Monday Market Briefing

By: Robert McHugh | Tue, May 24, 2005
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Summary of Index Daily Closings for Monday May 23, 2005
Date DJIA Transports S&P NASDAQ Jun 30 Yr Treas
Bonds
May 20 10471.91 3620.99 1189.28 2046.42 115^31
May 23 10523.56 3626.51 1193.86 2056.60 116^22


SHORT TERM FORECAST
(Next Two Weeks)
     
TREND PROBABILITY   Legend     
Substantial Rise Low      
Market Rise Medium   Very High   80%
Sideways High   High   60%
Market Decline Medium   Medium   40%
Substantial Decline Medium   Low   20%
      Very Low Under   20%
INTERMEDIATE TERM FORECAST
(Next 12 Weeks)
     
TREND PROBABILITY   Substantial   800 points+ (DJIA)
Substantial Rise Low   Market Move   200 to 800 points (DJIA)
Market Rise Medium   Sideways   Up or Down 200 (DJIA)
Sideways Medium      
Market Decline High      
Substantial Decline High      


Equities Markets
Technical Indicator Index (TII) ™
Week Ended Short Term Index Intermediate Term Index Scale
May 6, 2005 13.30 (24.42) (100) to +100
May 13, 2005 (28.25) (20.71) (Negative) Bearish
May 20, 2005 8.68 (28.00) Positive Bullish

Over the past few weeks we've been mentioning two indicators that we follow, the Purchasing Power Indicator and the Secondary Trend Indicator. Tonight we start publishing their "buy," "sell," or "neutral" status at the end of this report, on page nine. We hope you find this of benefit.

The Dow Industrials rose 51.65 points today as the rally shows signs of petering out. Volume was only 86% of the last 10 days' average, breadth was okay, not great, and New NYSE 52 Week Highs were below that seen last Wednesday and Thursday.



Tonight our Percent Above indicators are showing an overbought market ripe for a top. The percent of DJIA stocks above their 30 day moving average rose above 80.00 today, to 83.33. The past two times this indicator rose to 80.00, we saw significant declines shortly thereafter, back on March 7th, 2005, and back on December 29th, 2004.

The percent of DJIA stocks above their 10 day and 5 day moving averages also are at overbought levels, at 90.00 and 73.33 respectively.

The key indicator we are watching is the 14 day stochastic. The Fast and Slow readings have converged just below overbought levels just above a reading of 75.00. Historically, that is a good spot for a sharp sell-off to start should the Fast drop decisively below the Slow from here. That could occur on the next down day in equities, likely triggering a "sell" signal. The beauty of this particular signal is it is one of the earlier ones, allowing aggressive traders to position themselves at the start of significant moves. Again, we are likely only one decent down day from generating this "sell" signal.

Another indicator we monitor is our proprietary Purchasing Power Indicator. It is a short term indicator that monitors the power behind a move. When it fizzles and turns, we get a "buy" or "sell" signal. It takes a while longer to signal turns than the 14 day stochastic, but usually once it is generated, the move lasts a few weeks or more. Tonight this indicator is still on a "buy" from April 21st, 2005. The other indicator we mention from time to time is a multi-month "buy," "sell," or "neutral" signal generator, our Secondary Trend Indicator. This keeps track of a number of measures on a cumulative basis, thus it is both slower, but also truer for longer-term players. Tonight it is neutral.

These three indicators are summarized in a table on page 9. They differ from our Technical Indicator Indices in that the TIIs do not generate buy or sell signals, but rather are a basket of measures from several technical analysis tools with high correlation to future moves in the markets, combined together to provide a risk analysis indicator. Risk does not mean we are going to get a move in a certain direction, but it warns if we might. It also identifies how severe the move might be.

We know wave ii is topping. We know it is a complex corrective pattern, an Expanding Running Triangle. We know the wave "e" of such a pattern is impulsive. We also know wave "e" is almost over. When and where will wave ii top? That's the question for tonight. One clue is the 14 day stochastic signal we just covered. When the Fast drops decisively below the Slow, the trend is down and wave iii has begun. Other considerations tonight: We can count four of the five waves for "e" complete, with the fifth almost complete. Wave {3} of e of ii extended so that means waves {1} and {5} should tend toward equality. Wave {1} was 180 points (from 10,075 to 10,255). So far, wave {5} has reached 136 points (from 10,424 to 10,560), about 44 points shy of equality. Equality gets us to a top of 10,604.

Now it gets interesting. If we compute a .618 retrace of the March 7th to April 20th decline, we arrive at 10,608 for a top - a mere 4 points from where {1} equals {5}. Now, we're not done here. If we extend the upper trendline for the wave ii Expanding Running Triangle, we come to 10,610ish on our second best fit phi mate turn date of May 25th, 2005 - this Wednesday. The trend-line also gets to 10,610ish late tomorrow. Time-wise, a top Tuesday has the rally taking an approximate .786 of the time the decline from March 7th to April 20th took. Are you sitting down? Wave "e" of ii would be 1.618 times the length of wave "d" of ii at - ready? - 10,609. Markets seek order. Probabilities are the top hits either late Tuesday, May 24th or Wednesday May 25th around 10,600 to 10,610ish.

And yes, even after another rally day today (the DJIA is up 525 points since April 20th), its 50 Day moving average has fallen further below its 200 day MA. The 50 day MA is at 10,373, while the 200 day is at 10,396 - Bearish. There's been a lot of Bullish rhetoric accompanying this rally, but so far it has only recovered about half of the damage from March 7th's top. If you sold at March 7th, you are still ahead.

The above chart of the NASDAQ 100 (courtesy www.stockcharts.com) shows a Minuette degree wave ii rally about over. It is a zigzag. The point where wave "c" is 1.618 times wave "a" is at 1,544.50. A .618 retrace of the decline from December 15th 2004 to April 29th, 2005 would bring prices to 1,543.50, essentially the exact same place. More evidence that markets seek order. We reached as high as 1,540.30 Monday. So a bit more is possible, but a top is close. The RSI is overbought and the 50 day moving average is below the 200 day MA. The wave ii rally was able to get these two simple moving averages to curl up, but failed to pull the 50 day above the 200 day. They remain decisively apart.

The HUI. If you go back to our weekend issue, you will see on page 18 that we had a blue arrow pointing to a nice little rally coming this week. That started in earnest on Monday. There may be a bit more to come, but the HUI is getting its marching orders from the general equity market these days, so once the equity market declines, look for the HUI to follow in step. I know this annoys the Gold folks who want HUI to be more in sync with the metal than it has been lately, but it's the corporate operating characteristics of the components of the HUI that are dominating the thinking at this time, not the value of the mined metal. That will change, but not now.

Key Economic Statistics
Date VIX Dec. U.S. $ Euro CRB Gold Silver Crude Oil 1 Week Avg. M-3
Date VIX U.S. $ Euro CRB Gold Silver Crude Oil M-3
5/06/05 14.05 84.59 126.29 301.00 426.9 6.96 50.96 9590.3 b
5/13/05 16.32 86.10 126.36 293.85 420.7 6.94 48.67 9584.6 b
5/20/05 13.14 86.66 125.62 293.30 417.7 6.95 48.65 -
5/23/05 12.95 86.40 125.85 296.50 416.9 6.97 49.20 -

Note: VIX down; CRB and Oil are up.

Summary of McHugh's Proprietary DJIA/S&P 500 Buy/Sell Signals
  Term Signal Date Last Given Dow Move Since Signal
Purchasing Power Indicator Short Buy April 21st, 2005 Up 304.96
14 Day Stochastic Short Buy May 16, 2005 Up 271.27
Secondary Trend Indicator Interm Neutral May 4, 2005 Up 138.92

Bottom Line: A top is nigh. Caution is warranted.

"There is therefore now no condemnation for those
who are in Christ Jesus."
Romans 8:1

This is the last week for our special $179 annual subscription rate, a 39 percent discount off the regular rate of $295. To subscribe, go to www.techncalindicatorindex.com and click on the Subscribe Today button.

Tonight's newsletter is a short market briefing to highlight today's market action in light of our full expanded analysis published over the weekend, issue no. 165, available by clicking on the weekend button at our home page at www.technicalindicatorindex.com

Here's the color coded, legend we use for our Elliott Wave count symbols, starting from the largest degree waves to the smallest:
  Impulse Waves Corrections
Grand Supercycle {1} to {V} {A} to {C}
Supercycle (I) to (V) (A) to (C)
Cycle I to V A to C
Primary (1) to (5) (A) to (C)
Intermediate 1 to 5 A to C
Minor 1 to 5 a to c
Minuette i to v a to c
Micro 1 to 5 a to c
Subnmicro {1} to {5} {a} to {c}
Nano {1} to {5} {a} to {c}

 


 

Robert McHugh

Author: Robert McHugh

Robert D. McHugh, Jr. Ph.D.
Main Line Investors, Inc.

Robert McHugh

Robert McHugh Ph.D. is President and CEO of Main Line Investors, Inc., a registered investment advisor in the Commonwealth of Pennsylvania, and can be reached at www.technicalindicatorindex.com. The statements, opinions and analyses presented in this newsletter are provided as a general information and education service only. Opinions, estimates and probabilities expressed herein constitute the judgment of the author as of the date indicated and are subject to change without notice. Nothing contained in this newsletter is intended to be, nor shall it be construed as, investment advice, nor is it to be relied upon in making any investment or other decision. Prior to making any investment decision, you are advised to consult with your broker, investment advisor or other appropriate tax or financial professional to determine the suitability of any investment. Neither Main Line Investors, Inc. nor Robert D. McHugh, Jr., Ph.D. Editor shall be responsible or have any liability for investment decisions based upon, or the results obtained from, the information provided.

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