No end in sight

The Dow Industrials, NYSE, and Nasdaq are all at resistance levels which they must overcome in order for the rally, which began last march, to continue. The TSE 300 is where it was last September and, if it can break through that level, its next major resistance is at about 8200.

The Pluses

1. The good news is that at the end of July, there were signs of a fair bit of accumulation going on, especially in the Top 30 stocks.

2. Another positive is the fact that the Tuey Special indicator got way down into oversold territory at the end of July. However, it's still going down which means that there's still negative momentum. In order for the Tuey Special to remain at the same level at the end of August, the TSE will have to rally to about 8300. Anything less than that means that the indicator will move lower.

The Minuses

Unfortunately, there are still a lot of negatives.

1. On the daily charts (not shown) of the Dow Diamonds, S & P iShares, and the Nasdaq there are upside gaps in the first week of April. Gaps occur when the low price low for a particular day is higher than the high price of the previous day. In my experience, these gaps tend to get filled-in, which means that these three securities will have to come back down to their March-April lows. If the Diamond and iShares come down, so will the Dow and S & P.

2. Another thing that disturbs me is the fact that there have been no buy signals by any of the volume lines for any of the stock averages. They don't all always give them but, at major bottoms, at least some indexes give buy signals. If the markets correct to fill in the gaps, there is a very good chance that the volume lines won't confirm the new low prices, and then we'll have our buy signals.

3. Another nasty little development is a sell signal by the U. S. Dollar's volume line in the second week of June. You can never be sure what currencies are going to do because governments manipulate them. However, if the Dollar weakens substantially, neither the stock nor bond markets will react favourably.

4. Now let's examine Sentiment. As far as I can tell, the most reliable indicators are the Investors' Intelligence Bulls and Bears. Last February, the Bulls got up to 61.8% and the Bears down to 30.0% and the markets sold off. Then, in April, the Bulls dropped to 43.9% and the Bears moved up to 42.5%-almost even. The market rallied. At the end of July, the Bulls had risen to 52.6% and the Bears had declined to 23.7%. It wouldn't take much in the form of a strong rally to drive the Bulls above 60% and the Bears below 20%. That would spell trouble.

5. In spite of the fact that the Fed has cut the discount rate seven times since the end of last year, the U. S. banks have been very stingy with respect to their lending practices. That isn't much help to companies that have been suffering from the economic downturn and need cash. Furthermore, investors continue to be kept off guard with bad earnings reports.

6. On top of all this, stock markets tend to have major bottoms in the second year of a Presidential term. Notice I said second and not first. The reason for this phenomenon is that governments like to get all the tough stuff out of the way in the first two years and then "kiss up" to the voters in the last two years so they can get re-elected. In the current situation, tax cuts and lower interest rates have to be positive for the economy and the markets in the long run, but they take time to filter through the system.

Although the market is trying to shrug off all the bad news, there are still a lot of problems out there. There's an old adage with respect to the stock markets which seems particularly appropriate in today's climate: "When in doubt, stay out."

PATRICK TAYLOR IS AN INDEPENDENT TECHNICAL ANALYST

Copyright Canadian Shareowner Magazine Inc. Sep/Oct 2001
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