wmeubank@ocp.kcmo.com
INSIIDE TRACK
Prepared by Jeneric Trading Corporation
0n Your Marks...6900 And Counting
Considering that this is one of the most determining periods in the stock market--and therefore the entire financial spectrum--it is important to review, reiterate and if necessary reevaluate the outlook for the next 6-12 months. Since credibility for future projections is gained from the track record of past forecasts, it is necessary to first review what has led to this point...
November 1996 is the starting point for this analysis, when I began to reveal the ominous Cycle of 360. This cycle indicated that in little more than 8 months, a bear market should reemerge to the surprise of many. As stated then (11/96), "July-October 1997 is the most likely time for a bear market to return with a vengeance."
The market had some volatile swings between November and May--vacillating between 6300-7000/DJIA. As 7000 gave way, it became clear what the target for a final high would be and this was published not only in INSIIDE Track, but also in Futures Magazine.
Several indicators homed in on 941-958.00/SP and 8256-8362/DJIA as the price objective for a major top and July/August as the time for a final peak. In typical futures fashion, the S&P overshot this target while the Dow adhered to it with uncanny precision. The top was set on August 6th at 8259 and the weekly trend turned lower before August was through. The first confirmation of a top was in.
A decline in September unfolded but the S&P was unable to reverse its weekly trend--spurring me to conclude that another rally was inevitable and would carry the S&P to new highs, while the DJIA should top out at 8100-8177...both in early-October. Traders were advised to buy put options when this took place. A sharp correction was projected to follow--with a minimum objective of 6900-7100/DJIA by mid-November at the latest.
Judging by initial response, this sounded extreme to many--but time would tell. A rally ensued and the markets peaked on October 7th--with the closing high in the Dow coming at 8178...and traders buying puts. A quick pullback followed and the market again showed signs of needing a final bounce (to lower highs) before the ideal pattern would set up for a sharp decline. The second sign of a top was in.
The 10/18/97 Weekly Re-Lay warned that the DJIA should bounce to 8023-8045--which would actually be "the most bearish scenario for the rest of October" and would "accelerate the decline" projecting the low "as soon as October 28-30th." Over the ensuing two trading days the Dow rallied to 8060, while the S&P retested its previous week's high, and then both turned lower. The third sign was intact.
If the downside projections were going to be as accurate as the three preceding tops, the market would have to drop 1000 points in about a week's time...an unlikely event in most situations.
But, Octobers are made for the unusual! After all, what other month has spelled more trouble for the stock market over the last century? And what month ushered in what I believe will be a momentous year for Israel? (And, what other month culminates with a celebration focused around death and the demonic, i.e., headstones, graveyards, skeletons, ghosts, skulls, witches, etc.?) October! And this October was fateful...and may have seen the death of a bull.
The market went into a tailspin on October 24th--but did not show signs of a complete meltdown. This led me to conclude that 6900 was still likely to hold and a collapse would be averted...for now. October 27th saw a drop to 7160--which was approaching the upper end of support and brought the market in line with timing and price expectations. That afternoon's Alert and hotline update concluded that 6860-6950 was very likely to hold and that traders should be taking profits on put options.
The following morning, the market dove to 6971, while the S&P went right to the monthly HLS (840.90 was the HLS, 844.00/SPZ was the intra-day low) and also held the weekly 21 Low MARC before reversing higher and giving the single largest one-day point gain in the Dow. So, where do we go from here?
The October 18th Weekly Re-Lay revealed part of what I expect over the next several weeks. If this was to remain a somewhat orderly and predictable decline, the market is likely to see a rebound into early November (4th or 5th is most likely for a peak) followed by a decline into November 17-19th. If, and only if, this scenario is accurate and a new low is tested (the Dow could reach 6835-6900 then, but should not go much lower if the following pattern is to unfold) after an early month rally, then an intermediate low is possible in November.
Though I usually will only include two variables at one time, I will provide a third projection in this discussion (if either of the aforementioned points are invalidated, it will void or at least alter each ensuing one)...The market would then be expected to see a more substantial rebound into early December.
I will be addressing this more as market action unfolds and will update the outlook as more components align or deviate from this potential scenario.
STOCK INDEXES (INTERNATIONAL): Not much can be said about the international indices that has not already been said. I have continually stated that the Nikkei was ready to confirm a major (second) breakdown and would lead the rest of the world lower. The only variable I did not convey was that the Hang Seng could be the one leading the Nikkei lower.
As stated in recent months, the Nikkei gave a sell signal on July 25th and needed a weekly close below 17,000 to usher in the collapse of the Japanese economy and create turmoil in the international financial markets. We finally received this confirmation as the Hang Seng and Nikkei went into retreat and the rest of the world followed.
I also stated, "Yes, this sounds extreme, but I have little doubt that time will vindicate this prognostication. 14,000 will be the first downside target, but will likely give way to much lower levels before anything resembling a bottom is possible." All of a sudden, it does not sound so absurd. 1998 will likely see the demise of the Nikkei.
Many of the international markets could now see a bounce into early-December, though mid-November does hold the potential for an intervening decline. In other markets, the weekly trend remains down in the DAX and gave the confirmation needed (a weekly close below 3906) to initiate a "c" leg down...with targets of 3560 and 3170. These objectives remain in force.
Both of the remaining positive indices turned neutral as the CAC-40 gave a weekly close below 2770 and the FTSE provided a weekly close below 4950. Additional confirmation is needed to signal a down-trend.
I look for a test of critical support at 2470-2500 in the CAC-40 and 4450-4530 in the FTSE-100. If these levels are broken, it will spell trouble. The FTSE has been the strongest in recent months, but now looks the most vulnerable into January (EMU-related?).
STOCK INDEXES (DOMESTIC): To recap from last month: "The S&P could not turn its weekly trend down and is poised to see new highs in early-October and could set a spike high by the 7-year anniversary of the beginning of this bull move (October 11, 1990). The DJIA is unlikely to see new highs since the weekly trend has turned down in the Dow Industrials. All of this has been addressed in the Weekly Re-Lay and in both intra-month hotlines.
Mid-month, traders were advised to look for "943.00-944.00/SPZ before a final surge to new highs." The drop to 945.50 fulfilled this forecast and traders were just told to look for a daily close above 953.60/SPZ on Monday (9/29) followed by a pullback to 953.20-953.60/SPZ on Tuesday (9/30)--where long positions could be initiated. The S&P closed above 953.60 on 9/29, then corrected to 952.70/SPZ on 9/30--fulfilling this analysis and setting the stage for a final surge into the first few days of October.
Substantial resistance awaits the Dow at 8100-8177 and the S&P at 980.75-985.50/SPZ. If these levels are tested by October 6th, there is a strong chance they will hold (particularly if it coincides with bonds testing 117-08 to 117-18 or slightly higher). If these resistance levels hold, I would not be surprised to see an outside month reversal lower and a test of 6900-7100/DJIA by mid-November.
Intermediate traders can buy November or December put options if the aforementioned scenario unfolds and risk a daily close above 996.00/SPZ." 10/01/97 INSIIDE Track
Traders should have entered put options when these targets were attained (October 7th was the DJIA closing high at 8178) and should have been liquidating on October 28th basis the objective for this trade (6900-7100) and the hotline updates (and/or the Alert of October 27th). As advised in the October 27th INSIIDE Track hotline update:
"Traders should now lower the risk to a daily close above 912.80/SPZ and take profits on ½ of position when the DJIA tests 6860-6950. In this case, traders should not wait for an ensuing rebound before exiting this 1/2. As stated two days ago, certain factors had altered the cyclic outlook and projected this objective to be reached by late October followed by a rebound into early-November and another decline."
Depending on which options were chosen and the exact entry and exit levels, traders should have seen the value of these puts jump to 300-700% of their purchase price leading into this crucial downside objective.
Intermediate traders may have another opportunity in the coming month. Most cycles and indicators lead me to believe we will see a quick rally into November 4/5th with the likelihood of the S&P reaching a minimum of 944.00-946.00/SPZ and a maximum of 954.50/SPZ. The exact analysis and trading strategy were mapped out in today's Weekly Re-Lay which I will repeat...
"Wednesday's Alert explained why the volatility should continue as the S&P attempted to gradually work higher into the middle of the coming week amidst violent swings in both directions. 902.00/SPZ was quoted as support which should hold for the ensuing two days (since it was the HLS for Thursday and the HLS for the week). The exact low came at 902.00.
The perceived optimum scenario...is to see a rally into November 4/5th, followed by another decline into November 17-19th. Resistance for the S&P comes into play at 946-954.50/SPZ and 7540-7580/DJIA.
6840-6850/DJIA is the downside objective for the Dow while 820.40-823.60/SPZ is possible in the S&P...Friday's close confirmed a complete weekly trend reversal (to down) in the S&P. This has more of a long-term impact than it does an immediate one.
Aggressive and intermediate traders can buy November S&P 900-910 put options if/when the December S&P tests (or spikes above) 944.00-946.00. If buying multiple options, stagger entry from 944.00-954.50/SPZ and risk a daily close above 966.50 for now. This risk should be able to be substantially reduced by mid-week." 11/01/97 Weekly Re-Lay
The same trade is recommended for INSIIDE Track readers. Take ½ profits on a test of downside objectives.
INTEREST RATES: To repeat from last month, "Since mid-July, the bond market has begun to show signs that it may be stronger than I originally anticipated. The first subtle clue of this came when minor cycles and trading patterns signaled a sharp drop into mid-August...The fact that this sharp drop came before the upside objective was reached altered some expectations and spurred me to project an extension of the rally into late-September-early-October.
Bonds have the potential...to continue this rally into the early part of 1998...mid-January, to be exact...This does not mean that a top at 117 to 118-00 will not be seen. Nor does it mean that an early-October peak could be seen. But, it might not be the final top, so any short trades need to perform quickly and confirm an intermediate trend reversal to be bearish.
One of the primary reasons for this is the drop which was seen in early-August. Having preceded the test of critical resistance, this drop alleviated any overbought conditions and gave the bond market a chance to regroup and build new momentum for another surge. What this means is that when bonds test 117-00, it will only be the mid-point of a rally which began around 112-00 only a few weeks prior--rather than the exhaustion part of a rally which commenced at 106-12, 6 months earlier.
Another factor has to do with the intra-year pattern. Through June of this year, bonds had been unable to break above the January 1997 high (intra-year open resistance). In July, this finally took place and bonds have since retested this level twice--in August and September--only to be pushed higher each time. Since the yearly SPR is at 121-02, this action could spur another rally back to major highs by the end of 1997/beginning of 1998.
If this scenario is to unfold, what might it look like? One possibility is that bonds rally in early-October and test 117-00 to 117-18, before setting a minor peak. (This would likely coincide with the S&P setting new all-time highs, while the DJIA falls short of its August high.).
Financial instruments could quickly turn lower and bonds would then decline into the first week of November. If this much of the scenario unfolds, then I would expect a low in early-November, followed by a rally into early-January. This rally could reach the yearly SPR (121-02) by the end of December, and spike up to new all-time highs (122-06) by mid-January.
If stock indices begin to drop on their own momentum, both bonds and gold could rally in synch for some time. When gold finally goes into a parabolic rally, then bonds would likely turn lower (mid-1998?...somewhere around April/May?)...if--bonds do begin another rally into the end of the year, the projected early-January peak could also be an intermediate one and a major top could extend all the way to April." 10/01/97 INSIIDE Track
Traders were stopped out of initial put positions which had been triggered early in the month on the initial spike up to 118-18. The 10/25 and 10/27 hotlines stated that traders should buy additional puts and/or sell futures at 117-23 to 31/USZ and risk a daily close above 118-19. This trade was triggered and remains intact with the potential of hitting 115-26 to 116-06 early in November. This would be confirmed by a daily close below the November 3rd low.
Following a daily close below the November 3rd low, traders should trail a 40-tick stop (above the lowest low of the move) and take ½ profits on a test of 115-26 to 116-06/USZ.
INFLATION MARKETS: Through the middle part of 1997, gold cycles were projecting a decline into October and a test of 308.0 before a low was expected. Aggressive trading signals triggered a buy earlier than expected and initiated a sharp rebound in September. This discrepancy between my cyclic and price projections and my trading signals forced me to issue the following warning last month--
"As I have identified for several months, some key cycles align in early October. Until the middle part of September, these cycles looked like they were going to be slightly lower lows (gold) or secondary/higher lows (silver). These cycles may have come early or could have inverted and gold could be seeing a high during the current week." 10/01/97 INSIIDE Track
The 10/13 hotline updated this and stated "Gold and silver are in the process of a final decline--which could still see gold setting new contract lows (below 318.5) while silver is expected to set higher lows."
The 10/25 hotline updated this and advised traders to buy February gold 315 and 320 call options and silver traders to buy 463-466/SIZ. Gold bottomed the next trading day at 308.0/GCZ and silver dropped to 463.0/SIZ the following day (10/28). So, both these trades are intact and traders should hold gold call options for now and risk 447.0 or a daily close below 457.0 in the December silver. Raise sell stops to a daily close below the 11/03 low after the first day of the month is complete and look for a daily close above 503.0/ SIZ to confirm. This will be updated in the 11/12 hotline.
SOYBEANS: January soybeans recently gave a weekly 2 close reversal buy signal which was detailed in the 10/25 hotline. This signal should lead to higher prices into mid-month and traders were told to buy January 725 or 750 call options on a pullback to 695-697.0/SF following this signal. (Weekly Re-Lay traders were also advised to buy the futures at this price.)
This trade was triggered on October 28-30th and should give way to a sharp rally in the first half of November (733/SF is resistance during the first week of November and 750/SF is the first target). Take 1/4-1/3 of profits if 750/SF is tested by mid-month and raise sell stops to a daily close below the November 3rd low beginning November 4th. If 750 is exceeded with conviction, 810 becomes the next target.
U.S. DOLLAR/CURRENCIES: The German Mark is stilled poised to test 60.00 sometime in November but could see an intervening pullback to 56.40-57.07. If this level is tested by mid-November, traders should buy mark futures or December 5750 call options (averaged down) and risk a daily close below 55.95/DMZ.
Both the mark and yen previously stopped out long positions in October (with profits in the mark and losses in the yen) which led to a period of consolidation and uncertainty. As a result, the yen is showing signs that a quick final spike lower (below 82.23-82.34/JYZ) is needed to wipe out any premature bulls before a sustained rally is possible.
The yen--after closing above the January high in June of this year--has now tested the January low (82.00) is three successive months...but has not been able to violate this level. This is indicating strong support in this region (although a spike could temporarily violate this low only to ricochet back through it) and is a level to watch for signs of a reversal. 82.23-82.44 is also the recent decline low, monthly SPS, weekly SPS, last week's low, the weekly LLS and the weekly 8 AMAC between November 3-7th.
Intermediate yen cycles are most powerful around mid-month, while minor cycles align between November 4th-7th. Cycles in the mark are similar. This indicates that a quick sell-off and subsequent low are imminent and traders should prepare for the first signs of a reversal higher.
If 82.23-82.50/JYZ is tested between November 3rd-7th, traders should buy a combination of December 8400 calls for a 3-4 week rally and March 8800 calls for a longer-term move. Risk a daily close below 80.50/JYZ for the first week and I will update stops on the November 12th hotline. Both the chart pattern and the intra-year pattern indicate that an extended, 3 wave rally could be developing which would carry well into 1998. More confirmation is needed and I will update this in the weeks to come.
ENERGY COMPLEX: Crude has just completed a weekly pattern I affectionately call the Kiss of Death. This does not mean that it is a negative signal, but rather the most consistent pattern I have encountered to indicate the end of a corrective period. In other words, it is the Kiss of Death for a minor counter-trend and an indication that the intermediate trend is about to re-exert its dominance.
December crude also gave a weekly 2 close reversal buy signal yesterday (10/31) and intermediate- and long-term traders can attempt to buy a pullback to 20.62-20.73/CLZ in the first few days of November. However, it is best to attempt this in the January contract at 20.66-20.88/CLF and risk a daily close below 20.30/CLF. Traders can also be buying February 2200 calls at 65-75 ticks and hold these until further notice.
Though it is the technical analysis that leads me to these conclusions, I cannot help but think that the Iraqis and Iranians are playing a game of cat and mouse with the U.S. which will end in disaster for everyone. I have continually emphasized why the Jewish year beginning on October 1/2, 1997 would usher in dramatic events in the Middle East which could be a combination of extremely good news and extremely bad news. If these cycles are even moderately accurate, Crude oil could see never imagined levels in the year(s) ahead.
(A subscriber also alerted me to one other possible explanation. It is based on a theory by another editor--whose name I can not locate--that Saddam Hussein is using the futures markets to finance the rebuilding of his infrastructure and armed forces. He allows the markets to sell off (after shorting them through Swiss bank accounts) only to balk at--or threaten--inspectors after he has reversed long. After running up the price by $2-3.00 per barrel, he repeats the process over and over again. At first, this sounded like a stretch. Now, I have to wonder.)
Last month, traders were advised to look for a retracement in heating oil and to buy December heating oil at .5650-5730 and risk .5340. This trade was finally triggered in the last few days and traders should now be long and holding these positions. Ideally, a 3 wave higher will now commence and catapult this market to new highs. If/when this is confirmed, trailing stops will be provided in subsequent hotlines. Traders should roll into the January contract before the last week of November.
Natural gas is entering a period of consolidation and could retrace to 3.080/NGZ, and potentially 2.900 in the coming weeks. All trends remain up, so I will be watching for signs of a new bottom and fresh buy signals particularly between intra-month cycles (7-10th) and mid-month (14/17th). No new trades for now.
Get set go!...and have a great month trading!
November 3, 1997
Eric S. Hadik, Editor
Jeneric Trading Corporation
P.O. Box 2252, Naperville, Illinois
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