Oct 1, 1999 Jerry Favors Analysis
After closing up 123 points on Thursday, the Dow was down over 152 points at the lows on Friday, It closed down 63 points. While the Dow was down 63 points the NYSE cash index was down only a fraction of a point. The S&P 500 Cash Index actually closed up a fraction, so the broad market was not that weak. Several secondary indices, like the Amex and the Russell 2000, performed much better than the Dow and closed near their highs for the week. In fact, while the Dow has fallen 9.82% from its 8/25 all-time high the Amex has only fallen 6% from its July top to its 8/10 closing low. The Amex has failed to break that 8/10 low since then, and in no way appears to show bear-market type action. In a true bear market the secondary indices would be leading the way down.
The 14-Day RSI on the Advance/Decline Line fell to 16.62 on September 24. That is one of the most extreme oversold readings of the last 17 years. Those oversold readings ranged between 12 and 18. Nearly 90% of those readings were followed by strong rallies in the Dow, most of which ultimately carried the Dow to new highs. In fact, even at the 1987 crash intraday low the 14-Day RSI on the A/D Line reached 12.28, not really that far from last week's 16.62 reading. That 16.62 reading is the most oversold reading since the 13.97 reading of 8/31/98, the exact day of the closing low for a 19% decline from the July all-time high.
Internally the market is getting stronger despite the weak Dow action last week. For instance, note the recent action in the net declines for the day, by which we mean declines for the day minus advances. On 9/21 the Dow closed at 10598.40. That day there were 1667 net declines at the close. On 9/23 the Dow closed 279 points lower, at 10318.59, however there were only 1283 net declines. The Dow closed even lower on 9/28 at 10275.53. However, this time there were only 769 net declines for the day. Finally, the Dow closed at a new low of 10213.48 on 9/29, however there were actually 145 more advances for the day versus declines. It is this pattern that generated the buy signal from the Lindsay A/D Indicator last week.
Another sign of strength is that the 5-Day Advancing Volume, after bottoming on 9/24, rose on Friday, October 1 to its highest level since July 7 of this year, while the Dow has still been weak. That is bullish and is in fact similar to the action of 9/8/98, five days after the August 31 closing low last year. This suggests that if we have not seen the low yet we are probably close.
Stix reached a low last week of 41.04 on Sept. 24. The market is normally near a low when Stix falls below 45.
One of our more important intermediate-term indictors is a simple 5-Week RSI on the Dow. Again it suggests the market is near a low when it falls below 30. Over the last 17 years the Dow has normally been near a bottom when this indicator fell down into the 10 to 28.62 area. In fact, over the last 17 years there have only been three occasions when extreme low readings in the above area did not occur near an important bottom. Those were during the January to July 1984 correction, when the Dow plunged almost 16%; during the 1987 crash when the Dow fell 36 %; and during the July to October 1990 mini-crash, when the Dow fell 21%. All other extreme low readings in the 13 to 28 area were followed by very strong rallies, most of which went to new all-time highs. Unless we are still in the midst of what will become a major correction of 15 to 20% or more, which we do not believe is the case here, we should be near a low.
The Dow is also normally near an important bottom when it falls down near or just under the bottom of its 10-Week 7% Exponential Trading Band. This band has a very long history of accuracy. For instance, the week of the 10/9/92 low the bottom of the band was 3026. The Dow reached an intraday low that week of 3087. The week of the 4/8/94 low, the bottom of the band was 3514. The actual intraday bottom occurred at 3520. The week of the 7/19/96 low, the bottom of the band was 5185. The actual intraday bottom came in at 5170. In fact, the only times the bottom of this band was dignificantly broken over the last nine years was during the 22% intraday decline from July to October 1990, for one week during the August to October 1997 decline of 16.87% intraday, and for two weeks prior to the September 1, 1998 low after a 21.60% intraday decline in the Dow. The bottom of this band last week was 9967. Last week's intraday low was 10055 intraday. It is not necessary that prices reach the bottom of the band for the Dow to reach a bottom. In fact, most of the time the Dow did not reach the bottom of the band at important lows. Again unless we are in the midst of a decline which will ultimately prove as strong as those of 1990,1997 and 1998 we should be near a bottom of importance now.
Technically the Cycles call for a short-term high near Tuesday, plus or minus 1 day and then a brief pullback for a couple of days. We should then see generally rising prices into Oct. 11 plus or minus 1 day.
One thing that does bother us short term is that the Gann 3-Day Chart did not turn up on Friday, when it should have been fairly easy for it to do so. If it had turned up we would have more confidence that a bottom has been seen. This suggests we may see a little more weakness early this week.
The bottom line is that we cannot yet be sure the bottom has been seen in the Dow, although we believe we are close. We do not believe we have begun any sort of true bear market, and that new all-time highs will ultimately follow this correction. However, we still believe the next wave up to new highs will start out slowly, and it will not become obvious that a bottom has been seen for several weeks after the bottom. The initial rally phase off the low will be labored and will at times look as if it is going to fail and fall back to new lows. However, we believe new highs will be seen this year.
We had several speaking engagements in Florida during this past week, and just returned to our office late Friday. Therefore the posting of this report has been delayed. Next Friday's, October 8, 1999 report will be posted on Monday, October 11, 1999 due to similar circumstances. We will resume our regular Friday schedule on October 15, 1999.
>>>Note that the number of conditionals if-then-else
>>>prognostications tend to move in inverse correlation
>>>to whether he is bullish. The more bullish, the
>>>fewer the if-then's. |
