Analysis - Wednesday, June 26, 2002 8 p.m.
At the lows today the Dow was down 200 points and the Nasdaq was
down 48 points. The Dow then rallied back to a print high of this afternoon
of 9160.8l, at which we were up 34 points. The Dow closed down 6.71 and the
Nasdaq closed up 5.34 for the day.
Last evening we discussed the fact that the Dow is normally near an
intermediate low when it falls below the bottom of our 10-Week 7%
Exponential Trading Band. We stated that the bottom of that band this week
should be somewhere in the 9000 area, depending on where we close on
Friday. Since the January 2000 Bull Market highs there have been four of
what we call "panic lows" in the Dow. In each case the Dow fell below the
bottom of this trading band, sometimes by 150 points or less, and sometimes
by 300 points or more, before a bottom was seen. The first of these four
breaks occurred the week of the 3/08/00 bottom in the Dow. That week the
Dow fell 36 points below the bottom of the band on a print basis, and that
day marked an intermediate low. The Dow then rose 1,645 points to the
4/12/00 high. The second break occurred the week of the 10/18/00 lows. That
week the Dow fell 230 points below the bottom of the band on a print basis,
but again did not close the week significantly below the bottom of the
band. October 18 marked an intermediate-term low, and the Dow then rose
1,381 points to the 2/6/01 high. The next significant break below the
bottom of the band occurred the week of the 3/22/01 low. That week the Dow
fell 474 points below the bottom of the band on a print basis, but again
did not close the week significantly below the bottom of the band. That
week marked the bottom, and the Dow then proceeded to rise 2,244 points to
the 5/22/01 high. The final break significantly below the bottom of the
band was the worst, and of course that was the week of the Sept. 21 Bear
Market lows. That week the Dow just crashed, or it was at least a
"mini-crash", with the Dow falling 1113 points below the bottom of the band
on a print basis at the low for the week. Still, that represented the Bear
Market "panic low", and the Dow then began a rise of 2,611 points on a
print basis, up to the 3/19/02 print high of 10673. We won't know for sure
where the bottom of the band will be this week until we see the close on
Friday. However, if the bottom of the band winds up near 9000, the Dow
today would have fallen 74 points below the bottom of the band. That is not
unlike the 3/8/00 example, when the Dow fell 36 points below the bottom of
the band. Still, at this time we are not convinced that we have seen any
sort of sustainable bottom just yet.
One thing that really bothers us here is the amount of publicity
about the probability of some sort of panic, or so called "capitulation
low" in this time frame as is being given by the press. Certainly, there
are thousands of sophisticated traders who understand the dynamics and
importance of panic lows. However, when this forecast, or expectation, is
being repeated over and over in the press, it diminishes the probability of
it happening, at least of it happening the way and when the street might
now expect. Rarely do market bottoms occur when and where most of the
street expects them. Something different will have to occur. Panic lows do
not occur until most investors are in fact, truly "panicked", and we do not
sense that here. A far more serious plunge than even the Bears expect short
term may be necessary to produce this phenomenon in this time frame. When
your gut is telling you, "I need to get out no matter what", that will be
when a panic low is most likely. I am not convinced we have reached that
point quite yet, despite today's reversal.
As we stated several days ago, the Cycles call for two time frames
from here when some sort of low is likely. They are: June 27, plus or minus
1 day, and July 3, plus or minus 1 day. Today was within one day of June
27, but at this point at least, we are not convinced that we have seen a
true bottom.
For tomorrow, if a very strong rally does come in, there will be
strong resistance to that rally near 9303, plus or minus 20 points on a
print basis in the Dow.
No matter what the Dow does tomorrow, the 3-Day Chart could not
turn up before Friday. If it fails to turn up Friday, it will suggest that
a further decline is coming into next week, probably bottoming near or July
3, plus or minus 1 day time frame from the Cycles.
A decline below both 8926 on a print basis in the Dow and 1375 in
the Nasdaq anytime from here on will signal that an even stronger wave down
is underway, which could precipitate a true panic.
For now, despite the prospect of some further rally attempt at some
point tomorrow, we will hold at our current 50% cash position.
Source: Jerry Favors |
