Market Clues

Last week, we saw the market soar after testing the rising polytrend support line:

It was a good rally, but not as strong as we thought it might be. Despite that, the market could reach relative new highs this week as it makes a bet that Bush will be re-elected President. However, we think the risk here is that the market is wrong and that Kerry will win. In case Kerry does win, there could be panic liquidation hit the market as players sell all of their stocks -- both winners and losers -- in anticipation that changes in the capital gains tax rates will be less favorable under the Democrat from Mass. Stocks with paper profits would be sold to pay the lower capital gains rate, plus stocks with losses would be sold to create capital losses in order to offset some of the capital gains realized on the winners. Thus, we have a situation where the entire market could come under intense selling pressure for a 30-day period.

Why 30 days? The reason lies with the Internal Revenue Service's definition of a "wash-sale". Stocks sold and repurchased within a 30-day period mean that losses cannot be claimed on the tax form. So, any stocks sold cannot be repurchased for at least 30 days. This means the buyers will be constrained for one whole month once they sell. If we assume they sell during the days following the Election (Nov. 2), then the selling pressure could be strong until after the first week of December. That would be a time for a great buying opportunity if Kerry wins.

Now, this is all presuming a Kerry victory. If Bush wins, we could see a quick rally. If no one is a clear winner, we suspect the selling would start due to the uncertainty -- after all, stocks sold during November can always be repurchased during December.

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The torrid pace of the rally took a rest Thursday. Although the market ended with a slight gain, it succumbed to profit-taking, giving back most of the midday gains by the close. This is normal and natural for a market which has soared off the bottom as vigorously as this one has. We should get a very brief rest period before the surge next week:

It does appear that a larger rest period may be ahead after the first week of November. However, at this point a retest of the rising support line may be all we get before the next acceleration higher.

The economy is humming along right now as the Fed appears to have achieved their goal of throttling back without sending the country back into recession:

Steady growth and no inflation -- the Fed has hit the sweet spot of the recovery for now.

The stock market is likely to take a Kerry victory next week as a negative and sell off. This would stunt the prospects for growth, but probably wouldn't eliminate the next rally. It might even give us another chance to buy at lower prices. A Bush victory would probably keep the market on the upwardly-pointed trendline into the first part of next year. The third alternative, indecision, would likely be the worst outcome and keep the market stalled in a range for months. At this point, it's still too close to call, but it does appear that Kerry has lost a lot of momentum over the last week and is slipping in key swing states.

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The powerful wave 3 rally in the stock market continued Wednesday, rolling right over the bears and turning them into buyers. Sentiment flipped around. OEX traders, after literally three weeks of pouring money into puts (bets the market would keep going down), finally realized the obvious: this market is a rocket ship heading for the moon. But, so far, they haven't even reached the overly-bullish zone, not to mention showing any kind of bearish divergence.

Thursday, we get into this month's Buying Spree (as if we haven't seen it start already :). We have two days left in the month and mutual funds who just might want to lift the prices of stocks they hold in their portfolios so their returns don't look so bad at the end of the year might decide to act now with the wind in their sails already. Is it possible they'll buy those shares to temporarily boost their prices? You bet they will!

So, expect the up escalator to continue for a while, into November and past the Election next Tuesday. We'll reassess our positions right after the Election. Could be a very big trend change in early November, but it also could setup some huge moves later on.

Not so for precious metals, bonds and oil. Those markets started down the slippery slope as money gushed out of those markets and gushed right into the stock market. The US Dollar has held its ground at that long term trendline we showed a couple of days ago, and that puts pressure on all these markets. The best Elliott count we've seen on the Dollar Index says we're about to enter a strong wave C rally that will carry the index right back to the highs of the year. That move is going to hurt precious metals and oil. It may hurt bonds, but that's a very manipulated market because the trade/current account deficit is being recycled right back into the bond market. Still, bonds took gas on Wednesday and that may very well continue for a while.

As one poster to the GMSTechStreet message board pointed out:

"The implication for gold prices should be interesting. If the dollar rallies and gold continues to rise then we are in a true bull market for gold. We shall see."

Indeed, it will be very interesting to see just how strong the gold bull market is. We wouldn't bet on it staying up with the US Dollar rallying, but Jake Bernstein, an excellent long term analyst, believes it can. We still think these are the foothills in the gold bull market. Later on, we get to the mountains. In the mountains, the dollar can do anything and it won't hurt gold. We think gold is going to continue to react to moves in the US Dollar for now. As long as the Fed keeps the "presses" running and generating new cash to "invest" in Chinese products, recycling that cash right back into buying bonds, this perpetual motion machine can continue without any overt signs of failure (all it needs is a continuing extension of credit to consumers). When the machine fails -- and we think it will eventually -- it will do so quickly and catastophically. We're not anywhere near that point right now, so gold is not considered a strong alternative to US Dollars among the masses. When it does become such an alternative, you'll know we are close to the day of reckoning for the fiat currencies.

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A lot of bears have made noises lately about how the Dow Industrials have been so weak and how the broad market was going to "catch down" to the senior average. The Dow certainly gave the bears a spanking on Tuesday as it soared by 138 points. That doesn't mean the Dow itself is out of the woods, of course. It is likely to continue to underperform, but it was definitely due for an oversold bounce.

The turn we've been looking for occured exactly when we expected it to. We can now look forward to enjoying the ride on the escalator.

In case you haven't paid much attention to the NYSE Composite Index lately, it has been just as strong a performer recently as any of the small- or mid-cap indices (S&P 600, S&P 400, Russell 2000, Value Line, etc.). And, it nailed the supporting polytrendline on Monday, coming within 0.0542% of the line and pivoting sharply higher off that support Monday and continuing the rise Tuesday:

That polytrend support line is accelerating higher, so it promises much more rally ahead. A color version of the chart is available at http://www.marketclues.net/img/nyac20041026.gif -- this image was posted on the GMSTechStreet Discussion Forum ("http://www.gmstechstreet.com/cgi-bin/webbbs_gmspublic.pl") after the close Tuesday in response to Dan Ascani's post of a chart of the NYSE Composite where he illustrated his Elliott Wave count. Although our count isn't exactly the same as Dan's, the end result is virtually identical, so any differences are purely abstract at this point.

We expect the rally to continue through the Election on November 2nd. We will assess the prospects for the market as new data is received.

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While the stock market was virtually unchanged by the close (the strong sectors that we are fully invested in went up, mostly, and the weak ones we are not in went down for the day, which is what we like to see on a significant turn day like Monday), the real excitement was the US Dollar Index, which continued to plunge toward the end of wave B down as it approaches a bottom and a strong bear market rally phase. The precious metals initially rallied on currency weakness, but closed very close to their lows, indicating the smart money was selling heavily into the rally (really, simply a mirror image of the decline in the US$). This is a sign of weakness in the precious metals and a clear warning that a high is being put into place right now.

But, the star of the show was the US DX, which is getting very close to the long term support line which started in the early 'Nineties:

The basing process in DX may take until early November or later, but the stock market is likely to rally for the next two weeks, form a significant top and then slide for several more weeks. Interestingly, the day after the US Presidential Election is being targeted for a signifcant top in the stock market right now -- which is exactly the relationship which has existed between these two markets for years. This suggests that the bottom in the dollar may coincide with the next top in the stock market in early November. We probably finished wave 3 down within c of B on Monday for those who are following DX on an Elliott Wave basis. That suggests a sideways move in wave 4 (i.e., a trading range), with a final low being made in wave 5 (down) which will thus finish up wave c (down), wave B (down) and lead directly into a strong bear market wave C (up). That wave C rally will finish wave 2 (up) and lead into wave 3 (down), usually the largest wave in a five-wave sequence.

At this point, it appears that DX will need to form a longer base in order to finish the current wave B decline.

At the same time, the stock market is like a racehorse at the starting gate, getting ready to explode when the bell is rung. And, this is the week the bell will ring. We have the broad market which is holding up well in the current correction after a strong rally off the mid-August low. Our "lead dog" indices, SOX and NDX, have bottomed and are straining at their leashes to run. The blue chip Dow Industrials has been stuck in the mud. The S&P 500 Index is midway between those extremes.

The mid-cycle pause period appears to be over now and the market should rise back to test the high just prior to this correction in the S&P 500. That was 1142 on the SPX, or about a 48-point rally from here.

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While the Dow generals continued their swoon, most of the market took a brief respite Friday from the recent rally. The broad market has been very strong recently and the NASDAQ has been even stronger. Typically, corrections end with the strong sectors pulling back and it appears we are very close to the end of this correction right now.

The chart below of the NYSE Composite Index illustrates just how strong the broad market continues to be. Even Friday's resting day couldn't drive the NYSE below its midweek low. The accumulation-distribution curve confirms trend direction of the polytrend support line, which is accelerating higher each day:

Even the more bullish levels recorded on our sentiment gauges Friday are actually bullish. That's because a good trading low is often accompanied by more bullish readings than occured earlier in the correction -- and we've seen literally weeks of overly-bearish readings on the OEX gauge. The bullish readings on Friday represent bullish divergence because the more savvy OEX traders are clearly buying calls at the low point of the correction.

The Bradley, which has correctly pinpointed most of the turning points in the stock market for the last several years, calls for a turning point to occur Sunday, October 24th. The nominal turning timeframe is ±4 calendar days, which says the turn should occur during the period beginning Wednesday, October 20th and ending Thursday, October 28th (this latter date is, coincidentally, the beginning of the next Monthly Buying Spree* and the end of most mutual funds' fiscal years). This last week also saw the ideal low for the 10-week trading cycle, representing the midpoint pause in the dominant 20-week trading cycle. Monday the 25th also represents a cluster of turning points on various stock and bond indices using the Time Ratio technique. With so many timing tools pointing to this period of time as a turning point, we have a great deal of confidence that the market will rally into the next turning point cluster due Thursday, November 4th.

*Monthly Buying Spree: the period which occurs monthly from the next-to-last trading day of the month to the third trading day of the next month; typically, the market rises during this period of time due to pension contributions to mutual funds, Window Dressing and other monthly factors. Historical studies of the Value Line Index have shown that the broad market rises 70% of the time on the last trading day of each month.

With virtually everyone espousing the view that the markets will do nothing until the Presidential "race" is decided, what will the stock market have to do to fool the crowd? Why, rally, of course! And, then, after the market soars to new highs in early November, we'll have to assess the potentials associated with that next high.

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If you're not fully invested in the stock market, it's not too late. The NASDAQ has been leading the way higher over the past few weeks while the blue chips have lagged significantly. Surprisingly, this isn't a new phenomenon. It happened just two years ago at the 4-year cycle low. And, it's happening today in the very same way it did then:

With the public extremely bearish and expecting the market to stay down into the "Election" and beyond, we have the right sentiment background for a very strong rally. Once the market breaks out to new highs, all that sideline cash is going to come rushing back into the stock market as the latecomers realize they've missed the train -- again.

The leadin to the USA Today Money market summary after the close Thursday read, "NEW YORK -- U.S. stocks ended mixed Thursday as the Nasdaq rose to a two-week high on a broad rebound in technology shares inspired by strong earnings from eBay, but blue chips fell after Caterpillar's results disappointed." That's the way the media keeps the investor on the sidelines. They make it appear that the rally was just news-driven and thus would need more eBays announcing great earnings tomorrow to keep the rally going. But, our portfolios are doing very well because we're looking at strength and finding it with recommendations to buy the semiconductors and high-tech stocks, as well as the small- and mid-cap sector indices that are leading this market higher. We're not waiting for the eBays and IBMs to announce good earnings -- the accumulation going on in those sectors has sent a strong message that earnings reports are a lagging indicator.

A Family Affair: How the Power Elites Give US Voters No Choice

Much is made in the media of the competitiveness of the so-called US Presidential Campaign, but little is said by that same media of the fact that the candidates of the two dominant parties are not only members of the very same secret society ("Skull & Bones"), they are members of the very same extended family (see http://msn.ancestry.com/landing/strange/bush4/tree.htm for details if you're interested -- they are ninth cousins twice removed). This is, unfortunately, not a surprise at all. US voters, as usual, are offered no choice whatsoever in choosing their leaders. This year, the police even arrested the third-party candidates and threw them in jail for attempting to exercise their right to be heard during the televised debates. The US is clearly devolving rapidly.

Who would have thought that before the first decade of the new millenium was less than half finished, a nominally communist country (China) would hold not only almost a trillion US dollars in reserves via a massive trade surplus with the US, it would also be the biggest holder of US government IOUs?

Speaking of the US Dollar

The US Dollar Index is still plunging like a knife dropped from the sky. It's still too early -- it may be early November before it sticks in the ground and stops quivering. In other words, don't be too anxious to buy.

Despite that background, the US economy is still growing. Thursday's repo activity tells us the brief slowdown of the last week was just a retest of the lower Bollinger Band:

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If you watch the blue chips for stock market direction, they're sending the wrong signals right now. The strength has been and is in the non-blue chip sectors. Recently, after underperforming the blue chips, the NASDAQ-100 Index started outperforming virtually everything. That's very significant because it means that the high tech sector is recovering; that sector tends to lead the blue chips by several months. And, the NASDAQ-100 Index (including, of course, its "fellow traveler" tracking stock, QQQ, which we recently issued a buy signal on) is our "lead dog index":

The upward-pointing triangle in the chart above is a Time Ratio turning point, nominally a high. However, these turning points often will "invert" and a low will occur where a high should have been, and vice versa. This always happens when an intermediate term change in trend has occured, usually when a time cycle bottoms just before the Time Ratio turning point -- and we had an intermediate term cycle, the 20-week cycle, bottom in mid-August. That Time Ratio turning point is likely to be a low in the blue chips and a point of acceleration of the uptrend in the NASDAQ.

But, the weakness in the blue chips is an indication that all the cylinders are not firing in the economy. That's also the message from the Federal Reserve's Temporary Repo Balance, which is plunging back toward the August lows. This is a start-stop economy and the stock market is certainly reflecting that in the blue chips. We believe, though, that due to the strength of the high tech stocks, not to mention the small caps and mid caps which have been strong for several years (and which have been powering to new all-time highs with great regularity while the headline stocks are stuck in the mud), the economy is continuing to expand. When those lead dogs falter, we will be entering the final phases of this cyclical bull market and be getting ready for that next leg down in the long term bear market which started in 2000. It's not time for that just yet.

The bluest of our lead dogs is IBM, which we recently recommended buying, and it's pointing up:

IBM is poised to regain its pre-eminent position in the computer industry as it trounces both Sun and Hewlett-Packard on the strength of its technological leadership.

Now, when the stock market turns up, it is likely to lead to strength in the US Dollar, which the crowd universally thinks is going down. We agree: in the long term it is going down. But, in the intermediate term, the US Dollar Index is bottoming and about to soar. This will put severe pressure on the precious metals. It's not so clear what this will do to the mining stocks. They have held up much better than we thought they would. In fact, if the whole stock market rallies, it's possible that they will move with the market. Still, it's a risk that with gold going down, the mining stocks will follow the metals down. We have reason to think that next month will provide a buying opportunity in the mining stocks, but we'll have to take it one day at a time. The rally in the US Dollar could last well into next year.

In any case, the long term bull market in the precious metals is just getting started. We have to navigate through the foothills to get to the mountains. There will be dips along the way. That's good because it gives long term investors lots of places to accumulate positions.

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The stock market rallied on great earnings from IBM announced after the close Tuesday, but gave it all back when Eliot Spitzer widened his probe into the health industry. This is a market where the cream is definitely rising to the top (IBM rose 4% on a day when much of the rest of the market went down), but the selloff helps build a solid base of fear among the public for a lasting intermediate term rally that can get the headline indices out of this long trading range.

Sentiment

One of our very best sentiment indicators, our OEX Dollar-Weighted Call-Put Ratio, shows just how bearish the average speculator is getting. In the last eight trading sessions, the value of puts traded was $140,272,000. But, the value of calls was only $78,387,000. That's almost twice as much money being poured into downside bets. Since this is a great contrary indicator, it's clear that it's saying that public fear is reaching panic proportions, making this a great time to buy.

Timing Indicators Point To a Low

Summarizing the various timing indicators which are pointing to a low now:

• Time Cycles: the 10-week cycle is due to land this week. This is the midpoint dip of the 20-week primary trading cycle.

• Bradley: after successfully calling several turns in the stock market this year, including the early October top, this indicator points toward an ideal turn on the 24th ±4 calendar days, a timeframe which starts Wednesday.

• Time Ratios: a plethora of Time Ratio turns are due in various markets during this timeframe.

• Polytrendlines: a key polytrendline which has defined significant lows in the market going back to 1998 is resting just below the market.

It's not only the stock market, but turns are due now in the US Dollar Index, Gold, Silver and the Bond market. It looks like this is going to be a very important turning point for many markets.

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After the bell Monday, IBM had some good news -- business is growing very nicely indeed:

ARMONK, N.Y., October 18, 2004 . . . IBM today announced third-quarter 2004 diluted earnings per common share of $1.06 from continuing operations as reported, compared with diluted earnings of $1.02 per share in the same period of 2003, an increase of 4 percent. In September, the company agreed to a one-time, pre-tax charge of $320 million (or 11 cents per diluted share) for the partial settlement of legal claims against IBM's pension plan. Without the one-time charge, IBM's earnings per diluted common share would have been $1.17, an increase of 15 percent.

Third-quarter income from continuing operations was $1.80 billion, an increase of 1 percent compared with $1.79 billion a year ago. Without the one-time charge, IBM's third-quarter income from continuing operations would have been $2.00 billion, an increase of 12 percent. Revenues from continuing operations for the third quarter were $23.4 billion, up 9 percent compared with the third quarter of 2003 revenues of $21.5 billion (and up 1 percent sequentially from $23.2 billion in the second quarter of this year).

Samuel J. Palmisano, IBM chairman and chief executive officer, said: "In what is normally a challenging quarter for the technology industry, IBM delivered one of our strongest third quarters in revenue and earnings growth in recent years. IBM has been gaining momentum throughout the year, and the strength of our integrated business model gives us confidence as we look toward 2005.

It's clear that the high-tech sector is recovering well now. And that was the message from our Accumulation-Distribution and polytrendline studies in the stock. Before the news, IBM moved up by $1.10 to 85.95. It then jumped in after-hours trading on the news and is on its way back to 99 where a long term resistance line could cap the rally several months down the line. IBM is one of our recommended stocks to buy.

The economy is strengthening as the trend in repos has been demonstrating:

Another indicator that the NASDAQ-100 (and the QQQ "cubes") are leading the bull market charge higher was given by the breakout in our Relative Strength Line which compares NDX to DJ. When the line is moving up, the bull market is healthy. When the line is moving lower, the bears are in control. Right now, it's clear that the bulls are in control of this stock market:

With sentiment heavily weighted on the put side for OEX options and the "lead dog" back in the lead once again, this is very likely going to be a very strong couple of quarters ahead in both the stock market and in the economy.

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The shorts kept pushing the market down, but it just wouldn't cooperate last week. Even though Friday was Triple Witching Options Expiration Day, the NASDAQ still closed almost 30 points above Maximum Pain (1400 on the NASDAQ-100 Index).

The NASDAQ-100 Index is the only true measure of the NASDAQ stock market because the NASDAQ Composite not only cannot be traded, it is loaded with bonds, which tend to skew the index because bonds move opposite stocks most of the time.

This is very bullish since it means the bulls have decided to make a stand at current levels. Once the bears throw in the towel and start buying (and bears have a tendency to become buyers after they admit they were wrong -- it's the law and they don't get to play if they don't buy), that extra buying pressure will send the market soaring higher again.

It wasn't just the NASDAQ that showed strength, though. Even the blue chip S&P 500 Index held above its prior low as heavier volume confirmed the buyers were in control of the market:

But, is there trouble in Paradise? Why, of course there is! The gold stocks are in big trouble here, as well as many other commodities and the commodity stocks. Copper crashed to earth last week and, as you probably know, is a fantastic leading indicator not only for the economy, but for the precious metals themselves. Does this mean we're heading for recession? You'd better believe it and prepare for it -- it's on the way. But, although it's a certainty, it's not right around the corner. The stock market, in fact, doesn't see it coming yet. So, we have one of those Indian Summer types of market environments where stocks can go up and money can be made on the long side even though the storm clouds are brewing. There are plenty of historical parallels for this, in fact. For instance, the 1932-1937 cyclical bull market came right in the middle of the Great Depression! Stocks rose more, percentage-wise, in that bull market than in any other bull market of the 20th Century, in fact (over 324% in a five-year period, as measured by the S&P 500 Index)!

We're not saying the market will do as well as that -- after all, stocks started from very depressed levels in 1932. But, it does show you that the market can do very, very well even in the middle of a vast economic meltdown. All it takes is a very easy monetary policy, which the current Fed has certainly demonstrated it is willing to engage in. Just as they revved up the "printing presses" (actually, money is created by electronic book entry nowadays -- no trees are harmed in the making of modern money) during the last downturn, the Fed is quite willing to mash the "pedal to the metal" again to keep the economy going. This is, of course, only possible when you have a monetary system where money can be created by whim rather than substance, but that's the system we have and it has worked very well so far. There's no reason to think it won't continue to work as well in the future.

Of course, there is a price to be paid. That price is the destruction of the dollar. But, that's a story for next year. In the near term, the dollar will be surprisingly strong, a trend we're looking forward to starting as early as this coming week. Bullish Sentiment toward the US Dollar is at an extreme low -- and that's a contrarian indicator. Everyone "knows" how bad the trade deficit is and that makes them bearish. But, the Elliott Wave count is very bullish for a major rally in the Dollar Index:

We have more to say for subscribers this weekend on these and other markets in our Detailed Comments Page . . . .

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The bears have tried their best to push the market lower this week, but each time they shove, it bounces back:

They have been trying to push the cubes down to $35 for a couple of weeks now and the best they have managed has been Tuesday at 35.20. Thursday's efforts at selling the index down only reached $35.33 and left them 45¢ above their target. The "cubes" represent the 100 top stocks on the NASDAQ. It appears that the cream just keeps on rising despite the bears' best efforts. The pressure they've been putting on the market is likely to be released shortly -- Friday is this month's Triple Witching Options Expiration Day.

That's not to say they're not taking other stocks down -- they are. They shoved the Dow down just below the polytrend support line Thursday, retracing about 4/5ths of the August-September rally in the process. But, for all their efforts, they have sent the Small Caps to only a 38% (Fibonacci) retracement of their rally gains. Typically, a wave 2 correction will retrace about 50% of its preceding wave 1 rise -- and have been known to retrace virtually all of that wave on very rare occasions.

We have several timing indicators which point to this timeframe as a turning point in the market. Since the market is clearly sliding into it, it looks like a great buying opportunity. We'll discuss the reasons why in detail this weekend.

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The market finished a five-wave rally early Wednesday and immediately succumbed to selling pressure. However, the QQQs held well above Tuesday's low and managed a strong comeback by the close:

Next week marks the 10-week trading cycle low within the larger 20- and 40-week cycles, both of which bottomed in August and are now pointing up.

Is the Commodity Bull Market Over?

The big selloff in the metals accelerated Wednesday, but we think this is simply a wave c decline in the metals that will end the long, drawn-out wave 2 correction within the long term bull market. Yes, corrective waves within a bull market are sharp -- that's why most participants bail out and miss the next leg up. When sentiment toward commodities reached relatively high levels right at the highs of 2004, those commodities had to have sharp legs down to convince the majority they were wrong. But, once we see five waves down, wave c will be complete and it will be time to buy:

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The stock market closed Tuesday basically where it ended Monday, fulfilling our call for a flat market. But, it was what happened intraday that was bullish.

The market started off on a big gap lower, but made its low only an hour into the day session. It was clear that QQQ option short sellers were trying to push the "cubes" to Maximum Pain at $35, but they only got the beach ball down to within 20¢ of that figure before it just had to rise again. The cubes ended the day at 35.69. Moreover, the early dip may have allowed the shorts to cover their bets at a profit, so we may not have to deal with their shenanigans again until November.

Indeed, we could argue that the cubes finished an Elliott Wave five-wave impulse to the downside on Tuesday morning. That would also finish wave c of the correction which started at the beginning of October and that would be very good news for the bulls, for it would mean that the market would be free to rally again. However, Elliott is not the best of tools to use in determining the end of corrections, but at least we are likely to see a better rally in the stock market very soon:

In any case, we are nearing the time for a 10-week cycle low in the stock market. With that low, we should see an acceleration to the upside which confirms Terry Laundry's latest T-Theory projection ("http://ttheory.typepad.com/terry_laundrys_t_theory_o/2004/10/update_october__1.html").

Precious Metals

The US Dollar Index hasn't quite found a bottom, but it's definitely showing signs of one coming. This has slowed, but not broken, the advance in the precious metals as the chart of December Silver shows:

The turn in the US Dollar Index and in the precious metals is likely to come sometime this month. Our estimate for exactly when can be found on the main website on the Cash Dollar Index chart on the Daily Futures Chart Page, as well as in the Recent Chart Notes page (see DX_A0 Futures).

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The stock market had to go without the bond market Monday as a semi-holiday atmosphere slowed trading -- bankers were on holiday, in other words. We were hoping to see the QQQs trade down to that Maximum Pain price of $35 early on, but that was not to be. That leaves the door open to further weakness this week -- Friday is October options expiration. At this point in time (after the close Monday evening), Maximum Pain is probably midway between the 35 and 36 strikes. With the cubes (QQQ) closing at 35.75, it's very possible they will stay anchored in this range until option shorts have finished covering.

In fact, looking ahead at the November series shows 36 to be the center of Max Pain 5 weeks from Friday. This suggests that we could get a lift after this Friday.

The market-leading index, the S&P 600 Small Caps, found support right on the trendline we show in the quarter-hourly chart (on the subscriber website). But, the bounce was not robust. A successful retest of that same line Tuesday could turn the market back up more strongly, especially if accompanied by increased volume. A failure at that trendline would probably see the S&P 500 (SPX) retest its lower Bollinger Band.

If the market continues to correct into the middle of next week, it would actually be more bullish. That's because that timeframe represents a timespan of exactly 10 weeks from the prior trading low of 13 August. That's the length of the half-harmonic of the 20-week trading cycle -- and a likely place for a mid-cycle dip just before the market takes off to the upside once again.

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The correction continued Friday after a very disappointing jobs report. It appears that our hunch that the level of Federal Reserve repurchase agreement balances (FRBREPO on our Daily Index Charts page on our main website for subscribers, updated daily) may be correct: this "repo" level seems to be a coincident indicator of the level of economic activity in the system. After bottoming in the late July - mid August timeframe, the indicator trended higher into a peak on September 7th (the Dow Industrials peaked on the same day and started a correction that continues to the present). From that early September peak, the indicator retraced 75% of its prior rise to put in a low on Wednesday. Despite the rise in repo activity in the last two days of the week, stocks sold off. We suspect that stock market investors are quick to sell when business slows down, but slow to buy when it picks up again. This, of course, is exactly the opposite of what they should be doing -- as Larry Williams said, "Be quick to turn bullish, slow to turn bearish."

Meanwhile, in London, our leading stock market index ran into a bit of resistance at the long term line last week and found the going very tough:

In general, the accelerated advance (the mathematical term for the curve is that it is "concave upward") is very bullish -- it indicates an increased desire for investors to pour money into the market as prices rise. That's the opposite of a market which is "concave downward" -- i.e., "curving over" and losing momentum. This is a very bullish indicator for the bull run continuing in virtually every stock market around the world. Of course, it's especially bullish for Great Britain itself. A period of digestion of the gains here would not be surprising in the least -- it would be indicated by a break below the support line of the polytrend channel. Even more bullish would be for the market to find support on that line next week and immediately soar through the overhead resistance.

If the last peak was actually i of 3 (instead of 3 as we have conservatively labeled it), the retracement should be very shallow. Finding support at the polytrendline would argue that count is the correct one. A powerful wave iii of 3 rally would then carry the FTSE-100 Index hundreds of points higher. And, it would very likely be the engine to pull the US market out of its funk this week.

The bearish case also has its strong points, however. The bearish divergence evident on our Accumulation-Distribution Line needs to be erased soon. If it is not, our labeling of wave 3 as complete would indicate that the bulk of the advance is over, with only a wave 5 rally left to go on the upside. That would give investors who are fully-invested in the market a chance to sell at higher prices, which isn't bad. But, it would also imply that the Elliott Wave pattern is almost certain to be a dread diagonal triangle, a pattern which is always retraced at least 100% -- and could just be the beginning of a much larger bear market decline ahead.

As befits October, we have a market poised on a knife's edge. What it does in the days and weeks ahead is going to have very serious ramifications for the economy. It may very well be that the market is at this crossroads due entirely to the current Presidential Election in the US. Rather than trying to call the market based upon who wins, we'll stick with the technicals, which are more likely to make a better call in the end anyway.

For subscribers, we'll discuss some very strong stocks which could benefit the most from a change in trend in the market. That's in this week's Detailed Comments Page . . . .

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Of Interest to Traders

Tom O'Brien of TFNN.com is offering his Tiger's Den online service for the month of October free to new trial subscribers. The normal price is $39.95 per month. This is your chance to try the service for free until the end of October. Go to Tiger's Den Free Trial to signup and start your free trial. Note that this free trial is different from Market Clues' Free Trial -- our Free Trial is for a minimum of three months and does not automatically convert to a paid subscription at the end of the free trial period, which the Tiger's Den subscription does until you cancel it.

Thursday's stock market got ready for the monthly Employment Report due out Friday morning. Whether it was the option short sellers trying to push the market down to Maximum Pain (QQQs reach that level at 35, but closed Thursday at 36.24 -- option expiration on the 15th means that option short sellers need to push the market lower so that they can maximize profits), or just plain profit-taking, the market took back all of Wednesday's gains. Friday morning's Employment Report, the last one before the Presidential Election November 2nd, will also include benchmark revisions which could be crucial in the remaining days of the campaign, so the report, which usually takes on great importance, is probably the most important one of the year. Perhaps Thursday's selling pressure was due to investors flattening positions awaiting the report. In any case, we shall soon see the report: it will be released at 8:30 am EDT Friday morning in Washington.

Semiconductors About to Shine

One of the worst-performing sectors this year has been the semiconductors, shown here represented by the Dow Jones MicroSector Semiconductor Index:

But, it appears that all of the bad news may be out on the sector and that the sector is under strong accumulation pressure. Our DJMSSC Accumulation-Distribution study below demonstrates a strong uptrend:

Component stocks of the index are AMAT (Applied Materials), INTC (Intel), KLAC (KLA-Tencor), MXIM (Maxim Integrated Products), and XLNX (Xilinx). Each stock represents close to 20% of the index. For more information about futures contracts on the index, see OneChicago. For more information on the Dow Jones MicroSector indices, see Dow Jones.

For a limited time, charts like those shown above are available free to non-subscribers. Visit our Daily Sector Accumulation-Distribution Charts Page at http://www.marketclues.net/img/d2/ .

Electronic Gold and Silver Trading at the CBOT

21-hour per day (Sunday evening to Friday afternoon) electronic trading at the Chicago Board of Trade is underway now. The exchange is bidding to become the premiere market for trading the precious metals by following on their very successful electronic Dow Jones Industrials contract. One of the biggest advantages of electronic trading is transparency: everyone has access to the live "book" -- the bids and offers at various prices are displayed and updated once per second in a Java-based applet in your browser (here's a screenshot of the Live Book). Since trading has just commenced, volume is relatively light right now, but is expected to grow. For more information, visit: http://www.cbot.com/ .

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The stock rally, now approaching the end of its eighth week on the upside (since the Friday the 13th of August low), continued Wednesday with the small- and mid-cap stocks maintainng their lead over the blue chips. Tuesday's day of rest was just the ticket for a rally day Wednesday -- it's exactly what the doctor ordered, in fact. The mostly sideways consolidation resolved to the upside as support lines bent, but didn't break, just as we expected.

US DX Surprises

The US Dollar Index (DX) proved to be the surprise of the day, however, as it broke above its recent downtrend line. Now, this doesn't mean we've seen a reversal just yet -- we expect a lower low is coming. But, it does sound a warning note about foreign currencies and the precious metals that a reversal is also ahead in those markets. Therefore, we recommend that when DX moves to a lower low, tighten up your trailing sell stops in the currencies and precious metals. A lower low in DX is expected because the last decline penetrated the lower Bollinger Band, which almost always implies a retest of that band. If DX can hold within the band on a lower low, it would constitute bullish divergence for DX and a bearish indicator for the currencies/metals:

Sentiment figures from WhisperNumber.com, released after the close Wednesday, show bullish sentiment is getting to dangerously high levels in the Gold market. So far, that hasn't been a big negative as Gold has had the luxury of a falling Dollar Index. But, when DX starts rising and investors have already bought into the bullish arguments in favor of Gold, who will be left to buy? A vacuum of buyers can be just as devastating to a market as an avalanche of sellers. And, when that avalanche gets started, many of those buyers are going to turn into sellers, much as we saw in April. This may be a long term bull market in Gold, true, but bull markets tend to see very sharp and powerful corrective phases. It appears one is upcoming, so keep those sell stops trailing the market:

Putting VIX In Its Place

Many traders who put their faith in the VIX indicator of option volatility to signal buys and sells have been sorely disappointed by stocks moving higher as VIX meanders lower. It turns out that VIX has never been a very good indicator to use for selling a market when volatility is declining. We refer you to Mark Hulbert, who has done some work on this recently (see Groupthink on VIX on CBS.MarketWatch.com). And, Tom Denham of Elliott Wave International's European Financial Update also weighed in with charts of the European bourses which show clearly that the stock markets of the world not only can rise during periods of falling volatility, they have done so at many times in the past. In fact, it's just another factor which backs up our bullish outlook (as well as EWI's bullish wave count as well) -- when the great mass of investors latch onto one indicator as the "Holy Grail" of indicators as they have with VIX, that indicator is sure to fail.

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The stock market rested Tuesday as heavy selling pressure sent most indices lower. However, the NASDAQ held up for a slight gain, while the market-leading small- and mid-cap sector indices were considerably stronger than the Dow. The ability of the market to give back so little of its recent gains in the face of this selling pressure confirms the bullish trend is still in effect.

It's always good to watch the longer term trends for perspective, as the following chart of the broad market Value Line Index shows that an advance of about 15% from current levels would carry the market into resistance:

We're looking for a resumption of the rally Wednesday if the short term support lines hold the market.

The NASDAQ-100 Index, embodied in the QQQ shares at 1/40th of the index itself, should continue higher past option expiration. The only thing standing in their way is Maximum Pain at the 35 strike, but as we've seen, when the trend is strong, option sellers don't have enough power to stop it:

The upper trendline in the chart above connects the 2000, 2003 and 2004 highs. It bottoms this month and turns up. You may recall a similar trendline in the S&P 500 which turned up just as that index was bottoming and beginning a 44% rally.

Speaking of the S&P 500, here's a chart of that index comparing its own advance-decline line to the index:

Dollar Index

The US Dollar Index retested that resistance line again on Tuesday and found it impenetrable, confirming the downtrend in the DX. It also re-confirms the uptrend in foreign currencies and the precious metals. If DX continues to track that trendline, its rate of decline should start to accelerate.

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The European lead dog stock index, the FTSE-100, continued higher in London, rising within an accelerated trend channel:

The uptrend has been in effect in London now for seven straight weeks and, with a long term resistance line looming overhead, that will be the next test for the staying power of this trend. We have projected Time Ratio highs due in the October 12-14 timeframe for London. This suggests the market should be taking a breather starting sometime within the next 7-9 calendar days. But, it doesn't necessarily have to be a large correction -- a sideways move would be sufficient.

The 20-week cycle bottomed on August 13th. According to Walter Bressert's CycleWatch website, the 20-week trading cycle is due to top sometime in the October - November timeframe. But, since we're only about a third of the way into the cycle, any pullback that starts now is likely to just be a pause before another leg up.

The US market is generating time targets for the next top in the October 25th area. That is a time which is exactly 10 weeks into the cycle, falls on a Bradley trend change date and is a Time Ratio projected high. If that's not the high for this trading cycle, it will definitely be a surprise to us. Of course, remember that forecasting indicators always have to be confirmed by coincident indicators before any action should be taken in the markets.

So, it appears that we are likely to enjoy three more weeks on the upside in the stock market before a more substantial drop into December's expected 20-week cycle low. Now, that doesn't mean we are going to see every trading day on the upside -- far from it. A market does not often go straight up, day after day. But, it appears that dips are buying opportunities for the next three weeks.

Gold and Foreign Currencies Suffer At the Hands of the Dollar

IF DX is able to take out the resistance line, sell foreign currencies and Gold. That is not our expectation, but we have a policy to not argue with the market.

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The stock market leapt higher Friday in a powerful wave 3 rally. The S&P 600 Small Cap Index (stock ticker symbol IJR) shot to a new, all-time high on both an intraday and a closing basis. Following in its footsteps was the broad market in the form of the Value Line Index (RSP mimics it), which is showing a clear (impulsive) five-wave up move indicating the trend is strong underneath the market:

Until this breakout, we had been wary of the market's lack of strength and suggested traders look to take money off the table on market weakness with a Bradley turning point coming up next week. But, extreme strength was well demonstrated early on Friday morning (before the NYSE open, the European markets were strong, as were the US stock index futures, which trade all night long). The market soared and never put any heat on trailing stop loss prices. Still, as a prudent trader, it never hurts to maintain that trailing stop loss to protect capital -- that's a standard modus operandii for trading. However, at this point with the strong momentum behind the market, it's not necessary to use tight sell stops -- give the market some room to ramble here because it appears the bears are on the run.

One of our best indicators of underlying strength has been the spread between the broad market Value Line Index and the Dow Industrials. The Value Line Index equally weights over 1600 stocks, while the Dow price-averages 30 blue chip companies. Thus, when the Value Line is outperforming the Dow, it means that the "troops" are advancing faster than the "generals" -- generally, a very good sign. That spread has now confirmed the uptrend by breaking out of its five-month sideways-to-slightly-down channel:

And, of course, we continue to recommend 100% investment in this market for intermediate term investors, who are now showing unleveraged gains of almost 13% in the strong small cap index fund (IJR) coming off the August low. We will have a correction -- no trees grow to the sky on Wall Street -- but the rewards go to the patient trend follower. If our wave count is correct (a powerful wave 3 is now in progress), the market has considerably higher to go, with a minor wave 4 correction to be followed by another wave 5 rally. It is after that wave 5 that we would look to take profits for intermediate term investments.

When will the next correction begin? It's too early to say for sure, but this coming week's action should be watched carefully. Repo activity (Federal Reserve repurchase agreements are an instantaneous indicator of the level of economic activity), had a big surge higher in August-September. But, it has recently been pulling back, suggesting that, if this trend continues, the stock market may be having to make a course correction sooner rather than later. That's why it's important to you as a trader to keep trailing stop loss orders protecting your capital (here we are referring more to futures traders than to stock traders, but the same advice applies to stock traders in regards to so-called "mental" stop loss orders).

Non-US Stock Markets and the Falling Dollar

With the US Dollar in a downtrend and most foreign stock markets trending higher, opportunities abound in overseas ETFs. For US investors, the falling dollar and rising foreign stock markets can give a double boost to your investments. That's because both contribute to capital gains. ETFs are available for many foreign countries -- see our ETF tables on the website for charts and performance measures (look for "ETF 20-Day Heat Map" and "ETF 50-Day Heat Map" links on the main website). For instance, at the top of the 50-Day Heat Map, you'll find that EWZ, the IShares Brazil ETF, has gained over 25% since late July, beating the S&P 500 by almost 22%.

Foreign Currencies and Gold

We think of Gold as a currency because it's an alternative to holding dollars, pounds, euros, etc. And, for US investors, Gold has been rallying simply because the US Dollar has been falling. But, in terms of return, the Australian Dollar has been a better performer, gaining over 50% on an unleveraged basis in recent years, about 7% better than Gold itself:

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