Jerry Favors Analysis - Friday, April 22, 2005 8 p.m.
The Dow showed no significant follow through today to yesterday's strong closing rally. The Dow closed down 60.89, with the Nasdaq down 30.32.
While the Dow and the Nasdaq held onto most of the gains we saw on Thursday of this week, it remains a question for us whether or not we have started the expected rally to point 25 in our 3-Peaks and Domed House pattern. It remains our position that a strong rise to point 25 in that pattern will come relatively soon. The question at this point is from where? By this we mean it is certainly possible that that rally to point 25 could begin from still-lower prices over the short term. That a significant rally up to point 25 will begin relatively soon we have little doubt. However, the risk short term is that prices could continue lower over the next week or two before that rally begins.
The Gann Weekly Charts will turn up next week on any rise above 10220 on a print basis on the Dow, 1962.41 on the Nasdaq and 1159.95 on the S&P 500. If those levels are exceeded any day next week a stronger rally should follow, at least short term. However, that would not in itself produce any sort of buy signal yet.
The initial support levels for next week will be 10000 on a print basis on the Dow, 1904 on the Nasdaq and 1136 on the S&P 500. A decline below each of those levels any day next week will signal that a still-stronger decline is coming, at least very short term.
On an intermediate and longer-term basis we remain bearish. However, on a short-term basis if the preceding key resistance levels on the Dow, the Nasdaq and the S&P cash are exceeded next week a still-stronger rise should follow. For that reason, and because we are aware that a rally from a low in this general time frame followed by a strong rise to point 25 should begin fairly soon, we do not want to move to 100% cash just yet. Once that rally begins, and appears to have run its course, we will raise cash even further, and begin increasing our short positions as well as going long one of the bear market funds, which move up when prices are falling during a bear market. This should be a gradual process over time, not a "sell everything now" process. The fact is some of the strongest rallies you will ever see are bear market rallies, as we believe was the case yesterday. Those extremely strong bear market rallies serve to give the bulls hope once again, before the rug is pulled out from under them one more time.
Our longer term position is that the bull market which began after the October 2002 bear market lows peaked on March 7 of this year. A new bear market began from there which should continue into late this year, or sometime between April and May 2006. The next major buying opportunity for long-term investors will begin from there, and will likely continue for many years.
