A Week Of Reversals:
A Week of Reversals?
The BOJ wants to continue holding down the yen because its weakness makes their exports cheaper in the US, and has helped them crawl out of their depression.
To reverse the record US trade imbalance, new Treasury Secretary Summers may be ready to bring the dollar down in order to make US goods cheaper to foreigners. The problem with this strategy is that it also makes our markets LESS attractive to foreign capital, adding an additional risk for them AND for US investors. This is why the US markets have apparently begun the painful process of an abrupt bearish about face. We see this as a very significant change of character that we looked for: additional evidence that the incredible bull market that so many are clinging to emotionally and "hopefully", is in the final process of reversing course.
However this plays out, a shift in US policies to a weaker currency as well as tighter monetary policy are exactly the opposite of the policies that have driven equity prices higher, and bond yields and gold prices lower. If these policies are indeed reversing, we would expect for these major market trends to reverse with them.
Even though corporate earnings have typically been "managed" (adjusting expectations lower so they can beat the revised estimates) to appear to beat the estimates, the markets have bid prices higher as a prelude to selling on the announcements, whether the news has been good or not. There's an old saying on Wall Street, "when the market stops going up on good news, IT'S TIME TO SELL!". It seems likely that we're finally experiencing something we've written about time and again, that the very best of news has become factored into prices, leaving no further reasons to anticipate an even more bullish future. This week's sharp bearish reversal after Monday's higher opening promises many significant buying climaxes (BC). These occur when a price moves to a 52 week high before closing lower for the week. Many market indices and individual issues have done this with little potential to come back by today's close.
NYSE short interest continues to rise as many day traders are borrowing more to average down on their "sure thing" net stock trades that have submerged. This is but a sure fired sign that we remain far from a bottom. Until they panic and throw in the towel, these stocks have plenty of bearish potential left, regardless of their long-term prospects as viable businesses. That means that the OTC market has more downside to because the net stocks have been the leaders. For the 2nd time in the past month, the Dow closed just beneath the uptrend line drawn from the 10/8/98, 7467 low, providing further confirmation that the trend is changing. Yesterday's close was also at the 30 day moving average. If prices push lower it will make these problems more pronounced.
Support at 11,080 was broken, testing the next level at 10,900 recently with the Dow reaching a low of 10,880 before bouncing back to close at 10,969. We suspect we'll see more attempts at a bounce if our wave count is correct, which suggests that minor wave "i" or "a" is complete. A minor retracement labeled "ii" or "b" should not make a new high or we will have been premature in calling this the top (obviously). It would still not change our overall bearish outlook. Resistance is at 11,050, 11,150 and at the 11,230 - 11,252 high. Support below 10,880 is at 10,740 and then intermediate support down to 10,400. A close below this would confirm the end of the bull run at least from last October's low, but probably of even greater magnitude than that.
In his semi-annual Humphrey - Hawkins testimony, Federal Reserve Chairman, Alan Greenspan made it pretty clear in his 'Fed-speak' language, that they are fully prepared to hike rates further and "pre-emptively" to avoid more dramatic actions in the future, stating, "it is imperative that we do not become complacent; the Federal Reserve will have to act promptly and forcefully so as to preclude imbalances from arising that would only require a more disruptive adjustment later." This was unsettling to the markets, which "HAVE" become complacent, thinking the Fed Chairman would soothe the markets savage beasts.
We had expected that Treasury yields would retrace some of their recent gains and so far, that's what has happened. We think that for further progress to take place, more base building is needed without violating the high at 6.20%. A violation would be very bearish and imply another bear market leg was unfolding. Another risk to bonds is that commodity prices have also experienced a sharp and sudden upside reversal. The CRB Index has moved up from a 7/13, 182.67 low to 189.76, for a "low pole" buy alert on the Point & Figure (P&F) chart. This may not seem like much, but it is proceeding to recover quickly after a successful test of the 2/26, 182.76 low. A move above 194 would confirm a very bullish (for commodities) double bottom. This would have bearish implications for Treasuries, also contributing to the overall change in character of the inter-relationship between the other markets that have also abruptly reversed course. Yield support is at 6.026%, 6.08%, 6.125%, 6.16% and at 6.20%. Resistance is at 5.95%, 5.85% and 5.75%.
The dollar's sharp reversal against the Dmark, euro and yen was precisely what our analysis called for in last week's July Reality Check. This helped the XAU to reverse up for a bullish "bear trap" reversal on the P&F chart. This occurs when a price moves one box (incremental unit) below a triple bottom before reversing back up, trapping traders in a false move. Resistance remains at 63, with a push above 68 needed to confirm a short term bottom.
Our indicators remain firmly in position to signal a major reversal of the persistent bearish trend that has endured. Sentiment among futures traders remains at the lowest level on record and bearish open interest also remains close to its highest level on record. Investors Intelligence (II) just reported that the precious metals bullish percentage indicator is oversold showing only 20% of these stocks that remain bullish. A move above 30% would turn this bullish. II also reported that their gold mutual fund bullish percentage is down to 10%. This too will turn bullish with a move above 30%. A close today in the metal itself above 254.50 (August gold) and above 253.80 (Republic cash gold) would produce a major selling climax (SC) with the 20+ year lows reached earlier this week. Finally, a close above last Friday's 59.14 close for the XAU would be a minor SC or a bullish reversal, after making a new trading low of 57.84 on Monday. Support is at this week's low to 56.99, then 56.66, then the 8/31/98, 48.73 low.
Other encouraging signs emerged this week as well. The weaker dollar should be supportive for gold as it makes it cheaper to buy in the US, especially to foreigners who still hold tons of dollars. House Banking Committee Chairman, Jim Leach, joined the Congressional opposition, stating that it was likely Congress would BLOCK the IMF gold sales! There was even an unfounded rumor that Tony Blair's scheme to sell off 58% of England's gold reverses was collapsing (this one may still take more time before it does get blocked). We are encouraged by this week's events.
Mitch Harris, RIA,
President, Market Trend Realities
Editor, The Reality Check Newsletter
23 July 1999
gold-eagle.com |
