"The Dichotomy"

Bonds and the S&P continue to battle between the daily and weekly trends. In both, the weekly trend is "down/neutral." The daily trend in both June bonds and June S&P remains "up" despite today's sharp reversal lower.

The S&P has fulfilled all the necessary cyclic criteria for a top by rallying into May 6/7th and testing monthly resistance (and even spiking to within 1.05 of the unadjusted monthly SPR at 839.45/SPM). As stated in INSIIDE Track:

"This rebound confirmed a "B" wave rally--which could take the S&P back to the highs...but should not go much farther. 732.80-- 735.00/SPM is the only other resistance.

Ideally, the market will rally into May 6/7th, decline into mid- month and possibly provide a lesser bounce into May 27/28th". (05/01/97 INSIIDE Track)

At the same time, bonds were fulfilling comments from last week: "Considering the LHR levels of this and last week (110-06, 110-02), and other indicators, a continuation of this rally is likely. The first level to look for a peak (around May 6/7th) is 110-14 to 21. Traders should raise sell stops on 107-13 longs to 108-27 and take profits at 110-12." (4/30/97 Alert)

If the weekly trend prevails, June bonds should test 108-07 before the week is out. Similarly, June S&P should test 795.85 to 796.20/SPM. This would be the first valid confirmation that a top was intact.

However, to further cloud the issue, both bonds and the S&P went straight to their daily HLS levels today...and held. In the case of bonds, they are holding the 5/01 low, whereas the S&P remains substantially above the 5/01 high.

In other words, there is still much confirmation necessary before a top can be assured (relatively speaking). The first thing I will be watching for is a daily close below 109-06/USM and below 815.25/SPM. If this occurs, it should trigger a move to 108-07 and 796.20.

The only revision to current trades is to raise sell stops on long June Japanese Yen positions to 79.26 or a daily close below 79.59/JYM.

...End 5/07/97 Alert

Beginning 5/03/97 Weekly Re-Lay...

OVERVIEW: Bonds and the S&P finally confirmed what has been suspected for the last two weeks: the sell-offs were not following through and were warning of an imminent rally.

The S&P reversed higher off minor support with near pinpoint accuracy--signaling traders to take profits of about 13.00 and 8.50 points, which meant an average of $5,500 per contract should have been gained.

At the same time, bonds gave the buy signal that traders were told to look for--providing an entry into long positions at 107-13/USM. June bonds have rallied nearly 3-00 basis points since that time and just came within 2 ticks of the recommended profit-taking level of 110-12. If profits were not taken (since the exact level was not hit), traders should still be holding these longs with $2,500 per contract in profits.

Long trades in silver are holding on to small gains while gold longs still have losses--and should be exited very soon if they do not rally immediately. Traders should have also taken profits in long crude positions and should be holding long yen positions at about break-even.

STOCK INDEXES: Traders have asked me why I was so skeptical of short trades which were consistently working well. Sometimes you can put your finger on the exact reason and sometimes you cannot. In this case, there were a few rules which played into my suspicions. The most important were:

#1--The weekly trend had just turned down. This is a good sign for the overall bearish scenario. However, the reversal of my trend pattern is often the most likely time for a reaction against the newly established trend.

I have explained this theory many times in the past, but Elliott Wave principles probably demonstrate it the best. To paraphrase Mr. Elliott's rules, "The first wave is part of the turning process and is usually heavily corrected by wave 2."

The most likely time for a reaction of this nature--in order to frustrate reversal traders and the doom-and-gloomers--is immediately following confirmation of a down-trend.

#2--The cycles were in no-man's land. I had explained for the last couple months why I expected a sharp correction in April and why it would be complete by the 22nd. The next projected down-turn was not until mid-May.

This means that the intervening period is the most vulnerable to sharp reactions--as we saw the last two weeks.

#3--The daily trend, which had reversed higher after hitting the April 14th low. As I stated in last week's update (4/23/97 Alert):

"The S&P is in a weekly down-trend and a daily uptrend. This means the two will battle until both are in synch. Since the weekly trend is the negative one, weekly cycle highs may override daily cycles. If this is the case, the rally in stock indexes could extend into next week."

#4--The intra-month trend which had turned up, and had even gone back to test support before surging into the month-end. As I also stated last week and again this past Wednesday:

"The S&P is above both the weekly and monthly opening periods...which gives the upside the benefit of the doubt into Friday and possibly into April 30th." (4/23/97 Alert)

#5--The final confirmation came early Monday morning when the S&P fulfilled several comments from last week's update. Among them were:

"If the S&P sets a low on Monday--and if it holds above 758.30/SPM, we are still likely to see one more rebound to recent highs.

One minor level of support which could come into play on Monday is 766.80/SPM (give or take .50 or so). If the S&P tests this level in the first 1-2 hours, traders should lower the stops on 1/2 of these shorts to .55 above the existing intra-day high (or 769.35/SPM-- whichever is higher).

Trading Strategies--Traders who sold June futures or bought June 750-760 puts at 782.25/SPM should dramatically lower buy stops and make this trade continue to perform. Buy stops should now be at 774.95/SPM and should be trailed 6.50 points above any subsequent new lows." (4/26/97 Weekly Re-Lay)

June S&P opened on Monday, tested 767.15 (only .35 from the optimum point--and within the prescribed range), and immediately reversed higher...signaling a final rally back to the highs.

Trading Strategies: I expect to see a top by mid-week, so traders should be vigilant in looking for reversal signals. Judging by monthly resistance, a spike up to 835.00 is feasible, but much of that will depend on Monday's action. No new trades.

INTEREST RATES: 5/03/97--Bonds were mimicking the S&P (or vice-versa), and I recently expressed skepticism over the immediate prospects for another sharp decline. Last week, I also explained that "there are certain characteristics of an upward correction which has not reached fruition."

June bonds held near-term support (106-31 to 107-05) and gave another warning signal based on my interpretation of one of Charles Drummond's patterns...which I use in the exact opposite way that is most common. As I described last week:

"For those familiar with his work, it is the trend run. For those unfamiliar, suffice it to say that a trend run is generated by three consecutive closes below his pivot ("point") calculation. Normally, this is construed as confirmation of a developing trend. I, however, use it in the exact opposite fashion. When a market is in a trading range--which bonds currently are--a trend run is more often the end of a move rather than the start."

Traders were advised to "look for a 2 close reversal higher to initiate 1-3 day longs." This came at 107-13--triggering longs which are still intact (unless profits were taken at the highs on Friday). As conveyed in the 5/01 INSIIDE Track, "Depending on how bonds approach this resistance level [110-14 to 21/USM, as conveyed in the 4/30/97 Alert], they could even spike up to monthly resistance at 110-29 to 111-14/USM. However, a high should be intact by early next week--based on both daily cycles and the weekly trend. If this is the case, the remainder of May should have a downward bias--with 107-07 to 107-16 the first downside objective.

Intermediate traders should try to sell 110-21 to 111-04/USM and place buy stops at 112-17. Look for a test of 107-16 by month-end. If this trade is triggered--and begins to follow-through lower-- 105-16 may not hold for long. Longer-term traders should execute this trade in the September contract at the equivalent levels." (5/01/97 INSIIDE Track)

Trading Strategy--Traders should be long from 107-13/USM and raise sell stops to 109-04. Take 1/2 profits at 110-11 and 1/2 at 111-03. Intermediate traders should use the strategy given in INSIIDE Track (repeated above) to enter short positions. The weekly trend gave a second neutral signal (against a prevailing down-trend) and needs a weekly close above 110-10 to reverse to up. Conversely, June bonds should NOT close above 110-10, if these short trades are to work.

CURRENCIES: Trading ranges are narrowing--which often precedes a final spike in the direction of the trend and an equally dramatic reversal against the trend. We are also in the midst of several 7-related weekly cycles--corroborating this analysis. As stated last week,

"The Mark...is now poised for a final spike lower. With weekly support (and the HLS) ranging from 57.37 to 57.53, and Monday's HLS at 57.40, I expect to see this level tested.

The yen has a similar set-up with 79.34 and 79.36 representing the most recent daily HLS levels, while the weekly SPS is 79.33 and contract lows are at 79.36/JYM. This range of support is likely to be tested, though a spike down to the weekly HLS at 78.76/JYM could ensue.

Since both of these currencies are approaching--or re-testing-- strong support levels, and we are now at a synergistic cycle low (primarily related to the "Cycle of 7"), I am willing to take a chance and attempt to pick a bottom.

Intermediate traders--who are willing to take the added risk of picking a bottom--should buy...the yen at 79.41--with sell stops set at 77.79...

These are higher risk trades and are geared more for intermediate risk parameters (since they will require rallies of at least 3 times these risk amounts to fulfill sound reward/risk criteria)." (4/26/97 Weekly Re-Lay)

Most of this analysis remains intact and the yen has already triggered long positions...but has not accelerated higher, yet. The mark is still poised to spike down to 57.36 to 57.47/DMM, since this is now the last 3 days' HLS levels, and 57.33--since this is the coming week's LLS.

Prior to this, the mark could find support at the low (57.68), which is also near the coming week's SPS and HHS (57.63, 57.69/DMM).

Trading Strategies--Traders who bought the yen should raise sell stops to 78.39 or a daily close below 78.94. I say this because new support aligns around 77.15 to 77.33/JYM--so either the yen will hold at current levels or spike down to this support. In either case, stops should be raised. Those who did not buy the yen should now do so on a daily close above 79.80/JYM.

PRECIOUS METALS/ENERGY: Gold/Silver--Silver continues to hold above strong support (466.0 to 470.0/SIN), but gold is having trouble reversing off critical intermediate support. In many cases, a test of the HLS (see 4/19 quote) does not signal the exact low--but is a precursor to a final drifting lower over the ensuing 1-3 periods (in this case--weeks).

"...Gold penetrated the minor support and went directly to intermediate support at 339.0 to 341.0/GCM. This level encompassed all 5 of the last 5 weeks' HLS levels, as well as the monthly SPS...so it is a powerful convergence of support." (4/19/97 Weekly Re-Lay)

Daily trends remain down and this exercise in bottom-picking needs to perform...or be aborted. A daily close below the 5/01 lows should be used as contingent risk on long positions, since a close below this will likely lead to another wave down.

Trading Strategies--Aggressive and intermediate traders should be long July silver at 471.0 and June gold at 346.0 to 347.5 and should place sell stops at 462.0/SIN and 339.2/GCM...but place contingent stops on a daily close below 467.0/SIN and 340.4/GCM. July soybeans are now capable of spiking up to 921.0 to 925.0, after reversing the daily trend up this past week. The weekly close reinforces this, since it fulfills last week's analysis--which stated:

"July soybeans gave a weekly inverted 3 period head & shoulders, but will need a weekly close above 874.0 to confirm the pattern and target a rally to 923.0."

Use a daily close outside the 5/01 range to determine the minor trend. Friday's (5/02) outside day reversal higher was not confirmed by a 2 close reversal--so watch Monday's action closely. A daily close above 887.0/SN will signal traders to buy beans for a surge to 921.0. 874.0 is the risk, so this should determine whether a valid buy signal is generated (since a 2/1 or 3/1 reward- to-risk ratio is warranted for a prudent trade).

June Crude--Crude stopped out all longs from 19.45-.52 at 19.81 and gave a daily and weekly 2 close reversal down on Friday's close. This market appears headed for 18.75, so traders should attempt to get short (if they did not go short on the 5/02 close) at 19.82 to 19.91.

Trading Strategies--Aggressive traders should sell 19.82 to 19.91 and place buy stops at 20.36/CLM. Take 1/2 profits at 18.80/CLM. ...End 5/03/97 Weekly Re-Lay

May 8, 1997
Eric S. Hadik
Jeneric Trading Corporation
P.O. Box 2252,
Naperville, Illinois

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