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Monday October 30th, 2000 Market Trend Mailing List Message #1 by TheTechnology Thank you for your interest in this mailing list. I want to extend a special thanks to those of you that have contacted me privately, comments have been extremely helpful and I encourage responses. Questions will be responded to as is possible, comments are appreciated. This letter is being sent out on a promotional basis. There was significant interest to my announcement of a mailing list. While I am interested in this project, I have time constraints that prevent me from doing the quality of work that I would like. What I concluded is that I will produce a letter, while I won't promise a regular publication date, I will shoot for a letter bi-weekly. I intend to monitor my Buy/Sell trading system here. A portfolio will be created and followed. The signals will be confirmed in this letter as well as actual trades executed based on these signals. The portfolio will consist of one security the NASDAQ 100 Index Tracking Stock (QQQ). Both long and short positions will be established. A buy was signaled on October 12, and again on October 18th (the opening price on 10/13 will be used for the portfolio), that position will be held until it is stopped out with a 10% loss or until a sell signal is generated at which time the position will be closed and a short position taken. In the event that a position is stopped out an attempt will be made to reestablish the position again. A Silicon Investor Board, TheTechnology's Market Trends, has been created, I want to invite one of you to make the first post. Subject 37249 In addition cutshort from Yahoo-IDTC posted a link to the following site. This site's Market Commentary section is imporant reading, it is presented in clear concise form, and I believe summarizes the critical current issue. Soft landing or recession? home.att.net SLOWDOWN OR RECESSION? NASDAQ Composite Market Trend After peaking on March 10th, 2000 at 5,048.62, broke down to 3,205.11 on May 25th. A retracement peaked on September 1st at 4,234.33. On October 12th the market closed at 3,074.68, the points referenced above all generated signals on my system as important inflection points. (All of the above references are closing prices) Trend analysis leaves the issue in doubt as to whether the NASDAQ has actually found a bottom, while I am not a trendline devotee, we can estimate a support target at roughly 3,100 and resistance at about 3925. A line has been created at the 3,100 level. A break of this level suggests a decline of about 10% to just under 2,800. Based on all of the information I have available I believe that we will see an oversold bounce in approximately the next 5 weeks. The failure of CSCO to hold the $50 suggests to me that we may seem a NASDAQ Composite break the 3,000 level possibly down to 2,800 - 2,900. Comparisons to other recent market declines may shed light on the level of risk currently in the market. The following figures are based on NASDAQ 100 index ($NDX). Of the last 4 declines ('96.'97,'98,'00) the average extent was a 24% decline over 13 weeks. The current decline now extends 21 weeks with a 34% decline. (Above figures are rounded off, using closing prices) Clearly more data than I have available now is needed here. I believe inclusion of data from '92 & '94 declines would lengthen the period of decline, my estimate would be to about 17 weeks. I will follow up on this after more research. Monetary conditions while not benign, are stable, GDP has slowed to what appears to be about 3%, employment appears stable at about 4%. We have a Fed Chairman that has put a high priority on fighting inflation, with the exception of energy prices, there are no indications of systemic inflation forces at work. So where does that leave the investor with money he wants to put to work. A review of individual charts shows some stocks moving off of v-bottoms, others that are moving sideways, or still down. We appear to have an extended bottom forming. A safe assumption might be a trading range extending from about 2,800 to 3,500. Buys into selling pressure with roughly 10% stop loss targets would not be unreasonable, chasing stocks currently would be an extremely bad idea. There may be a window extending into December for establishing positions. Investors should monitor energy prices, bank bad loans, and market sentiment. Margin levels are still excessive. In short we have a market worried about an energy driven slowdown. Stocks have discounted a slowdown in the 4th & 1st quarters to about 10% earnings growth. The next 4-6 weeks of market activity should indicated just how much of a slow down we will see later next year. It would be prudent for investors to stay nervous until future earnings growth estimates stabilize. A 30%-50% cash position is warranted here. Preserving capital makes the possibility of missing a trade worthwhile. My Buy/Sell indicator has issued a buy signal on the $NDX, since that is a system trade it is automatically executed. With discretionary funds I am waiting to observe market behavior and additional base development. My Buy/Sell indicator does not attempt to address the long- term trend. However, it does suggest an oversold market on both a short-term (that terminology used here means up to a one month time period), and a long-term basis (up to 9 months) AN INTRODUCTION TO THE DOW THEORY The Dow Theory, while having lost much of its popularity today, is the beginning point for serious study of trend analysis of the markets. Much of the focus of these letters will be attempt to determine current trends, so that positions can be established consistent with that trend direction. Robert Rhea, author of The Dow Theory lists in his book the hypotheses and theorems of the Down Theory. They are as follows: Hypothesis #1 Manipulation: Manipulation is possible in the day to day movement of the averages, and secondary reactions are subject to such an influence to a more limited degree, but the primary trend can never be manipulated. Hypothesis #2 The averages discount everything: The fluctuations of the daily closing prices of the Dow Jones rail and industrial averages afford a composite index of all hopes, disappointments, and knowledge of everyone who knows anything of financial matters, and for that reason the effects of coming events (excluding acts of God) are always properly anticipated in their movement. The averages quickly appraise such calamities as fires and earthquakes. Hypothesis #3 The Theory is not infallible: The Dow Theory is not an infallible system for beating the market. Its successful use as an aid in speculation requires serious study, and the summing up of evidence must be impartial. The wish must never be allowed to father the thought. Theorem #1 Dow's Three Movements: There are three movements of the averages, all of which may be in progress at one and the same time. the first, and most important, is the primary trend: the broad upward or downward movements known as bull or bear markets, which may be of several years duration. The second, and most deceptive movement is the secondary reaction: an important decline in a primary bull market or a rally in a primary bear market. these reactions usually last from three weeks to as many months. the third, and usually unimportant movement is the daily fluctuation. Theorem #2 Primary movements: The primary movement is the broad basic trend generally known as a bull or bear market extending over periods which have varied from less that a year to several years. The correct determination of the direction of this movement is the most important factor in successful speculation. There is no know method of forecasting the extent or duration of a primary movement. Theorem #3 Primary Bear Markets: A primary bear market is the long downward movement interrupted by important rallies. It is caused by various economic ills and does not terminate until stock prices have thoroughly discounted the worst that is apt to occur. There are three principal phases of a bear market: the first represent the abandonment of hopes upon which stocks were purchased at inflated prices; the second reflects selling due to decreased business and earnings, and the third is caused by distress selling of sound securities, regardless of their value, by those who must find a cash market for at least a portion of their assets. Using Dow Theory we are going to focus on Identifying intermediate trends in the market. These are the most difficult to interpret, yet the most critical for investors to determine. For the most part we are going to be ignoring daily price fluctuations. Sincerely, TheTechnology | ||||||||||||||
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