We have oft pointed to the cycle of the institutional collapse in 1962 (40 years). Below is the chart of that famous collapse. That market topped on November 15, 1961 at 741.30 and bottomed on June 25, 1962 with a low of 524.60 for a drop of 29%. The move took 222 days. On June 6, 1962 the market made a high of 611.80. It promptly lost 14.3% in a mere 19 days. Not quite what we described above but a reasonable facsimile. That was 40% of the drop in only 8.5% of the time of the move. But with 45 days left (roughly 20% of the move) the market was at a high of 653.70 and a few days later it was a high of 660.60. From that level it represented 63% of the move.
It is interesting that this move appears to be getting underway as well on June 6 starting from a gap open high that was made early in the morning of June 6, 2002. We expect that this market will not bottom until the aforementioned June 25 that was coincident with the 1962 bottom to around July 4, 2002. The earliest we expect a bottom would be around June 21, 2002. Targets on the Dow Jones Industrials could be down around 7200/7400 with the other markets appropriately lower as well. Along the way there will be some very impressive rallies that even be as much as 200 points on the DJI but each of these should represent a selling opportunity.
Another indicator that suggests that we have not reached capitulation is the Volatility indicator known as the VIX. Typically bull market tops are near 20 or lower while bear market bottoms are near 35 or higher (moves inverse to the market). On September 21, 2001 the VIX topped at 57.31 while the low recently on the VIX was at 18.87 on March 28, 2002 not far from the high on the DJI made on March 19, 2002. With the VIX currently in the 28 range we are a ways from the bottom. Here is a chart of the Dow Jones Industrials and the VIX indicator.
Gold has been struggling recently especially after the $7 plus drop seen on June 5, 2002. The selling got underway the night before after hours when it was later reported that a large fund came in on the ACCESS system owned by the COMEX and sold about 5000 futures contracts or the equivalent of 700,000 to 800,000 ounces of gold. The ACCESS system is only available to large funds. Worse it was sold in illiquid months compounding the problem. A top in gold? Or, manipulation in an attempt to suppress the price of gold? We suspect the latter.
Gold has been tracking the US Dollar quite well over the past few months. With gold priced in US$ gold prices must rise in order to compensate for the fall in the US$. Curiously gold has been steady in currencies that are gaining against the US$ including the Canadian$. Still the stocks have been knocked back roughly 10%. Key long-term support on the XAU can be seen at the rising trend line near 73. There is also important support near 80. Still that is a 10% drop in the XAU (we are there now).
The drop has been concentrated in the larger cap gold stocks that have largely benefited from this move. The juniors have barely budged in this pullback. This pullback is a buying opportunity as the fundamentals on the US$ have shifted. The chart of the US$ index shows that has broken down with targets down to 105 and possibly to 95.
Finally, has Nortel (NT-TSE) bottomed? Today's high volume reversal suggests that at least a temporary bottom may have been seen. So for all you bottom fishers here is your opportunity to own a former $124.50 high flyer at the ripe old price of $2.35. But at these levels its S&P 500 listing is in trouble. So could a consolidation be far behind? And they continue to dilute their stock. So this one is for serious bottom fishers only. Be nimble. Prices eventually could be even lower than what we have thus far.
June 14, 2002
Charts and technical commentary by David Chapman of Union Securities Ltd. 69 Yonge Street, Suite 600, Toronto, Ontario, M5E 1K3 (416) 604-0533, (416) 604-0557 (fax) 1-888-298-7405 (toll free) email david@davidchapman.com
The opinions, estimates and projections stated are those of David Chapman as of the date hereof and are subject to change without notice. David Chapman, as a registered representative of Union Securities Ltd. makes every effort to ensure that the contents have been compiled or derived from sources believed reliable and contain information and opinions, which are accurate and complete. Neither David Chapman nor Union Securities Ltd. take responsibility for errors or omissions which may be contained therein, nor accept responsibility for losses arising from any use or reliance on this report or its contents. Neither the information nor any opinion expressed constitutes a solicitation for the sale or purchase of securities. Union Securities Ltd. may act as a financial advisor and/or underwriter for certain of the corporations mentioned and may receive remuneration from them. David Chapman and Union Securities Ltd. and its respective officers or directors may acquire from time to time the securities mentioned herein as principal or agent. Union Securities Ltd. is an independent investment dealer and is a member of the Toronto Stock Exchange, the Canadian Venture Exchange, the Investment Dealers Association and the Canadian Investor Protection Fund.