollar tops in this bear market rally that should be coming to an end in just about two weeks.

The DIA shows strong Money Flow going into the market this morning after a lower opening which broke briefly below the downtrending polyline. However, the low this morning appears to be significant, so we redrew the support polytrendline to contain it:

Given the evidence, it appears that the market could have found a short term bottom this morning.

Stocks: Hitting the Skids

Better-than-expected economic news sent most dollar-denominated markets skidding lower on Tuesday, including the stock and bond markets. The quarter-hourly chart of the DIA, an ETF which stands in for the DJ (Dow Industrials), pretty much tells the tale:

<img src="http://www.marketclues.net/img/dia15m20040413.gif">

This correction of the recent advance is probably setting up the final leg up into late April - early May, so look for the market to slide down that polytrendline until it hits the rising polytrendline — with the usual bounces along the way.

Option expiration is Friday and some of this volatility may be due to position squaring in that market (the tail usually does wag the dog given no underlying trend either up or down).

Gold stocks tumbled along with the rest of the market, which was something we told you about last weekend — and on Tom O'Brien's TFNN Monday afternoon. If you sold, keep that cash handy: the dollar's rally is a final rally leg in a very severe bear market. As Tom mentioned on the show, 91 is just about where we think the Dollar Index will reach toward the end of this rally. After the dollar tops out, gold stocks are going to be a screaming buy again, so keep that cash handy.

Our VLE-DJ indicator, which measures the strength in the broad market, tumbled by $1686 to close at $57,637.80. That's a sign we're probably going to move toward the lower band in the daily VLE-DJ spread chart, currently running right around $53,350. But, the risks are high right now: the spread has no trend. After running up by several tens of thousands of dollars over the last year, the spread is going essentially sideways. What we need to see is for the spread to hit the support line. That should make a good buy point for a trade. Once the trend turns, we'll be able to play both sides of the spread, but the risks are too high right now to chance it.

RSS Feed

As many of you know, the big media conglomerates are doing their best to censor the information you receive. The Internet is their biggest threat. It's no wonder they're pulling out all the stops to crush the competition. One of the tools they use to eliminate the competition is to throw up roadblocks like blocking email. For instance, AOL, SBC and Earthlink block email on the rationalization that they're blocking SPAM. Don't believe them. It's a big lie and they're out to shut down the competition.

Well, they're not going to win this battle. We are implementing an RSS feed for you. We are setting things up now, but if you want to switch to RSS (which stands for "Real Simple Syndication"), you can add Market Clues to your RSS feed. Don't have one yet? Simple, go to http://my.yahoo.com/, where you can add the RSS Module to your My Yahoo! page. Add this link in that module: http://marketclues.blogspot.com/atom.xml. Whenever we update the website, you'll see an entry on your "My Yahoo!" page!

For new subscribers, catch up on last weekend's commentary on our Detailed Comments Page . . . .