Capital Preservation Takes Top Priority
Morning Market SnapShot for Tuesday, August 31, 1999
In yesterday?s column we stated that if last week?s low was broken on the S&P 500 index, we would sell all remaining stock positions and go to 100% cash. In yesterday?s trading, the S&P 500, the Dow Industrials and the CBOE Internet indices all broke last week?s low.
The market has fulfilled all of our upside targets. For example, at the beginning of the year, we measured the head and shoulders bottom formed on the Dow Jones Industrial index. The distance between the July 1998 high and the September 1998 low measured approximately 1,970 points and, using the classic Edwards and Magee pattern measurement formula, we added that to the breakout at the neckline and we arrived at a target of 11,335.
To date, the Dow Industrial index has made three waves up into the 11,000 area with an intraday high of 11327 made last week. The Dow Industrials is the only major market index to make a new high in August and stands alone to produce a glaring non-confirmation of this new high. The three peaks seen on the weekly chart in itself is a variant of the head and shoulders top pattern and as such, all eyes will be on the neckline at 10,600 on any decline.
Looking at market internals, we can see that NYSE 52-week new lows are starting to move up while new highs are now but a handful to produce a ratio of over 3:1. The CBOE Market Volatility index, the VIX, tagged the lower Bollinger Band a few days ago at the peak of the rally and appears to be on the way up, indicating that fear is rising. These factors suggest that a short-term top on the daily chart has been seen, with the conclusion of failure on the test of the all-time highs. Add that to anecdotal evidence of speculative excess in the markets, where little Nasdaq stocks were blooming one after the next and we get the picture that as of last week, the only fear in the market was leaving money on the table. Risk to the downside was seen as low, while day traders and the media worked Pokemon into a feeding frenzy.
On the daily charts, all the uptrends from the recent lows have been broken, with the Dow Industrials, S&P 500 and the CBOE Internet index trading under both the 20-day exponential average and the 50-day moving average. Sellers have taken control for now and going into the end of this week, the Employment number due out on Friday will provide a catalyst for volatility.
For now, the first target for the failure has been met upon breaking the 20-day EMA on the downside. The next target, should a bottom not be found here, will be the lows from early August. Given that this was a test of the all-time high on the weekly chart, a break to the downside now beyond the early August lows will produce a decline of magnitude and possibly trigger a panic. Even a 50 percent pull back from the low of last September would be several hundred points on the S&P 500, and a corresponding move would place the Dow Industrials at the 9,500 level.
At this time, our only concern is preservation of capital. Should a new uptrend develop on the weekly chart in the near future, there will be another place to get on board again. In the meantime, guarding profits is paramount.
Charts specific to these comments have been posted to
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