Here is The Chartist
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TECHNICAL REGISTER: Monday, November 09, 1998
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THE TECHNICAL REGISTER
By Mr. Chartist
November 9, 1998
WEEKLY ROUNDUP
BULL, HUMBUG!
Equilibrium is what brings markets into line with reality. That
equilibrium should come this week in the form of a decline toward the average
spread between the current DJIA closing price and the 9-week exponential moving
average (EMA).
During the winter-spring 1998 rally, the DJIA stuck within a few
percentage points of the 9-week EMA. At the peak of the spread - during the week
of March 15th - the DJIA deviated by 6.6% above its 9-week EMA. Another stellar
week was during February 22nd, when the DJIA rose by 6.2% above its 9-week EMA.
In its worst week, that of August 30th, the DJIA dropped by 16.37% below its
9-week EMA. This is how equilibrium works. The DJIA rises above and falls below
its 9-week EMA (or a shorter- or longer-term EMA) within a standard range.
The harder they fall, the faster they rise. The faster they rise, the
harder they fall. After its most deviant week, the DJIA climbed back to its
9-week EMA. When this past week ended, the DJIA had achieved its largest upside
point spread, above the 9-week EMA, for the entire year - by more than 42%!
The DJIA is now 9.4% above its 9-week EMA.
For those unfamiliar with the rate of change of the cumbersome 9-week
EMA, it moves very slowly. From the week of October 11th until this past week,
the 9-week EMA rose by 199.36 points while the DJIA jumped by 1074.91. The
2-week rally that pushed the DJIA into very thin air came about from the
confirmation failure of the weekly shooting star of October 18th.
No wonder the market technicians are getting nervous. It is no small
feat that the DJIA (and the rest of the U.S. markets) have sprung from the
gutter to the 89th floor in a matter of weeks, with practically everyone
agreeing that the 100th floor is easily reachable and surpassable. May we
suggest you review your copy of Charles Mackay's seminal work, "Extraordinary
Popular Delusions and the Madness of Crowds?"
There are other major differences between the January - July rally than
the current one. That rally came from the "golden cross," when the 9-week and
18-week EMA lines crossover and uptrend. That happened during the 1st week of
February. Similarly, the "dead cross," when the 9-week and18-week EMA lines
crossover and decline, occurred during the week of July 26th. True to form, the
DJIA continued dropping until it deviated substantially below the lower band of
the weekly Bollinger Bands. It then rose back to touch the 9-week EMA line,
retesting lows, and finally rising above the 9-week EMA line. The 9-week and
18-week EMA lines have yet to cross and uptrend in tandem, as is the usual case
in a strong rally.
The current rally resembles the head-fake rally between the weeks of
June 14th and July 12th, when the Slow Stochastic lines rose by remarkably
similar percentage points. The weekly %K line most closely resembles that rally,
when that line rose from 23.77 to 97.93. During the present rally, the weekly %K
line rose from 25.35 to 96.00. Following the July 12th week, the DJIA slumped
into a 7-week decline.
We are not suggesting that the DJIA will collapse by 700 points over the
next 2 weeks. Equilibrium will dictate, however, that the DJIA (and the other
markets) will stall sometime this week and trade sideways, declining to a
greater or lesser degree. This is not a far-fetched notion. Examine the chart of
the December Japanese Yen (JYZ8), between October 4th and presently, using the
9-week EMA line as the comparison point. During the October 4th week, JYZ8
jumped by nearly 17% above its 9-week EMA line. At present, JYZ8 stands around
2.3% above its 9-week EMA line. The EMA line jumped by more than 700 points and
JYZ8 fell by more than 400 points. Equilibrium smoothed out the deviation.
Hopefully, this may explain why we have recently made bearish comments
about the dramatic rise in the DJIA, NASDAQ and other senior markets.
RECOMMENDATIONS
The last time IBM closed above its upper weekly Bollinger Band for 4
consecutive weeks (April 19 through May 10th), the stock fell by nearly 18% from
its high to its bottom. IBM has a near-hanging man and has now traded 3
consecutive weeks above its upper weekly Bollinger Band. The greatest deviation
that IBM achieved above its 9-week EMA line, occurred the week of July 26th,
with a 20 point difference or nearly 15%. IBM stands at nearly 15 points or
about 10% above its 9-week EMA line. There had been 3 Slow Stochastic line peaks
during 1998, when the weekly %K line peaked. The first occurred the week of May
3rd, two weeks prior to a strong decline in IBM shares. The second occurred the
week of July 26th, forecasting a very strong decline in IBM shares. During each
strong decline, IBM dropped to a low that touched its 48-week EMA. The Slow
Stochastic lines have nearly flattened above 95. The Momentum indicator shows
that IBM has previously risen above 22, only to decline to its 48-week EMA. The
Momentum indicator now stands at 24.56. We forecast a decline in IBM shares. The
candlestick support level stands at $129-7/8. The 48-week EMA level stands at
$115.91.
Using comparable analysis on other stocks, we find the following support
levels for these stocks during an equivalent decline:
America Online (AOL): $122/share
Amazon.com (AMZN): $106-3/4/share
American Airlines (AMR): $58-1/4/share
Delta Airlines (DAL): $99/share
United Airlines (UAL): $60-1/4/share
Dell Computer (DELL): $56-1/2/share
Intel (INTC): $85-5/8/share
Ascend (ASND): $43-7/8/share
Micron (MU): $36-1/8/share
Advanced Micro Devices (AMD): $19-3/4/share
Compaq (CPQ): $27-3/4/share
Cisco Systems (CSCO): $61-1/4/share
Worldcom (WCOM): $48-1/4/share
Sears (S): $42-7/8/share
Apple Computer (AAPL): $30-7/8/share
Chase Manhattan (CMB): $52-1/4/share
Pfizer (PFE): $100-1/8/share
Yahoo (YHOO): $121-1/4/share
Nortel (NT): $38-1/4/share
CANADIAN STOCKS
All figures are expressed in Canadian dollars and show the expected
support levels during an anticipated decline.
Nortel (TSE - NTL): $58-5/8/share
Toronto Dominion (TSE - TD): $40-1/8/share
Royal Bank of Canada (TSE - RY): $60-1/8/share
Bank of Nova Scotia (TSE - BNS): $28-1/4/share
Canadian Imperial Bank (TSE - CM): $27/share
CANADIAN INDICES
TSE 300 Index: 5950
TSE 35 Index: 335
INTERESTING STATISTICS
From a national radio show: "Four-star restaurants are even downsizing
their menus to try to lure the brokers and bankers back to their tables. At the
Four Seasons, the fixed-priced lunch menu in the Grill Room is being cut from
$75 a person to $65, and the manager at the mucho-expensive DelMonico's
restaurant says, 'We've added a lot more pasta dishes and a lot more salads, so
everyone can come and afford lunch.' Sales at Neiman Marcus are off by seven
percent in a single month, art auction houses report that buyers are making
fewer of those $500,000 impulse purchases for a small Renoir, and sellers of
million-dollar-and-up Manhattan apartments are actually having to discount them
by 10 percent or so."
Mr. Chartist, Editor
Technical Register
WEB: stockhouse.com
IML: ta@stockhouse.com
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