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June 19, 2004

Sell on the Rumors and Buy on the Fed News
by Don Delavan

The remainder of June is shaping up to be "sell on the rumors" and "buy on the news" of the Fed's announcement on interest rates on June 30. Why? Obviously, there will be plenty of speculation on how much the Fed will move on June 30, and sellers may be trying to get out before the announcement.

But more importantly, we may have just seen an historic top today, and most investors do not even realize it. The recent rally since May 12 is probably a truncated black wave 5 of C up of green Wave B up that started in October 2002 as shown below. The DJ Transports peaked today just 8 points below its January high, retracing 98% of its black wave 4 down and giving the clearest wave count for a truncated black wave 5 of C up, which completes its green Wave B up today. The DJ Transports chart shows a future Wave C decline to around 1100 by the fall of 2006.

The DJ Industrials chart below shows an amazing Fibonacci time ratio. The Dow peaked today at 10438, retracing 65% of its black wave 4 down and creating a truncated black wave 5 of C up. What's amazing about today being the top of green Wave B up is the time relationship with the Dow's green Wave A down. Green Wave A down started at the Dow's all time high on 1/14/00 and ended at its lowest close on 10/9/02, which was 999 calendar days or 685 trading days. If Friday June 18 marks the top of green Wave B up, then it lasted 618 calendar days or 425 trading days, which are both very close to 61.8% of the time for the Dow's green Wave A down. It's uncanny how 618 days occurred on 6/18. To further support this, the Dow's high for this year occurred on 2/19/04, which was exactly 50% of the time for the Dow's green Wave A down.

What does this have to do with the remainder of June? It means that green Wave C down just started at today's highs. Wave C down is known for its relentlessly falling prices, and the chart is showing the Dow dropping to around 3000 by the fall of 2006 with the bottom of the current 4-year cycle. So the last 2 weeks of June might be just wave 1 of 1 of C down that bottoms at the summer 2003 levels, which is 8850-9360 for the Dow. Then wave 2 of 1 of C might be a multi-week rally back above Dow 10,000 by late September. If this occurs, then wave 3 of 1 of C may be a 1987 style crash in October that makes new lows for all the indexes.

The S&P 500 retraced 76% of its black wave 4 down, creating a truncated black wave 5 of C up. The S&P 500 chart below shows a much weaker picture than the Dow. Wave A down for the S&P 500 fell 50% while the Dow fell only 38%. Wave B up for S&P 500 has retraced only 50% of its Wave A down while the Dow has retraced 78% of its Wave A down. But the S&P 500 provides the realistic picture of market conditions. Its green Wave B up is very close to two-thirds of the time for its green Wave A down.

The 1998-2002 4-year cycle was bearish because it ended lower than it started. Since its 4-year moving average is still pointing down and is acting as resistance, the current 4-year cycle is still bearish. Its 4-year moving average is about to cross below its 8-year moving average, which is a very bearish sign for the remainder of this 4-year cycle. The last time that a similar crossover occurred after a multi-year bull market was in 1971. The 8-year moving average will probably turn down later this year.

The chart is showing the S&P 500 dropping to around 380 by the fall of 2006 with the bottom of the current 4-year cycle. So the last 2 weeks of June might be just wave 1 of 1 of C down that bottoms at the summer 2003 levels, which is 960-1015 for the S&P 500. Then wave 2 of 1 of C might be a multi-week rally back up to around 1100-1130 by late September.

What will happen to gold stocks for the next few months? With the selling pressure for the rest of June, HUI should continue its decline to around 155-160. XAU and NEM have old price gaps at 74.88 and 33.40 that should be filled in late June. These targets will be great buying opportunities for gold stocks in late June because of its Wave 5 up into September. In the past, Wave 5 up for gold stocks has been a very strong rally, and the targets are HUI 300-315 and gold $475-500 by September/October. So gold stocks might be the most profitable investment during the late summer months, but wait for a good buying opportunity in late June around HUI 155-160 and XAU 70-75. Whatever the Fed says or does at the next FOMC meeting on June 30 may cause inflation fears to rise and cause gold stocks to skyrocket into September like they did before the 1987 crash when NEM skyrocketed 122% in 12 weeks! Will we see a repeat of history?

P.S. See Zoran Gayer's wave count for more detail on the truncated wave 5 up.

Don Delavan
SBRB Management Corp.

Don Delavan is the editor of the Market Waves newsletter. For subscriptions, contact dondelavan@adelphia.net

DISCLAIMER: This newsletter is a publication dedicated to the education of investors. The newsletter is an information service only. The information provided herein is not to be construed as an offer to buy or sell securities of any kind. The newsletter picks are not to be considered a recommendation of any stock or mutual fund but an information resource to aid the investor in making an informed decision regarding investing in securities. All investors should consult a qualified professional before trading in any security. The information provided has been obtained from sources deemed reliable but is not guaranteed as to accuracy or completeness. The newsletter makes every effort to provide timely information but cannot guarantee specific delivery times due to factors beyond our control.

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