Jerry Favors Analysis - Sunday, November 22, 1998 7 p.m.
The Dow on Friday closed up 103.50 points, at 9159.55. The
Dow on Friday closed within 178.42 points of a new all-time
closing high. Back in August and September of this year we
stated that the Dow should see a very important low near
October 28 and then begin a major rally . Our Cycles and our
Bradley Indicator both suggested the Dow would see some some
of low near October 28 plus or minus 2 days and then begin a
large rally which would be worth trading even if the market
crashed below 7400 into late October. We stated that our
cycles suggested that rally would last at least into November
25 plus or minus 2 days. The Bradley suggested the rally
would last into November 24, plus or minus 2 days. The Dow
reached a print low of 8328.71 on October 28 exactly and has
since rallied 832 points to a high of 9161.35 on Friday
November 20. We now have projections calling for 9325 plus or
or minus 192 points intraday.That projection calls for a
minimum of 9133 intraday to a maximum of 9517 intraday.
We have discussed the fact that the momentum indicators
here are giving potentially bearish signals. The best
explanation of momentum we have come across is that given by
one of our favorite technicians,Gerald Appel,in his
excellent book Stock Market Trading Systems. Appel
states,"Imagine a baseball hit by a batter ,perhaps a long
and deep fly ball. At first the ball will leave the bat at a
certain trajectory,rising rapidly. As the forces of gravity
and wind resistance slow the drive,the rise in the ball will
slow,although the ball will continue to rise for awhile
before arching over. An experienced outfielder can
frequently discern from the slope of the ball's rise just how
far and for how long the drive will carry. The falling of the
ball to earth is initially signaled be the slowdown in its
rate of rise- the ball will lose upside velocity before
starting on its downward path." This is the best explanation
of market momentum we have come across. Keep in mind the
momentum will peak before the Dow peaks,and this will herald
the Dow's eventual decline.
One of the best momentum indicators at market tops is
the 5-Day Advancing Volume.The 5-Day Advancing Volume peaked
at 611.80 on October 20,with the Dow at 8506.36.The Dow
continued up to 8970.57 on November 6 but this time the 5-Day
Advancing Volume was only 474.20. On Friday November 20 the
Dow closed at 9159.55,but the 5-Day Advancing Volume was only
382.20. Note the dwindling upside momentum as the Dow has
continued higher. The 10-Day Moving Average of Advances minus
Declines,another momentum indicator,peaked at 624 on
10/22,with the Dow at 8533.14 .The Dow has since rallied 626
points to last Friday's high but the 10-day Moving Average of
Advances minus Declines is near its lowest reading of the
last 21 trading days. The 10-Day Rate of Change peaked on
10/22 and is also showing very bearish divergence as the
Dow has moved higher. There are numerous momentum indicators
giving similar signals here.
The Trin-5,our 5 day moving sum of the daily trading index
readings,closed at 3.94,still below 4.00. Readings below 4.00
tend to occur near market tops. In the past this has proven
to be one of our most reliable indicators.
Last week we told you that the latest readings from
Investors Intelligence showed that an incredible 57% of
advisory services are now bullish. Now keep in mind that this
is a contrary indicator and that when most advisors are
bullish the market is normallly near some sort of high. Last
week's reading was even higher than the 54% Bullish reading
on 7/24/98,5 days after the 9337.97 closing high which was
followed by a decline of 1,789 point closing decline into the
August 31 closing low. If we look back over the last 12
months a peak reading of 54.6% was seen on 4/21/98,with the
Dow at 9184.The Dow then fell 267 points on a closing
basis,or 2.9% over the next 4 trading days.The Dow then
rallied to a minor new high of 9192 on May 4.That high was
just 8 points above the 4/21/98 high. The Dow then fell 565
points,or 6.14% to the 8627 closing low of June 15.The Dow
then rose to a final high of 9337 on 7/17. But note that 7/17
high was only 1.66% above the 4/21/98 closing high when the
Dow closed at 9184. So throughout this entire 3 month time
frame from April 21 the Dow was only able to rally less than
2% higher from the close the day the Bullish Advisory
Sentiment hit 54.6%. If we look at the advisory sentiment
over the last 5 years we find a peak of 56.09% was seen on
12/3/96. This was 5 days after the Dow reached a short term
high of 6547 and then fell 3.65% on a closing basis to
12/17/96. Last week's 57% Bullish reading was the highest
since January of 1992. The Dow reached a closing high of 3265
on 1/17/92 and a slightly higher high of 3272 on 1/28/92.
The Dow then went into a trading range which saw the Dow
close no more than 0.55% higher for almost 3 months. Now
keep in mind that the percentage of bullish advisors today is
the highest in almost 7 years.To believe that Dow is
beginning a major upside explosion from here goes against the
history of these sentiment numbers.
The 3-Day Put/Call Ratio on the CBOE hit 52.52 on
Friday.On 7/20/98,the 3-Day Put/Call Ratio closed at
51.61,very close to Friday's reading.This was one day after
the 9337.97 closing high of 7/17,which was followed by a
1,798 point closing decline to the August 31 closing low.On
4/21/98 the 3-Day Put /Call Ratio closed at 51.03,with the
Dow at 9184. The Dow then fell 267 points,or 2.9% in 4 days
on a closing basis.
The current Lindsay Top to Top Count from 8/14/98 calls
for the next top near November 27,but the normal margin of
error there of 102 to 113 calendar days allows for the high
as early as Nov. 24 to as late as December 4.
We do not believe we have seen the high for this rally
quite yet.We should see higher pices this week even if the
Dow sells off early in the week,so we will not go short quite
yet. But we will give you shorting instructions before the
week is out. Stock traders will be going short and mutual fund
switchers will be going long the Rydex Ursa fund.
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