Over the last several months the S&P has been in what is becoming a well defined trading range. Early last week the S&P made a trip to within a couple of points of the lower end of that range before rallying modestly. In Elliott wave terms we see this as a potential triangle but one that is not yet complete. The term or pattern of triangle gives one the impression that this pattern will resolve to the upside. That that sideways behavior is nothing more than a well earned rest or consolidation within the post March 2003 (October 2002) rally. However, this is not necessarily the case both in terms of the wave structure as well as from what we are seeing from the indicators. For a more detailed explanation of the Wave structure see the Elliott Wave section of the report.
As far as the technical indicators are concerned our biggest problems stem from the sentiment side of the equation so we will discuss this part first. Last weeks low coming within 3 points of the May low in the S&P (the Russell 2000 came within a point of its May low) failed to produce readings in a number of indicators anywhere close to what we saw in May and in a number of cases March. The first that comes to mind are the volatility indexes. This is one of the key measures of fear and complacency that we have available. In both March and May the VXO move well above 20 before the market was able to rally. This is not a high level based on the past several years but since we got two rallies of similar magnitude in terms of price it is a fairly good short-term focal point. We see a similar reading or lack of reading from the VIX and VXN. The failure to get even somewhat close to levels that were seen at two previous trading lows does suggests that the latest move to the low end of the range was greeted with a lot less fear and perhaps a bit of complacency when compared to those previous two lows. These indicators have already given back nearly half of what they gained and are not far from the levels seen at the March, early April and late June peaks. It doesn't stop here, however. We see similar although not as pronounced a reading from both the CBOE and equity put to call ratios. The 10-day moving averages of both are now at or fairly close to the levels seen at the early April and late June. The CBOE ratio is not at bearish levels but it is at or near levels that have ushered in previous declines this year as is the equity ratio. This does not mean that these indicators cannot move lower as they most certainly can. It does, however, put things in perspective in regards to investors expectations or lack thereof.
Other medium and longer-term measures of sentiment are mostly still on the negative side of the ledger. We did see improvement in one of the futures polls which has moved to bullish on a weekly basis and to neutral via the 4-week moving average. However, the other poll while improving slightly is still bearish on both accounts. Insiders although easing a bit from their huge selling spree to massive record levels in the Fall and Winter continue to be net sellers. This key indicator, with the exception of last year, remains near its worst levels in well over 12 years. Last but not least, our own sentiment model just last week is back to bearish levels. Compare this with late May when it moved to mid neutral. This again was not bullish but at +10 it was far above the current +6 reading.
A number of our important momentum indicators did hit fairly deep oversold readings at last weeks low, and the one that did not, the breadth oscillator did come close. These were sufficiently oversold to support a fairly strong bounce and that did occur. However, at least weeks low all four of our primary indicators confirmed the move down from the June peak and also reached levels that on a historical basis rarely if ever mark a price low. In other words, the levels last week argue strongly for a positive divergence with price before a serious low is in place. This is not unlike the extreme overbought readings seen in early June but not to that degree. It is interesting to note that the S&P is still not back to where it closed on July 15. That date was the peak in the 10-day and open 10 Arms, both of which hit extreme oversold readings. This seems to validate our view then that the excessively high Arms was an initiation signal not a buy signal. These indicators are still a bit on the favorable side and can be supportive of further price gains over the near-term.
Over the past couple of weeks we have repeatedly stated that things were finally improving technically not to buy signal levels but that they were headed in the right direction. We have also said that a rally from these levels would be premature and most likely do more harm on a medium-term basis then good on a short-term basis as it would prevent and delay the indicators from reaching levels that could support a more exploitable and sustainable rally. This is in fact exactly what occurred last week. Although not back to levels seen at other important tops this year, a number of indicators are not far off. While we did get oversold at last weeks low we have not see any true upside momentum generated other than the 3-day oscillator, which does argue for higher prices on a very short-term basis. However, strong upside momentum in and of itself does not imply a strong rally. All one has to do is go back and look at the record levels recorded on the McClellan oscillator and our own breadth oscillator in early June to see how that one failed. The key in our view is to build up enough fear to allow for a more sustainable rally. In this regard not only has the market failed but it actually has moved in the opposite direction. The wall of worry does not exist. Short-term we do not think the market is going to run away and we do not even see it a close to as strong as what we saw coming off the May low but we do not think that the rally is over and further gains are most likely. We will remain neutral on the short-term. Medium and long-term nothing has changed and in fact with last week it has actually weakened further. We still expect to see a move below the May low on the S&P before a sustainable rally has a chance of unfolding. We remain bearish.
Larry Katz
email me at: LK1618@mta.org
website link: www.marketsummaryandforecast.com
Larry Katz serves as both editor and research director of Market Summary and Forecast. Mr. Katz is a full member in the Market Technicians Association and is both one of the founders and the president of their Southern California Chapter. He also serves on the management committee chairing the membership committee. Mr. Katz is a regular contributor to Top advisors corner on America On Line. He is a regular guest on the Business Channel in Los Angeles with Richard Saxton. He has been a quest speaker of the Market Analysts of Southern California (MASC), the Omega users group of Thousand Oaks, Ca. and Orange County, the Market Technicians Association Atlanta Chapter as well as the Foundation for the Study of Cycles. He also ran a workshop at the Market Technicians Association 1999 Annual Seminar. He has been a regular commentator on the Reuters Financial network, both in the US as well as in Japan, as well as being published in the Market Watch section of Barrons Magazine on a number of occasions. He is currently ranked in the top five for intermediate term gold timing by Timer Digest.
For a detailed explanation of the services we provide you are invited to go to our web site at www.marketsummaryandforecast.com, where you can also receive a free two-week trial to all of our services.
You can E-mail us at LPK1618@AOL.com and LK1618@mta.org, or write to:
Market Summary and Forecast
3835R E. Thousand Oaks Blvd PMB 297
Westlake Village, Ca. 91362
or call the office at (818) 889-0485
