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June 28, 2004

Sell on the Fed News
by Don Delavan

With historic tops occurring last week and today, this week is shaping up to be "sell on the news" of the Fed's announcement on interest rates on June 30. Last week is the opposite of what happened in mid-March 2003. As seen below, black wave B down in mid-March 2003 made a new low for the DJ Transports while the DJ Industrials made a higher low above its October 2002 low. This created a Dow Theory buy signal that started black wave C up. Last week, just the opposite occurred - a Dow Theory sell signal was created when the DJ Transports made a new high while the DJ Industrials made a lower high below its February 2004 high. Thus, a multi-month trend reversal is starting this week that will decline into the fall of 2006 - the relentlessly falling Wave C down.

The recent rally since May 12 is probably a black wave 5 of C up of green Wave B up that started in October 2002 as shown below. The DJ Transports peaked today 115 points above its January high while the DJ Industrials stayed 266 points below its February high, creating a truncated black wave 5 of C up for the other indexes. The DJ Transports chart shows a future Wave C decline to around 1150 by the fall of 2006.

The DJ Industrials chart below shows an amazing Fibonacci time ratio. The blue-chip indexes may have completed their truncated black wave 5 of C up on June 24, which would make green Wave B up since 10/10/02 exactly 89 Fibonacci weeks long. This is 62.5% of the time for the Dow's green Wave A down, which was 1 week less than 144 Fibonacci weeks. The Dow's black wave 5 up truncated at 70.5% of its black wave 4 down, which is very close to the Fibonacci ratio 0.707. Since today starts the 233^rd week of the Dow's bear market, this week should start a multi-month trend reversal downwards, being a Fibonacci week. To further support this, the Dow's high for this year (black wave 3 up) occurred on 2/19/04, which was right at 50% of the time for the Dow's green Wave A down.

What does this have to do with sell on the Fed news? It means that green Wave C down just started at the recent 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 next decline 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 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.

For the S&P 500, black wave 5 up truncated at 80.6% of black wave 4 down, which is very close to the Fibonacci ratio 0.809. Black wave 4 down lasted 47 trading days for SPX, and black wave 5 up lasted 29 trading days, which are both Fibonacci numbers that have a ratio of 0.618. 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 lasted 67% 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, and that bear market continued until 1982. 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 next decline 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 1100-1135 by September.

What will happen to gold stocks for the next few months? With the coming selling pressure, HUI should continue its decline to around 155-160 in early July. XAU and NEM have old price gaps at 74.88 and 33.40 that should be filled in early July. These targets will be great buying opportunities for gold stocks 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 XAU 140-150 by late September. So gold stocks might be the most profitable investment during the late summer months, but wait for a good buying opportunity around HUI 155-160 and XAU 70-75. Inflation fears will probably return because the Fed is so far behind the curve, which will 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?

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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