FAVORS
Jerry Favors Analysis - Thursday, Oct. 15, 1998 8 p.m.
We had expected some further rally this week before the
next top but today's late surge exceeded our expectations,and
then some. Of course the bulk of today's rally was due to the
surprise Fed announcement that it was cutting both the Fed
Funds rate and the Discount Rate by 1/4 of a point. Just
prior to that announcement at 3:15 EST the Dow was trading at
8055.80,up 87 points. After the Fed news the Dow took off
like a rocket, closing up 331.10 points at 8299.88. We have
stated since the July highs that we believed the Fed would
fight this decline by consistently lowering rates and that
each time the Fed lowered rates the market would respond with
a strong rally. We also stated that while each of those
rallies would cause the shorts to cover and give the Bulls
renewed hope,each of those rallies would ultimately fail and
be followed by new lows. That remains our position today.
Today's rate cut caught the street totally by
surprise,ourselves included. But in our opinion the end
result will be the same,that is the Dow will ultimately fall
to new lows below 7400. In fact since today's rally turned
the Gann Monthly Chart back up the odds are even greater that
the next decline below 7400 will lead to a crash or mini-
crash.
As far as the numbers go there are signs that the rally
is near at top. Not only did the Trin-5 fall back below 4.00
today,closing at 3.92,but the 10-Day Trin closed at 0.80.
That is the most overbought reading in the 10-Day Trin of the
entire year. It is even more overbought than the 0.87 reading
which occurred on 7/17/98,the exact day of the Bull Market
closing high. The 5-Day RSI closed at 82.26,the highest,most
overbought reading since the 83.68 reading which occurred on
7/17/98,again the exact day of the Bull Market closing high.
The Dow also closed above the top of the 21-Day 3 1/2%
Exponential Trading Band today,which is rare. The top of that
band was 8227.08 and we closed at 8299.88. Our rule is that
the Dow is normally near some sort of top when the Dow
rallies up near or just above the top of this band. The fact
that we closed above the top of the band suggests that even
if we get some further rally tomorrow the Dow should fall
back down within the band very soon,within a day or two,then
try one more rally back up near the top of the band before
really beginning to tumble. If so the Dow could hold up into
the October 21 plus or minus a day or so time frame before
the next major leg down truly gets underway.
The odds are the overseas markets will rally tonight
and tomorrow morning in response to today's Fed news and the
Dow's subsequent rally. If so this could spark some further
rally tomorrow morning. The 89-Day Moving Average is at 8474
and the Dow could rally up near or just above that moving
average on a print basis. However the 14-Hour RSI closed at
75.59,one of the most overbought readings of the year.On
September 23 it reached 71.70 with the Dow at 8160.59. The
Dow then fell 692 points on a print basis to the October 8
low. On July 15 it reached 71.65 with the Dow at 9282.36. The
all-time Bull Market print high of 9367.84 came 2 days later
and just 81 points higher. We know what followed then. So
even if the Dow rallies strongly tomorrow morning it will
just push that 14 hour RSI even deeper into strong overbought
territory,meaning some sort of top will be close at hand. We
could see the Dow reach a high along with the 14-Hour RSI
tomorrow and then see a brief pullback. The Dow could then
later rally to a slightly higher high while the 14-Hour RSI
fails to confirm,producing a final high. Sometimes the
absolute high occurs at the exact same hour as the 14-Hour
RSI and at other times there is some divergence before
final top.In any case unless we see strong evidence to the
contrary we will give the market another few days to finish
off this rally,but a top should be seen near October 21 plus
or minus 1 day or so,if we did not see a closing high today.
Stock traders and mutual fund switchers we believe if we
did not see a high today we will see one between here and Oct
21 or 22,but we must keep our risk reasonable until we are
sure that high is in so we will cover shorts for now and give
you instructions on where to reshort in the next few days.
|
