Another Bear Rally
Mike Drakulich
07 Aug 2001
The market has now been in a large trading range for quite some time. After the March/April lows and the big explosion from there, we've seen prices drift around in very choppy and unclear action. This is a market that overall one should not have any huge bets in, and that one should keep as open a mind as possible, because there are so many near term possibilities at this point.
I got very Bullish several weeks ago when the NYSE Open 10 TRIN(Trading or Arms index) hits one of top 5 oversold levels(1.38) in the past FIFTY years, but the resulting rally was pathetic (and I exited) and within a few weeks the price lows seen when that extreme was hit, were taken out. Now that had NOT happened before when those oversold extremes were hit, and that tells me that this current market is of MUCH different character than others, meaning we are still very likely in a Bear Market.
My best guess here, given the overall Technical action and Ewave pattern analysis, is that we are in what so far is a very weak rally phase that in most cases will probably not exceed the May rally highs, and that will like "peter out" in August and result in fairly important intermediate term top. And depending on how high we do go here, the next decline I think could be one that rather easily takes out those March/April lows, with especially severe declines in indices like the DOW and Financials, I think the Dow could easily go below 9000, with Dow 8000 a potential target area. Remember, this is my "best guess" within what is currently a tough market to read. And remaining objective and flexible here remains of paramount importance, and I will not hesitate to "revise" my scenario if I see things from the markets action that causes me to do so.
Probably the most important reason that I think no important low has yet been seen is the current sentiment, and that we saw no really "classic" Bearish sentiment often seen at important market lows. Even back in March and April, surveys like the Inv. Intel. survey never saw more Bears than Bulls, and in previous weeks this survey saw Bearish levels fall to the low 20s, with Bullish sentiment near 52%. This was over a 2 to 1 Bull to Bear ratio, and that occurred with a declining market from the May 22nd highs, this sentiment on a ratio basis was the most "Bullish" seen all year, hardly Bull market action, or action supportive of any sustainable rally.
Also there is a survey that tracks Wall Street Strategists percent of equity allocated to the stock market, in the past few weeks it hit 70.8%, a sixteen year high, in the past a reading above 60% often constituted a sell signal. We've seen these guys(and gals to be fair) dismal "performance" the past year or more, anyone want to bet that they will be "right" at this time? Now one can find other surveys that show less Bullishness, but what I've presented I think correctly shows the prevailing attitude out there, that so many think THE BOTTOM is in and the worst is over. I do not think so. Bear markets bring continual surges of "hope", that are then dashed with lower lows, until finally all the "premature bottom callers" just give up and become Bearish, then setting the stage for an important low. And that in my opinion simple has not yet occurred.
I have done little or no trading the past several weeks, and overall it has been justified by lousy price action and little overall movement. There are times it is simply best to sit tight, and the key is to await that good opportunity that will come to those who are patient enough to wait for it. Right now I think that opportunity will come from the short side, and probably this month, but I will be flexible. We'll see how it develops, be patient out there.
Mike Drakulich
Wave Signals Commentary
August 7, 2001
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