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Market Rally,
Bull!
If this is the “New Bull” market, then it is the weakest new
bull market I have ever witnessed. My original forecast predicted the
rally to grow through the election, sideways through November and then
resume the bull move through January. Now, having witnessed the first
leg up, I think that forecast is optimistic. This rally has not shown
any of the strength characteristic of a typical four-year low. Coming
out of the previous 4-year low in October of 1998, the NYSE A/D line,
which measures the number of stocks moving up verses the number of
stocks moving down, posted over 9 to 1 advancers verses decliners for
three days. This means 9 stocks went up for every 1 stock that went
down. The current rally never surpassed 3.5 to 1. Looking internally at
each day’s biggest gainers reveals the stocks that are down over
90% from their highs are the ones making the big moves up. These
overvalued, nearly out of business companies are not long term investor
buys; but rather, the movement made by fat and happy short sellers
taking their profits. The whole rally looks like it may be the result of
short covering and those staunch bulls who are still scared of
“missing out” and have expertly bought high and sold lower
throughout this entire bear market.
There are numerous technical factors
which indicate this rally is close to or may already be over. The market
volume has lagged considerably from what we would expect for a 4-year
low. Numerous market indexes are coming up against their 20-week moving
averages and their Fibonacci resistance levels. Let’s look at some
charts.
Here the Dow Jones Industrial Average had a one day bounce above
its 20-week moving average (MA) and the 38.2% Fibonacci retracement of
the most recent decline. This is also known as an Island Reversal.
The
S&P 500 bounce only brought it to the declining trend line and 38.2%
retracement.
My favorite index, the Value Line Geometric, is also right
at its 23.6% retracement from the 5/22/01 top and 61.8% from the 8/22/02
top.
The 38.2% Fibonacci retracement has corralled many of the bear
market rallies over the last 2.5 years. There is also another Fibonacci
relationship that may offer some insight. Besides percentage
retracement, Fibonacci numbers may be used to predict future turning
points in time. These potential turning points can be revealed by adding
Fibonacci numbers to important market highs and lows from the past
market action. Their value increases when they coincide with other
indicators such as an overbought market and the 32.8% retracement or a
declining trend line. November 7th is the 55 trading and 233 calendar
days from the 8/22/02 high and 3/19/02 highs respectively. November 8th
is the Fibonacci 987 trading days from the NYSE first decline low on
2/25/00 and 21 trading days from the 10/10/02 low that started this
rally. These Fibonacci turning points combined with an extreme
overbought market makes this week a likely ending point for this rally.
Inter market analysis shows the U.S. Dollar breaking down and
threatening to break it four month range a push below 103 would be bad
news for US stocks.
The Gold and Silver Mining Index, XAU is also
showing life and I believe it could make an assault towards its July 90
high. However, the 81-day cycles low is due to around the 19th of
November; so, I expect a brief decline between now and the ultimate
high. On any softness we will sell.
Even with Mr. Greenspan's 50 basis
point rate cut, the market should head down towards the lower end of its
range. If it breaks through the old lows then watch out below.
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