INSIIDE TRACK Prepared by Eric S. Hadik
The Wide-Angle View
(Big Picture For Long-term Investors, Fund Traders, Etc.)(January, 2001) STOCK INDICES: Weekly trends remain down confirming that cycles point lower into 2001. 11,750 remains as the fulfilled major upside target in DJIA with 9000-9380 as first major support. Investors should remain out of the stock market for the foreseeable future.
INTEREST RATES: (Opposite of bond direction)--Long-term uptrend with intervening down trend that could extend into June 2001 when interest rates could bottom.
GOLD & SILVER: Long-term downtrends have been basing since mid-1999 and are expected to turn higher in 2001.
DOLLAR: Long-term uptrend exiting a key alignment of cycles in late October. Watch late January for next signal.
CRUDE OIL: Long and intermediate uptrends expected to reassert themselves in February 2001.
COMMODITIES: Soybeans are confirming an intermediate low and potentially the onset of a major rally. Other grains (and exotics) at lows. Copper has confirmed an upside breakout.
A Snapshot
Stock indices came within 14.00 points of hitting support at 1256.80 and bottomed during the recurring 69-71 day NASDAQ 100 cycle. Traders should have taken profits on December S&P 1320-1340 put options on 11/24 or 11/30-12/01 with average gains of $4,250-$5,500/option.
Bonds are at an important juncture and could pull back--instead of rally--into January. If so, it would likely lead to a new surge into mid-year.
Gold and silver are hovering at their lows. Long-term investors should be accumulating long positions for a potential 6-12 month surge. Intermediate longs should be added.
The dollar and Euro are confirming their projected late October extremes. The yen could not rebound and is setting new lows into key long-term cycles on 12/26-29.
Crude oil is confirming cycle highs on November 20th-22nd and is close to testing the lower end of this large, volatile range of congestion at 23.60. Look for a final low in January.
Corn and wheat longs--as well as sugar shorts--should be intract. Soybean longs are possible if a pullback occurs.
A Perspective On Cycles
Since this section of the newsletter has so much discussion on cycles, it is important that I reiterate certain specifics and criteria regarding the cycles I use, my perspective on them and some frequently misunderstood assumptions and generalizations about cycles.
I will repeat this from time to time so that readers will remember the foundation of my cycle analysis and not place too much emphasis on facets of cycle studies that should only be "points of interest"... or "food for thought."
I am often reminded that semantics are the cause of more needless arguments, misunderstandings, offenses, etc. than actual philosophical disagreements. What one person "thinks" the other is saying or--even worse in some instances--intending to say or mean is often dramatically different from what the speaker or writer is actually attempting to convey. And often it can be attributed to a single word or phrase.
I do not want that to be the case here.
Another important point is to compare apples with apples and oranges with oranges. Do not take one bit of cycle analysis and try to apply it to another and/or extrapolate it out to the "nth" degree. Since this would make an entire scenario contingent on the accuracy of an isolated piece of analysis, it is a very precarious and vulnerable-to-change means of analysis.
The following gives a brief description of my approach to cycles...
I take what might be characterized as a "centrist" view on cycles (call it "compassionate cyclism"). I am a strong believer in cycles. I am not a believer that cycles create, govern or otherwise strongly influence corresponding events, except as much as self-fulfilling prophecies temporarily exert an influence.
This is particularly important when distinguishing my views from those that adhere to an astrological approach to the markets. I believe that those methods might have some accurate means of measuring applicable cycles to human and/or market behavior. However, I do not believe that planetary alignments create, govern or determine these behaviors. Rather, I believe they are merely a much larger clock or calendar than the one to which we are accustomed.
I explained it in a similar way (to what follows) several years ago and hope this will help clarify my own view...
A cycle extremist would say that every time the big hand on the clock hits the number 12 and the little hand hits the number 5 (similar--in astrological terms--to an "opposition," though not a perfect one) and the sun is beginning to set, it makes most American workers get up from their desks (or other forms of vocation), punch the time clock and go home.
The electromagnetic pull of these two hands in this position--even though not enough to be measured a mere 3 feet away--would be credited as being strong enough to govern the physical comings and goings of millions of humans.
The same cycle extremist would then come up with a reason or a theory of why these clock hands do not have the same mysterious, all-encompassing power over our beings on the 6th and 7th days of each cycle (also known as Saturday and Sunday). The occasional miss on certain Monday's of the year would carry little statistical significance, so they would be dismissed as an anomaly.
However, the belief that these clock hands--even when represented by an LED readout--are the reigning power in our culture would be guarded with adamant and dogmatic tenacity.
Conversely, a cycle antagonist would argue vehemently that this phenomenon has absolutely nothing to do with why all these workers arbitrarily stop their work--often on a dime, like a market reversing abruptly--and that these workers' actions are irrefutably a case of random work and random walk. The 24-hour and 8-hour cycles--they would say--have absolutely no bearing on these events.
They would cite the 28% unreliability factor (Saturday and Sunday anomalies) as well as the various times throughout the year when this cycle stops working with no warning. Any mention of a cycle or a rhythm that influences or measures our lives would be ridiculed as superstitious or "hocus-pocus." They know what they believe so do not confuse them with the facts.
I argue the middle...
Cycles Time Or Measure Events Of Like Nature...Not Govern Them
I also contend that planetary movements are nothing but a larger calendar of events...as opposed to some mystical governing coalition of celestial bodies. First and foremost (in my mind) it is a Biblical principle that reinforces this belief. (See the book of Genesis where it is stated that the sun, moon, and stars were placed in the heavens for "signs and for seasons"...not for absolute and tyrannical governing of human life).
It is also a natural, human principle. Our bodies, our lives, our environment and our universe all work on various (usually constant) rhythms that can often be measured by some form of time-keeping device (clock, stop watch, calendar, tree rings, medical devices that measure various bodily rhythms, or whatever). In many cases, the markets are the same.
The rotation of the sun, moon, earth and all other planets measures our days...and our markets. They sometimes influence events, but do not cause them.
For those that believe in a Creator (as I do), both are evidence of a preordained design, all of which reflect His creation of cycles, mathematics, and science. To place one in dominion over the other or one in subordination to the other is to distract from the bigger picture. Each of them is subject to a greater power and a greater design than is inherent within them. They are both--or all--effects, not causes.
Even those that do not believe in a Creator have to rely on these rhythms in order to measure past events, etc. as support for their belief structure. Without them, there is no consistency and no means of definitively measuring or determining any past event. In both cases, the cycles and rhythms remain constant and dependable.
It is hard to argue that there are rhythms throughout our world. Whether it be things as simple as the seasons, the gestation periods of humans and animals alike (which have somehow remained constant for thousands of years) or the more complex rhythms measured in molecules and the atom.
The primary argument, then, is whether they govern or measure events in our world.
I believe that the markets, politics and human existence all repeat certain cycles as Solomon discussed in the book of Ecclesiastes ("The thing that hath been is that which shall be...there is nothing new under the sun").
Often larger cycles exert influence over smaller ones...and vice-versa.
Often, the "governing" (from a measurement standpoint as opposed to a "cause and effect" type of relationship) cycle is elusive.
Often it switches with little or no warning.
This does not diminish the existence of cycles, but merely shows that we do not know everything...and do not understand all there is to understand about cycles (or the market for that matter).
More than anything, cycles need to have a practical aspect to them when being implemented in market analysis. That is why I refuse to enter, exit or recommend a position without strong corroboration from time tested (objective) indicators and without a definitive assessment of risk and reward. To do otherwise is ludicrous.
I also believe that implementing cycles is a "numbers game" (for lack of a better term) just as is trading. The important factor is not as much whether an individual cycle is the Holy Grail, but whether it can be integrated into a disciplined approach to analysis...and ultimately to trading. The bottom line is whether it produces positive results over an extended period of time.
The 90-day earthquake/volcano cycle I have often cited is an example of this. It is not perfect, by any stretch of the imagination. It is also not geographically precise or intensity specific. However, it is a good example of a natural rhythm that I cannot explain...but nevertheless respect. In more instances than not, it has presaged significant earth movements and disruptions. (Mid-January is another occurrence.)
So, you can call me a cycle pragmatist if you wish but that gives a basic idea of how I approach cycles, how I treat them and how I attempt to integrate them into trading.
Stock Indices
Long-Term (3 Months+) Outlook
"The weekly trend in the SPZ is the only one that has not reversed to down...It needs a weekly close below 1331.00/SPZ to do so. If this takes place between now and mid-January--when intermediate cycles trough--it will be a negative omen for the coming year...Stock indices could decline into September 2001 if the October 18th lows are taken out in the coming months. This is due to several distinct combinations of cycles and would represent an even closer parallel to 1973-1974 when the market lost almost 50% in just under 2 years.
"The NASDAQ 100 has already bested (or should I say "worsted") its '73-'74 decline so there is already one parallel to that infamous period. It is spiking below intra-year support (2661-2775/ND) and is on the verge of attacking intermediate support at 2320-2375/NDZ. It must hold above this range to maintain any possibility for a decent rebound before a complete collapse. Cycles still portend a rebound into December 8th-11th and then another sell-off into mid-January."
This was the 11/30 analysis that was quickly validated by the action in both the S&P 500 and the NASDAQ 100. The SPZ (and SPH) closed below its trend point, reversing its weekly trend to down. The NDH dropped to its support, spiking as low as 2213 intra-week, but giving a low weekly close of 2469/NDH on 12/22. This should initially be viewed as support holding and could give way to a rebound--instead of the previously expected decline--into late January.
The reason for including these comments in the "long-term" section is that the action of the next 3-4 weeks will have a strong bearing on what I expect for the entire year of 2001. If the indices rebound into January 17th-19th and do not reverse their weekly trends up, it will be a negative omen for the ensuing 6-8 months. More on this next month...
Intermediate #2 (1-3 Months) Outlook
At least one item is beginning to change for the near term and the overall outlook in stock indices. So far, the scenario for a bounce into early November, a decline into late November, an ensuing rebound into December 8th-11th and a subsequent decline into mid-January has remained on track. However, a few indicators are signaling a potential change for the period between now and mid-January. The 12/23/00 Weekly Re-Lay put it this way (and also further explained my views on cycle analysis, the topic of this issue):
"Occasionally, an inversion will be signaled early on due to attained price objectives in line with conflicting (smaller/larger degree) cycles. This could be the case currently in the stock indices. For the last two months, the projected scenario has been a brief rally in early November followed by a sharp decline into late November, a quick rebound into December 8th-11th and an ensuing drop into early-to-mid January.
"...if the daily trends reverse higher, it would alter this. Since I have stated stock indices have cycles in January and could extend this decline to September, there is a chance that January could see a high instead of a low or both.
"The first indicator signaling an impending low is the weekly HLS synergy discussed last week...the NDH spiked right into its support at 2060-2245 and the SPH came within a few points of its support at 1243-1262.40/ SPH...the NASDAQ bottomed during such an accurate intermediate cycle (69-71 day cycle, discussed in the 12/20 Alert), there is a good chance that a low has been seen and that a rebound into mid-January could take hold...January 17th-19th is the strongest period for a peak."
The 12/28/00 A.M. Weekly Re-Lay Alert added these observations (since 2 of 3 daily trends have reversed to up):
"Stock indices are reinforcing the idea that a rebound into mid-January is unfolding. On 12/27, the DJIA and SPH reversed their daily trends to up while the NDH missed by just a few points (it needs a close above 2519). This usually precedes a correction, so do not be surprised if 12/29 or 1/02 sees some new selling. However, if this is truly the start of a rebound into mid-January, the next correction should not reverse the daily trends to down.
"The odds for a 3-4 week rebound have moved from about 30% to about 45%. If the DJIA can close the week above 10,720 and the SPH can close above 1357.50/SPH, they will complete weekly 2 close reversal buy signals and increase the probability to about 60%. If this occurs, a pullback into 1/03-05 will likely be the best opportunity to buy the indices."
So, that about sums up the near-term outlook. If the NDH can close above 2519, I expect a quick pullback in early January and then a rebound into January 17th-19th. If key resistance levels (1412-1423.00/SPH, 3048-3225/NDH, and 11,750/DJIA) are not taken out and if the weekly trends do not reverse to up and if certain objectives of a normal advance (11,650/DJIA in particular) are met during this rebound, the time would be ripe for the start of a new decline.
Trading Strategy
Intermediate traders should have bought SPZ 1320-1340 put options up to 1438.00 (average entry price around 11-14.00 points, respectively) and should have exited between 11/24-12/01 at prices ranging from 32.00-42.00 down to 24-30 points with average gains of $4,250-$5,500/option.
If stock indices rebound into January 17th-19th, without providing new lows in the interim, traders and investors should begin looking back at the short side of the market...at least into late March/early April. Specific recommendations will be provided--as they become clear--in both the hotline and upcoming newsletters.
Interest Rates
Long-Term (3 Months+) Outlook
Bonds are still targeting an important turning point for mid-to-late January 2001. Resistance remains at 105-27 up to 106-19. This analysis has not changed for months and bonds have now come very close to hitting this target (for all intents and purposes, they have fulfilled this projection since the 12/26 high was 105-23/USH) and the time for a prolonged period of consolidation could be close at hand.
As conveyed last month, bonds should peak during the week of January 15th-19th or January 22nd-26th and then decline in what could be a quick and sharp correction. However, since they are attacking the higher upside objective Bonds might not drop as far before mounting another rally.
Intermediate #2 (1-3 Months) Outlook
Though bonds will maintain important support at 96-19 to 97-11/US and secondary support at 94-12 to 94-24/US, the level that should be watched closest in the coming months is 100-24 to 101-10/US. If bonds pull back to this support leading into weekly cycles on February 19th-23rd, it will represent a strong combination of price and time support zones and should generate a new rally.
Though I try not to give too many variables or scenarios--which end up diluting each other and sometimes rendering analysis ineffective--I do feel compelled to discuss one alternate possibility. The reason is that bonds have already reached their ideal upside objective (or at least they got within 4/32 of it) before reaching their next important cycle.
As a result, what I thought would be the low-high phase of this cycle progression might turn out to be another low-low phase preceding an 18-week rally. If bonds cannot take out 105-23/US by mid-January and/or do give a weekly close below 104-25 on 12/29/00, it will indicate to me that bonds are more likely to decline into 1/15-26/01 and then mount a strong surge into late May/early June.
Another reason for suspecting this is based on the daily charts. Bonds have just peaked during some minor/ intermediate cycles between both their highs and lows. They have seen an 8-week high-high-high cycle unfold and a 7-week low-low-high evolve at the same time...both pinpointing the week of 12/26-29/00 for a peak. The daily charts identified 12/26 (48 days low-low/48 days low-high between the 9/21, 11/08, and 12/26 turning points) as likely for a top.
In addition, the 5/08/00-9/01/00 rally lasted 116 days. Another 116 days projected from the 9/01/00 peak projects 12/26 as a top (low-high/high-high progression). So, 12/26/00 is an important alignment of cycles that was initially overshadowed by the January alignment. However, both may turn out to be equally significant.
If the 12/26 high holds, we could see a drop into 1/19-1/25 in line with this newly established cycle. This would also have Elliott/cycle significance since it would demonstrate a "4" wave equal--in at least duration--to the drop of the preceding "2" wave. Bonds first intermediate decline, of this 11 month advance, lasted 27-38 days in April/May 2000 (5/08 and 5/19 were a double bottom so either one could be valid). A similar 27-38 day drop from the 12/26 peak would bottom between 1/22 and 2/02/01.
So, there you have it. There is a strong case to be made that bonds could drop into cycles in late January if they can close below 104-25/USH on 12/29 and if they can give a daily close below 104-15/USH on 12/29 or 1/02.
Trading Strategy
No new trades.
Inflation Markets
Long-Term (3 Months+) Outlook
The long-term outlook remains the same in gold and silver. The trend is down but at a point that is most likely to see a sharp rebound. This time period (through 2001) has been cited since 1998 as the probable time for a sharp move higher in gold and silver. Little has occurred to change that.
It is important to keep the action in gold in perspective. Though it remains severely depressed, gold is still above its 1999 low and also above its 10/00 low (which was also above the 1999 low). If it can hold above 263.0/GCG and give a weekly close above 278.5/GCG, it will indicate that a "3" of "1" of "3" wave is unfolding. Though this should give a boost to gold, the real surge is likely to be later in 2001 when the "3" of "3" of "3" wave takes hold.
Silver is similar in some respects and different in others. It remains above its 1997 low, which was above its 1993 low, which was above its 1991 low. It is roughly equal to its 12/98 low--showing a type of irregular correction from the 2/98, 750.0 high in this market. It has declined for longer than I expected but remains above major support at 420-440.0 and at 350.0. If this continues to be the case, it means the next rally will have that much farther to travel in that much less time. The current week is exactly 180 weeks from the 7/97 low, so the new year could usher in a new trend.
Intermediate #2 (1-3 Months) Outlook
It is important to repeat what has been stated several times: In most cases, 80%-90% of the move in price occurs during the final 10%-20% of time in a cycle. This is why I have identified early 2001 as the time likely for acceleration (higher) to take hold in gold and silver. However, until a valid buy signal is given, call options will remain the way to prepare for a rally in the first few months of the new year.
Trading Strategy
Intermediate traders should be holding February gold 290 and March silver 550 call options. Add April gold 290 and May silver 500 and 525 call options.
Commodities
March soybeans have reinforced their underlying intermediate uptrend, but appeared poised for another pullback. If the 12/29 close is below 513.0/SH, it will generate a monthly key reversal lower with a 2nd close target at 478.75/SH. Intermediate traders should buy March soybeans at 480.25 down to 472.0 and risk a daily close below 464.0/SH.
Intermediate traders should be long March wheat from near current levels and now risk a daily close below 263.5/WH. This market has the potential to begin a new multi-month advance if it can give a weekly close above 277.5/WH during the month of January.
Intermediate traders should be long March corn from 211.5-212.5 and should be holding these positions with accelerating gains. Move the stops on these positions to a daily close below 223.5/CH in an attempt to lock in some profits but still give enough room if corn is ready to take off.
Intermediate traders should have sold March sugar at 9.95 up to 10.30 and now risk a daily close above 10.51/SUH. The weekly trend is down and is poised to reassert itself if sugar can close below 10.35/SUH in the coming weeks. If so, this should trigger a decline to 8.90/SUH or lower.
U.S. Dollar/Foreign Currencies
Long-Term (3 Months+) Outlook
The dollar and Euro continue to hold, with near perfect precision, to the overall outlook which--since April--called for a strong dollar rally into late October and a subsequent sharp decline. If this decline extends into the week of 1/22-26/01 and can hold above 108.00, the dollar should be in a decent position to begin a new advance and potentially retest its highs. Conversely, if this correction takes the dollar much below 105.00, any ensuing rally should not reach the highs.
The yen is entering the 84th week (7 x 12, or completion x completion) since the last major low of May 1999. These 84 weeks have divided almost perfectly into 28 weeks low to high, 28 weeks high to high and 28 weeks high to low if a low is set in the current week. Though the yen has looked anemic throughout this year, there is another side to this story.
In 56 weeks, the yen has only retraced 50% of the preceding rally (that took only 28 weeks). In other words, it has been dropping for twice as much time, but only able to correct half of what it had rallied. This has the potential to give way to a new advance to begin 2001. Two important cycles are likely to come into play next year. The first is in late March (which also coincides with the end of the Japanese fiscal year) and the second is in mid-July. Either of these could usher in a major top if the yen has rallied into them.
Intermediate #2 (1-3 Months) Outlook
"The dollar and Euro have both traced out the first leg of their forecast correction and have likely completed the second leg of this move. The typically dynamic "3" or "c" leg will now be confirmed if the dollar can close below 116.32/DXZ. If so, it should spur dollar selling/Euro buying into mid-December and eventually into early 2001."
These 11/30 comments proved to be on target as the dollar and Euro entered their respective "3" waves. The clearest indication of this was the setup for--and confirmation of--weekly 2 close reversal combos on 12/08-15. This triggered a 2-3 week signal (short DXH at 114.51-114.68/DXH and long Euro at 87.64-88.00/ECH) that is just reaching fruition now (see 12/09, 12/12, and 12/16/00 Weekly Re-Lay updates for details).
Trading Strategy
Intermediate traders should have exited December Euro 8900 and 9000 calls in early December.
Energy
Long-Term (3 Months+) Outlook
The longer-term trend in crude remains bullish and is expected to reassert itself in 2001. Major support is at 23.60. If crude pulls back into late January or early February, look for the beginning of a new advance thereafter.
Intermediate #2 (1-3 Months) Outlook
Market action reinforced the November 20th-22nd cycle peak in crude and ushered in its sharpest decline of this bull market. This also validates ongoing analysis that crude should remain in a very wide and very volatile trading range during most of the year. As long as crude can remain above 23.60, it is expected to begin a new advance in February that should last into mid-April. Watch for a rebound and then a final decline in the next 3-5 weeks...leading into this expected low.
Trading Strategy
No new system trades.
January, 2001 Eric S. Hadik, Editor INSIIDE Track Trading P.O. Box 2252, Naperville, Illinois 630-585-9218
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