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Technical Traits…Faux Distribution?

March 15, 2002

Distribution of sorts . . . has been evident for over a week now, as per warnings in these Daily Briefings, not to join the crowd in chasing breakouts, as welcomed as of course they are, in harmony with the idea that projected 'confirmations of strength' in recent times, basically put the frosting on the most immediate aspects of the market's recovery from our February W bottom lows. There's a certain esoteric aspect to the current market, as we'll touch upon that a bit later in tonight's remarks.

Wednesday's behavior take was dampened from the start on the Retail Sales reports although we don't think that really should have watered-down enthusiasm. Strength of economic recovery is not the key issue right here; profit-taking was expected to be a fixture between intraweek rally attempts, and the recent move was long-in-the-tooth before the week even started, for the post Feb-low phase. Penetrating recent highs would be welcomed, but may be a bit unrealistic for the moment given the backdrop. It's one reason we thought the behavior of the Dow Industrials lately, aided by firmer action in the Banks and Oils, was characteristic of areas moving, that needn't have a great impact on advancing capabilities of the broad market; hence masking neutrality.

As for the Retail Sales, we would think the flagging rate of ascent is not a negative; in fact it is a positive, because it dilutes pressures to move the Fed's policy to neutrality from expansion, and brings into starker question the wisdom of hiking rates officially. The market takes care of long-rates, which are neither at their recent peak or trough, and there's no reason presently to anticipate rates driving back to what I proclaimed as a low point last October/early November, in the wake of the post-attack rate drop, and just a few weeks after the proclaimed low for the Senior Averages in late Sept.

The Oil price increases, and trimmed production levels, do not bother us particularly; at the same time most attribute recent hikes typically to economic recovery. Well that could do it, but it is more artificial than that, having to do with production limits that we suspect are not going to be continued into the Spring, particularly if (or as we suspect will be the case) Russia and other non-OPEC members rekindle a higher production level. Hence, while a full explosion in the Middle East could always 'spike' oil, there's no reason for median prices to exceed the band we suggested; of the mid-'teens to mid-20's, in general. Movement outside the range should be unsustainable extremes, which will garner media publicity, but -barring new war(s)- could be treated inversely.

Cautious commentary about technology certainly created a drag on Wednesday; very careful remarks by some firms actually, that we take issue with, despite believing NASDAQ and Nasdaq 100 (NDX) areas were ripe for recent corrections, as these work-through the pattern call. Then there was the growing discussion of a 'cattle issue', which while certainly not creating fears of terrorism, conjured up fears as to what the economic impact on the Nation could be, if bulls suffered hoof & mouth disease, or even if food attacks occurred. (Balance of this topic reserved for readers.)

Also troubling to markets, but little noticed, was a statement by North Korea that was very close to abrogating their 1994 Agreement regarding freezing nuclear technology going forward; something that should be bothersome, both given the rising tensions, as well as the (idiotic?) transfer of presumed non-weapons-grade reactors to them in recent years. Such matters tend to emphasize the nature of the world we live in now, which is never something that's too far from the backs of many minds anyway, I think.

The Fed Chairman made some interesting comments to a private gathering. What I gleaned from them was mixed: an indication that consumer spending may have some limits, while investment productivity is very dependent on savings rates (reserved). At some point the Dollar may weaken, and a repatriation commence; that's been the risk for years (even longer) really; though international backdrops aren't conducive to expecting such money-transfers in earnest during the ongoing crisis conditions. If that raises question about whether financial risk increases after others risks, so be it. Just now, it is (as some terrorists readily proclaim) their aim to get people to sell Dollars.

In any event, the history of American finance is replete with examples where eras of peace were more beneficial to markets than war(s), and we don't see that necessarily changing. As for war itself, market bottoms have historically occurred during earliest signs of victory, though in the current case, only imprecise determinations of results are available, and markets bottomed in days immediately after the post-attack panic.

Of course the greatest risk for higher rates relates less to the Fed, and more to fairly robust economic behavior, which would diminish the attractiveness of stock purchase decisions, in the face of rising low-risk returns from the debt sector. We think most of the discussions in the field are still premature, because of the sluggish recovery in at least some key areas, and the necessity to be defensive about doing anything that at any level could possibly abort the nascent recovery, which is only about 5 months old now; with its origins (as postulated) approximately at the time recession was officially proclaimed by Government. Probably this is more of a discussion for 2003 or beyond.

At the same time Mr. G touched on demographic trends; particularly 'baby boomers', that over the course of the next decade will increasingly require services and care (as they age gracefully). Well ahead of the pack, the Chairman observed that the same era will concurrently see fewer productive tax-payers in the U.S. able to help sustain demands for such services. Well, we know that already; it's a reason for needing the economy to prosper in the years just ahead, basically from the 2001 lows to the 2006 possible cyclical peak, though that's too far ahead to speculate seriously as of yet.

Technically . . . there is a very weird period developing. It's very hard to analyze on a short-term basis, but has the potential to be something really fascinating. That's the 'esoteric' action I mentioned at the outset of tonight's commentary.

If you look particularly at the Nasdaq 100 (NDX) on an hourly basis, you'll see what is normally a nasty, if not outright negative, pattern. (Interpretation reserved.) While this is a set-up for the short-term fall already ongoing of sorts, and to be interrupted, we can't help but also notice that it's hourly oversold already, and that a break that gets bears excited about the downside, could be (something interestingly different as outlined to our readers). So it could be a 'hook' of sort, with a resulting swing aspect.

Similarly take a look at the hourly basis June S&P; incredibly negative cast to it; just a very nasty looking chart (not seen on the longer-term perspectives most commonly viewed by all). There are no spatial gaps, just gaps-up and down (such as referred to in recent commentaries), which thus fail to appear on daily or weekly charts. But as it is easy to turn and get negative on these, and while that might generally be the case at first blush on a very short-term basis, these kind of structures could be (something else than what they appear to be; sorry, interpretation reserved for our subscribers).

You might recall my remarks a couple weeks back about resistance in the 1170's for the S&P; and that the bullish alternative could be a move up there, and then a drop to the vicinity (level reserved), which we thought logical coming of our 'W bottom'; after which we could (continued to readers). Add Expiration, a subsequent FOMC meeting, war(s), and it suggests a lot of volatility on-tap, and some right here.

Hence, we've discussed how the bullish alternative may not be what superficially first strikes one's visual references, with outcomes that would subsequently be very wild.

Daily action . . . continues to attempt capturing moves that emerge from congestion that dominates the moment-to-moment action; though it is far less important that the picture and interpretation just provided, especially if we're right about what it means.

Meanwhile, June S&P guidelines (this time from a traditional annual or just six-month perspective, chart-wise) did manage to conclude slightly net ahead for Wednesday; a session much milder than most recently, and from which we've extracted consistent gains most of the time. Just now, the (900.933.GENE and direct-dial) hotline (update mid-morning Thursday) reversed a short, so speculatively long June S&P from 1155).

At the same time, the Dow Transports continued easing a bit, after bringing in high-priced buyers following 'confirmation' of a six-month advance in the sector, of almost an astounding 50%. Several weeks back we suspected the sector would have such a breakout; which would get some analysts excited, but that as it 'affirms' what we've expected since September's panic, that it was essentially meaningless in terms of the ideas being floated of new stock investment in the sector, at least on the shorter-run.

The closest markets gets to a bearish fundamental arguments is valuation, or 'lag' in economic improvements being translated into justification for any immediately higher stock prices, primarily due to multiples remaining relatively high, because earnings in many cases aren't yet visible, and the new transparency in reporting standards tends to be a bit sobering. However, no logical investor failed to see through the veil some firms previously wore to obfuscate the manner in which they estimated results, so while we understand this issue, we find few who are particularly surprised by it. In fact, it is a bit of a market ruse, as it keeps investors and analysts cynical about value, while a market progressively works to higher levels, albeit with the churn following the short-term topping, which was expected, and with the 'weird' pattern generated. Aside from 'event risk', we suspect that volatility is going to be the increasingly dominant quality.

Hence, while we've properly captured most moves from the rocky early March start in harmony with the pattern call for a rise thereafter (versus decline like February's), we cautioned against getting too short-term excited, after so many well-meaning, run-of-the-mine, technicians and analysts have belatedly embraced the condition that we've forecast from the panic in the wake of the attack on America last Fall. Remember; the 20th and 21st of September were screaming buy points, in a general sense, whereas the 'W bottom' in February was a test of that low. Risk tends to increase when one is buying after it feels particularly comfortable, even if it goes to a higher plateau. And it was our specific warnings that S&P recent thrusts would be repelled from the 1170's.

In summary . . economic data continues acceptable; as the market pattern flinches from its recent toying with a further nominal breakout, as forewarned in these past several days, as being short-term extended; albeit not from longer-term perspectives. Eventually we see an unusual evolution from this; anyway expect daily volatility to be choppy just now, as outlined, and for bears to perspire vehemently if the subsequent week or two yield what we've postulated, subject to reassessment.

Today, easing from extended daily overbought some more, the McClellan Oscillator readings faded to about +31 for the NYSE, and to +20 for the NASDAQ market. Most breadth readings were was moderately negative on both the NYSE and NASDAQ; behavior typifying trading reversal continuations; and contested action taking place around midweek, in a challenging combination of Expiration coming up, and proximity to the FOMC meeting later; all of which is against the technical backdrop described.

Our prayers and thoughts remain with our troops fighting anywhere in the world, and as events of the week explicitly continue to remind us of various new risks the Allied fighting forces face, or may face, we try to keep in mind that the unexpected remains a risk; while all free peoples certainly hope for the best.

A majority of the initial move from our forecast February W bottom low had occurred of course, and that remains as it should be, once investors or analysts viewed upside as too easy, much as we suspected would be the case on 'confirmations' of strength. Maybe even rebound towards this week's Expiration; but more or less for any trading purposes; not necessarily time to get excited about new investing, as suggested for a few days, allowing the market's outline oscillatons, with news-related variables. Right now at mid-evening, S&P on Globex has a -700 discount; that is actually unchanged. A slight deterioration of the deep-discount could firm the S&P early-on Thursday; if it does that we might fade it on the 900.933.GENE hotline, but then buy ensuing dips.

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