U.S. markets continued soaring into the stratosphere last week as the "melt-up" continued to exert its influence on key stock market sectors, particularly the OTC stocks. As we pointed out last week, the famous trader Jesse Livermore once said that a move by a stock or index above a previous high, especially if that high happens to be at a round number, is almost guaranteed of a meteoric rise before correcting in any discernable way. This obviously is the case with the NASDAQ.
The NASDAQ is moving ever closer to our near-term projected target of 3500, a level which should be achieved with little difficulty. We do not foresee any significant pullback or correction until the NASDAQ reaches this level. The OTC stocks have been moving rapidly on record-high volume-all of it upside volume. This is the definition of a bull market: money flowing earnestly into equities, which is exactly what we are seeing. As we pointed out in last week's newsletter, average daily upside volume has been ahead of downside volume by a ratio of 3:1. This is undeniable proof that the bull is back with a vengeance.
Our ultimate target for the NASDAQ of 5000 still stands. As we wrote in last week's edition of the newsletter: "…a convincing bull argument could be made that the NASDAQ could see a level as high as 5000 within the next year. This is based on the fact that the NASDAQ fluctuated within a 400-point range for several months before breaking out to the upside on high volume. As we observed in our book, Technical Analysis Simplified [available from www.traderslibrary.com], a measuring formula for rectangle consolidations (of the type seen in the NASDAQ over the summer) is derived by multiplying the number five (the number of times price typically alternates between the upper and lower boundaries of the rectangle) by the height of the rectangle measured in points (in this case, approximately 400). Therefore, by adding the product of 2000 (400 X 5) to the breakout point of 3000, it can be seen that 5000 is a very real possibility based on this measuring formula. Whatever the case, the bottom line is that momentum and volume-the two most crucial ingredients for any market undergoing a bullish phase-are clearly on the side of the NASDAQ. The bulls are clearly in control right now while the bears are in retreat."
The question that everyone seems to be asking right now is "what gives with the Dow?" While the NASDAQ has been white hot since its volume breakout of two weeks ago, the Dow Industrials have barely budged by comparison, managing only a meager gain and a slight close above the benchmark 11000 level last week. Normally, when the NASDAQ breaks out ahead of the Dow, the Dow follows suit within a week or two. But not this time. Explanations for this strange and unprecedented phenomenon range from "bearish non-confirmation" to "the NASDAQ represents the 'New Economy' while the Dow represents the 'Old Economy.'" With respect to those who adhere to these either of these arguments, we must emphatically disagree.
Allow us, then, to offer our take on the matter: The Dow, as an industrial-based stock sector, is tied both directly and indirectly to the crude oil market. While we have pointed this out before, it bears repeating that industrial-based companies are highly dependent upon oil and petroleum-based derivatives (such as gasoline) for both a supply of energy for manufacturing as well as for transportation and distribution of goods. Without oil, industry would cease to operate. In fact, oil is of great importance to the Internet economy, as well, due to the fact that roughly 85% of all e-commerce involves some form of petroleum-based transportation.
It has further been observed that the Dow Jones Industrial Average itself is inversely tied to the price of crude oil. Notice how, historically, the Dow tends to rise during times of a falling crude oil market (as per the mid-to-late 1990s) and how it tends to fall during a time of strengthening oil markets (as during the Persian Gulf War). The oil market, of course, has been very bullish the past few months and has even exceeded its previous decade high of the Persian Gulf War. It should therefore not be surprising that the Dow has been stalling for the last several months as crude oil continues its strong performance.
It is important that we gain an understanding of where crude oil will likely head as we move into the new millennium. Besides being a leading indicator for inflation, the crude oil market also serves as a strong indication of what may lie on the horizon for the world's political and economic affairs. And of course, it will give us a strong indication of where the industrial stocks are likely headed.
While the trend has been undeniably toward higher prices in the oil market for the last several months, we freely confess that we have no idea whether it will ultimately resume its upward march into the Year 2000. On Friday, Nov. 19, December crude oil futures no the NYMEX staged an ominous intraday move to the $31 mark-a record high level for the decade! By the end of the trading day, however, crude oil futures had almost completely retraced these gains to close at only slightly above its previous close. This leaves a bearish one-day bar chart reading known in Japanese Candlestick literature as a "shooting star." However, the move occurred on average-as opposed to high-volume; thus, it may be only a temporary top. We won't know for sure until the market itself gives us more information from which to forecast.
Even if the oil market has topped out, the impressive run-up to $31/barrel must have some forecasting implication for the immediate-term outlook, especially since the rising trend continued over such a long period. The obvious question is, "With Y2K only a few weeks away, is crude oil telling us that something negative is about to occur?" A possibility, but we'll find out only at the stroke of midnight, Jan. 1, 2000.
Actually, we fully expect the Dow to join the OTC stocks in the ride higher over the next couple of weeks since the leading indicator for the Dow blue chips-IBM-has already begun moving up from its consolidation base on high volume, just as we predicted three weeks ago. The trend is now up for IBM and that can only mean the Dow will soon follow.
If the Dow Theory still holds true (and we believe it does) then the Dow Jones Transportation Average must begin rising in the next few weeks. The pivotal point for the Dow Transports is 3100. For the Utilities the level to watch is 310. Once these crucial levels are overcome on rising volume we can know for sure that the bull has firmly descended upon the industrial sector, as well as the tech sector.
For those of you out there who may actually still be bearish on equities, we would remind you of a basic technical principle that applies in the case of the present market. Stocks, like virtually everything else in the created world, move along the path of least resistance. In technical jargon, this is known as "ease of movement." The path of least resistance can always be detected by noting in which direction equities tend to move most freely and easily, and with less volatility. In the case of the NASDAQ, that path is most emphatically up. Actually, we do not comprehend how anyone can be bearish on this market right now since upside volume has been swamping downside volume, even on the "down" days (which are almost non-existent). Volume alone is screaming "bull market!"
Our volume indicators present a pictorial representation of this bullish trend. The chart showing 5-day NYSE Advancing Volume is giving its most bullish performance we have seen in over a year, with the uptrend clearly visible. The chart showing 5-day NYSE Downside Volume is, in converse fashion, descending steeply. The Cumulative Volume Index (CVI), our most important indicator, has traced out a "V-bottom" on its chart and is now moving firmly higher after its summer decline. This means that an overall accumulation is taking place. Volume momentum, however, is still weak, which indicates that NYSE stocks will probably undergo at least a few more days of low-volume sideways-to-lower movement before resuming the upward trend.
The momentum outlook is also supportive of a continued push higher in the broad market. The chart showing 10-day NYSE momentum is powering higher, along with the 30-day momentum indicator. This shows that stocks have momentum on their side, along with volume.
Based on the latest readings of the CBOT put/call ratio, there seems to be way too much bullish sentiment out there. This doesn't mean that the bull is coming to an end; rather, it implies at least a brief pullback-maybe enough to shake out some of the bulls before resuming the upward rise. Be on the lookout for a possible corrective phase this week.
The best news for the Internet bulls came last week when both the CBOE Internet Index and our own proprietary Internet Index (composed of the five leading Net stocks) finally broke out of their respective triangle patterns. This was extremely significant since these indexes have been consolidating for the last three or four months. The high-volume breakout from the "coils" in these indexes are a show of strength by the Internet stocks. Looking at the daily bar charts for most Internet stocks is like looking through the window of a candy store-sugar as far as the eye can see. This is the complete opposite of what we saw this summer, when trying to find a bullish-looking chart in the Net sector was like trying to find a needle in a haystack. Get long the Internets if you aren't already.
All told, the impressive bull move we have witnessed in most U.S. stock sectors should continue into at least the first quarter of the New Year-maybe even until the spring. We do not anticipate any further brushes with the bear until later on next summer. That is a story in itself, but we'll address it when the time comes.
23 November 1999
Clif Droke is editor of the weekly Leading Indicators newsletter, covering the U.S. equities market outlook from a technical perspective as well as the general economic outlook. He is the author of the recently published book, Technical Analysis Simplified. For a free sample issue of Leading Indicators, send name and mailing address to firstname.lastname@example.org or mail to: Leading Indicators, 816 Easely St., #411, Silver Spring, MD 20910.
Also by Clif Droke
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