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REALITY CHECK UPDATE
Published Every Tuesday and Friday

ARCHIVE:    APRIL 2000-MAY 2001  

Contributed by Mitch Harris
President: Market Trend Realities,
Editor: The Reality Check Newsletter

August 24, 2001

STOCKS
REALITY RATIO: +0.129
Last Signal: 08/17/01, TRADING SELL
Dow: 10,240.78 OTC: 1967.03 

With the Dow remaining well within a broad trading range since its May top, the Reality Ratio finally broke down to give a confirmed trading sell signal. HOWEVER, because of how well it and many of its component indicators have held up during the recent prolonged selling, we are interpreting this to be "lagging" and a BULLISH divergence. Perhaps we are not being realistic but we see so many constructive technical signs that we think it is likely too late to get bearish for the month ahead. This issue will provide supporting data for our pre-emptive conclusion. I will also point out that because the ratio never quite reached an overbought extreme, an upturn here still allows for this extreme to be reached and this could last for a while once reached! 
FRIDAY, August 24, 2001: Wednesday s 100 point gain found no follow through Yesterday The market rebounded Wednesday from Tuesday s steep decline over the post FOMC meeting statement, "Household demand has been sustained, but business profits and capital spending continue to weaken and growth abroad is slowing, weighing on the US economy." This statement could NOT have been a surprise to the markets, after all the bad news it has absorbed in recent weeks and months, yet hearing it come from the Fed after all their rate actions this year sent a chill down the collective spine of investors. We see this as having the potential to be the event that marked an important trading low, but the jury s still out. Even if this proves pre-mature, we think a bottom is very close.

While we don t do this type of work ourselves, many shorter term cycles we ve been reading about are due to bottom between 8/20 and 8/31, which is consistent with our thinking that we are very close to a low if it hasn t already been reached. Combined with many of our indicators that are either bullish or show bullish divergences against the weak market, and we continue to believe a very significant rally will soon emerge. If proven correct, we will not mind being early. 

Still most impressive to us is that even in the face of declining market averages since the 5/22, 11,350 price peak, the A/D Line remains at its highest level of the year. Our 10 Day A/D Line indicator has been bullish for the past 17 trading days, telling us that more individual stocks are going up than down, even as the averages have declined. This is by far our main reason for optimism in the face of much despair, as a rising A/ D Line is a precursor for prices to follow. Another significant sign of bullish divergence under the surface is in the daily list of new highs versus new lows. New highs expanded to 221 on Tuesday, even as many were scrambling to sell the Dow off by almost 146 points and as Abby Joseph Cohen had downgraded her still very bullish forecast! We see this as quite significant as new highs do not expand while the markets are deteriorating. Adding this to our growing list of bullish signs and our confidence remains high. 

Our Tuesday comment that "if the Fed wanted to stimulate the markets, economy and consumer confidence, they would be much better off taking NO action, issuing a statement of confidence," proved to be what the market was actually hoping for, judging by the reaction when they got the opposite. Yesterday s release of the June FOMC meeting supports our view that they indeed may be close to the end of their rate cutting for at least a while, as a number of voting members voiced their concern that they may overshoot, sowing the seeds for higher inflation next year. If the Fed really wants to see the benefits of their rate cutting, they would issue instructions to banks who have actually been tightening their lending standards in spite of the easier money. Until they make money available for those seeking capital, NO reduction in interest rates will matter! Banks have become more reluctant to lend because of the rapid deterioration in personal and corporate balance sheets, making it difficult to assess the ability to pay loans back. This has perpetuated the cycle of despair that we have written about in the past. 

Our technical parameters have not changed. An initial push above the last Dow high at 10,478 would turn the short term trend positive and should lead to another test of the resistance at 10,600. Above this key short term level, higher resistance remains near 10,800, 11,000, 11,180, and then at the more significant intermediate term barrier of 11,350. Support remains near 10,200 and then at the key 7/11, 10,120 low. A close below this would most likely usher in stop loss selling, but in itself, this would not change our expectation that a tradable low is due.

TREASURIES

Treasury yields pushed ahead to a new trading low yesterday at 5.398%, pushing into our next resistance at 5.40%, and toward our next lower (.786) at 5.363%. With another �% rate cut fully discounted and the growing likelihood that the Fed s rate cutting cycle is coming to an end, we think the risks are growing very high that a reversal toward higher rates is becoming overdue, especially if money begins to flow back to equities. 

Many of our technical trading indicators continue to show glaring bearish divergences by not confirming the yield low reached last week. These include Stochastics (which are also overbought), Rate of Change (ROC), Momentum, and MACD, and generally get resolved by leading to a trend reversal, as we expect. The large mutual fund inflow in June is also evidence that bullish sentiment has been building dramatically as retail investors are generally the last ones in. We see this as a clear warning, ESPECIALLY as the public has become heavily invested, after years of shunning bonds. 

The yield is testing our next lower resistance near the 5.40% level. A push above the 8/6, 5.617% high is needed to confirm a short term bearish reversal. A break above the 7/6, 5.771% high would confirm a more substantial bearish trend reversal and indicate to us that the larger degree wave (3) bear market was underway. Higher support is at the 5.975-6.025% level and would be the next upside target for the bears. 

GOLD

Gold & the XAU have so far topped out right into last Friday s Futures expiration, with cash closing at its highest close since May, at $279. The futures reached what was considered resistance at $282. Prices have slipped back since, with cash at $275.25 and the futures at $277.70 at yesterday s close. We have seen, heard and read a great deal about the current bull market in gold. We still need more evidence before joining the crowd. The choppy, reluctant effort for these markets to go up is just not what we envision as how gold will be acting when the bull market does begin. We think that like other bull markets, when it is gold s turn, it will EXPLODE to the upside, leaving NO DOUBT that it has begun. This is not how it is acting now, which is much more suggestive of a bear market rally. This does not preclude higher prices in the short run, just that they should not be sustainable. 

The XAU pushed to a high of 58.44 on Friday, clearing short term resistance near 57. Next resistance is at the 6/14, 60.39 high, and then at the 5/18, 66.54 high. A clear breakout above 60 would be very bullish because it would also break above the long term downtrend line drawn from the 2/7/96, 155.60 high. For (cash) gold itself, resistance begins near last week s $279 high, with more at $280 and $286. Support begins just above $272, where it would trigger a very bearish High Pole at the Bearish Resistance (HPBr) on our short term P&F Chart.. Support for the XAU begins near 52 and with more at the 2/14, 45.64 low, and then at the even more critical 7/14/00, 41.61 low. 
 

PORTFOLIO CHANGES

Friday, August 24, 2001: -- NONE TODAY -- 
[Part of our offensive is to have a good defense! That means limiting losses and protecting gains]! 
Article contributed by Mitch Harris: President, Market Trend Realities & Editor, The Reality Check Newsletter, and reprinted here with permission. 

Market Trend Realities (MTR) is a Registered Investment Advisory which manages personal, corporate, Trust, and retirement accounts on a fee only basis. Several low cost, flexible management fee arrangements are available. Investment Advisor, Mitch Harris has studied the Point & Figure Charting Method under the direct supervision of Michael Burke, Editor of the prestigious Investors Intelligence research organization. Management is based on a unique combination of technical analysis methods and tools which include, The Point & Figure charting method, Elliott Wave Analysis & techniques, industry group analysis, cycle analysis, Relative Strength Analysis, Stochastics, and investor sentiment studies. MTR offers a very uniquely structured managed mutual fund program using the RYDEX family of mutual funds, which offer outperformance potential whether equity markets are rising OR falling! Inquiries are welcome by calling us at
(513) 421-8737,  Fax: (513) 421-8733 ,  or by email at: mtr@fuse.net

MTR also publishes a monthly investment newsletter called "Reality Check", which offers technical commentary on the stock & bond markets, the Dollar Index, gold & gold stocks (XAU), Treasury yields, utilities, investor sentiment, and Federal Reserve policy. It also offers stock trading recommendations each month with price targets, stop loss points and insider activity. There are 4 trading portfolios, including a short selling account (we are very proud that our short sale recommendations have averaged 12.5% "compounded" during the roaring bull market of the last 5 years). Short term market commentaries are updated on Tuesday and Friday mornings, along with portfolio changes on this web page. They are also emailed for free to anyone who provides us with their email address. The regular subscription rate is $200 (US) per year. Samples are available upon request. MTR will be happy to send information on any of the above mentioned services. Please email us your home or business address along with your daytime phone number and specify your interest(s). 

 
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Last modified: August 24, 2001

Published By Tulips and Bears LLC