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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 28, 2001

STOCKS
REALITY RATIO: +0.29
Last Signal: 08/24/01, TRADING BUY
Dow: 10,423.17 OTC: 1916.80 

The market s strong close for last week was enough to turn the ratio line back up, and while it comes from a very high reading, the many constructive bullish divergences we have pointed out, including the high level maintained by the ratio itself, we think a market turn is due, and perhaps the ratio line will become overbought and remain that way for a while, as a rally runs its course. 
TUESDAY, August 28, 2001: It looks to us like Friday s powerful 194 point rally was the turn we had been looking for. The markets finished strong last week after Tuesday s sharp over-reaction to the Fed s 7th rate cut for the year, ending the week 182 points higher. Our indicators remain bullish and we think the Dow will move generally higher in the coming weeks. 

The markets pulled back yesterday after Friday s strong close, but that wasn t surprising as many still fear the worst. We would always rather see selling in the early part of a new week, because it tells us that investors worried about their investments all weekend and came back selling. Generally, turnarounds by the end of the week are considered constructive as weekend fears are proven unfounded, and traders scramble to get their money back in.

Our technical parameters have not changed. Prices fell just short of our cited initial resistance at 10,478 on Friday. A break above this level is needed to 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 turned down on Friday to close higher for the week after reaching a new trading low. This was enough in our book for a bearish key short term reversal. Adding to this significance, the Dow 20 Bond Average, an important long term bond timing indicator, closed the week lower after reaching a new high for the year, for its second major Buying Climax (BC) in the past 6 weeks or so. These are significant signs of distribution and reinforce our view that the bond rally is increasingly vulnerable to ending with a reversal toward higher rates. 

Last Thursday s 5.398% low was well within our overall forecast and long standing comment that we didn t think rates should be able to push below the key 5.40% resistance level, as this was the original point that confirmed the bearish trend reversal after the yield had reached a low of 5.217%, on March 22. With the Fed moving another �% rate cut closer to the end of their easing policy, the markets are likely sensing that further rate cutting actions may no longer be a good bet, and this should provide many with more than enough incentive to move out of long bonds, especially if we are correct that money will begin moving back to equities. 

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. Resistance is between 5.40% and 5.363% (.786 Fibonnacci retracement). Below this, resistance is near 5.31% and then at the 3/22/01, 5.217% low. 

GOLD

Gold & the XAU have stalled in their rally, stopping on a dime once the option and futures expiration ended a week ago Friday. Gold itself has pulled back markedly, closing yesterday at $274.90 (Dec), down from a closing high of $282 on option expiration day. The XAU on the other hand, has been holding up remarkably well, within one point of its recent trading high. Admittedly, this is a constructive sign for the equities, regardless of the futures, because the stocks generally lead the futures. This may be a sign that the rally has only paused and not ended. While we have not been bullish on the metals recently, we would gladly become so under the right circumstances, and we still need to see more before we would change our overall opinion for the near term. As stated last week, "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." 

Yesterday s 58.39 high fell short of the 58.44 high reached by the XAU on Friday for a very short term bearish price divergence. For this to become more credible, the XAU needs to close below Friday s low at 56.90. While we generally don t attempt to micro-manage this, we thought we d point out what we see as a pretty clear short term trading parameter for a downturn. To negate this, the XAU needs to move above the Friday high. 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

Tuesday, August 28, 2001: 8/27: AMR was added to our large cap portfolio yesterday at 33.60. We think the Airlines have been acting relatively well and we see many bullish divergences between our daily trading indicators, which have made higher lows, against the recent prices, which made a modest lower low. We think this is a good sign. 

[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 28, 2001

Published By Tulips and Bears LLC