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THE WEEKLY RE- LAY
6900/DJIA–Part II...
OVERVIEW: Each week brings additional clues that a major top in the stock indices could be forming...and additional profits to traders as a result. After closing out a $14,000 long trade, traders reversed to short the S&P at 981.35/SPZ and finished the week with open gains of over $16,000 per contract.
Bond traders exited short positions from 117-20 to 24/USZ–with profits of $1,400-$1,800 per contract while option traders remain long December 116 puts with profits of over $1,000 per option or gains of 140-200%.
D-mark traders were stopped out of longs (55.80-.87) with approximately $1,400/contract profits while option traders should have exited December 5700 calls with small gains. 2CR traders should have exited the yen at about break- even.
Crude traders should have bought February 2200-2300 calls at 60-90 ticks and could have exited with $200-$300 per option losses or be holding with $250-$300 drawdown.
STOCK INDEXES: The S&P and DJIA continue to cooperate and trading has been extremely rewarding during this critical time frame. But, that should not seduce traders into becoming complacent since this is the time frame (shortly after a potential intermediate/major top) when trading is the most volatile and market swings are the most violent.
Dec. S&P (SPZ) DJIA Weekly Trend: Up/Neut. Down Weekly Resistance: 971.75- 976.65 8027-8045 Weekly Support: 925.40//905.60 7607- 7667 Daily Trend: Down Down Daily Resistance: 959.80 7938 Daily Support: 935.50 7753
Last week (10/11/97 Weekly Re-Lay), I stated “Another decline is possible beginning Wednesday–based on an aspect of my moving average channel techniques I have not yet discussed. I will be addressing these techniques in the November 3rd Tech Tip installment.”
After struggling to rally on Monday and Tuesday, a decline kicked in on Wednesday and the S&P took out all three confirmation points listed in last week's update. Now the focus should be as much on resistance levels–which need to hold to perpetuate the down- trend–as support levels, which need to be broken.
Three key levels should be monitored next week. One is resistance and the other two are support. The resistance level is 971.75-972.25/SPZ, which could extend up to the weekly 2nd close resistance at 976.65/SPZ.
The support levels are 923.50-925.40/SPZ and 904.50- 905.60/SPZ.
If the market rallies early in the week (959.80- 962.50 is possible on Monday), a reversal lower from 971.75- 976.65/SPZ should take hold. Equally important resistance appears in the DJIA at 8023-8045. This would be the more bearish scenario for the rest of October. If this were to occur (a bounce followed by new lows), it could accelerate the decline and project a minor low as soon as October 28-30th.
...The bottom line is that all traders should be short and should let the market determine which scenario is going to unfold.
INTEREST RATES: Bonds confirmed a couple observations from Wednesday's (10/15) Alert, which are reiterated below...
“114-13/USZ is the last two days' HLS levels and a few ticks below recent lows, so this will become a likely target for the next decline. If this level is tested by Friday, a final low is expected around 10/27.”
Dec. Bonds (USZ) Mar. Euros (EDH) Weekly Trend: Up/Neut. Up/Neut. Weekly Resistance: 115-23 to 116-01 94.06-94.07 Weekly Support: 113-16 to 113-29 93.94-93.95 Daily Trend: Up/Neut. Down Daily Resistance: 115-10 94.05 Daily Support: 114-09 93.97
December bonds dropped to 114-16 on Friday–reinforcing this analysis and projecting a low which could come sooner, rather than later. In fact, Thursday's low had projected a third consecutive HLS of 114-13, so this level became such a magnet, it was almost impossible to resist.
Due primarily to sensible money management criteria, traders who were short from 117-20 to 24 were stopped out at 115-28 or 116-07 (depending on whether an intra-day or close only stop was chosen). However, put option purchasers remain in these options and have seen increases of 150-200% in the short time they have been held.
One important factor in the coming week is the daily trend–which has not yet turned down. It will take a daily close below 114-24 to accomplish this, so the most bullish scenario would see an early spike down to 113-25 to 30 and a close back above 114-24/USZ.
If a daily close below 114-24 intervenes, the trend will turn down and any rebound will likely be an opportunity to sell for a subsequent new low.
The weekly trend is in a similar situation with a weekly close below 114-16 needed to reverse the trend to down. A weekly spike down to 113-25 to 30 and Friday close back above 114-16 (and particularly above 114-27) will give a similar bullish signal–but on an intermediate basis.
CURRENCIES: The yen is struggling to take the leading role I referred to last week, while the Deutschemark confirmed my suspicions.
Dec. D-Mark (DMZ) Dec. Yen (JYZ) Weekly Trend: Up Down Weekly Resistance: 57.19-57.40 84.42-84.81 Weekly Support: 56.11//55.12 82.31-82.66 Daily Trend: Up/Neut. Up Daily Resistance: 56.99 84.04 Daily Support: 56.31 83.04
The mark unfolded in what appeared to be a bearish wedge (known by Elliotticians as a diagonal 5th wave), where each subsequent new high is barely above the preceding one, while the lows are set at increasingly higher levels.
This type of pattern usually leads to a sharp move in one direction or the other depending on what stage of the overall trend the market is in. Since the mark is still in the infancy of what appears to be a new bull market (which still needs some confirmation), the sharp correction became more probable and stopped out long traders with significant profits.
As conveyed in the last few updates:
“The mark continues to rally, but needs to break out soon or suffer a quick correction (testing 56.40-56.55/DMZ). It spiked lower on 10/08–as expected–and gave a 2 close reversal higher...which has since followed through. However, the 10/09 high held an LHR level–which could be signaling a minor top.” (10/11/97 Weekly Re-Lay)
“Currencies are in no- man's land and the mark needs to accelerate higher (and close above 57.90/DMZ) or risk a quick drop to 56.40, and ultimately to 55.70- .80/DMZ.” (10/15/97 Alert)
This is almost exactly what happened on Friday as the mark suffered an abrupt decline to 56.52/DMZ and is likely on its way to test 55.70-.80. This could come as early as Monday or Tuesday and could actually set up an intermediate buying opportunity.
At the same time, the yen is giving plenty of false starts in both directions. The trends (daily and weekly) are mixed while cycles give some hope for a low being intact. However, for all intents and purposes, the yen has remain locked between 82.50-84.50/JYZ for the last couple months and needs a daily close below 82.31 or above 84.58/JYZ to signal a breakout. Whichever occurs should trigger a corresponding move into late November.
PRECIOUS METALS/ENERGY: Gold/Silver–Silver is confirming projections for a decline to 482-484.0/SIZ, and could drop as low as 462-466.0 if this past week's low is taken out. As stated on Wednesday, October 16/17th was the anniversary of the July 16/17 and September 16/17th lows in silver and gold. The fact that a reversal higher occurred could be an early sign of a developing low, but I would recommend caution.
Dec. Gold (GCZ) Dec. Silver (SIZ) Weekly Trend: Down Up Weekly Resistance: 330.0-331.2 510.0-512.5 Weekly Support: 322.0//312.0 479.5-482.0 Daily Trend: Down Up Daily Resistance: 327.8 500.5 Daily Support: 324.5 491.0 Dec. Crude (CLZ) Weekly Trend: Up Weekly Resistance: 21.21-21.43 Weekly Support: 19.61-20.03 Daily Trend: Up Daily Resistance: 21.25 Daily Support: 20.20
Since the trends in gold have been unable to turn up, it could still attempt to set a new low before a major bottom is intact. This could be enough to weigh on silver prices for the next couple weeks. This would be especially likely if metals bounced early in the week and reversed lower at weekly resistance levels.
January soybeans are in the midst of correcting a break-away rally, but are also coming off a test of the monthly LHR level and a weekly reversal lower following a second down-neutral signal for the weekly trend. As stated last week, a weekly close above 707 1/2/SF is necessary to turn the weekly trend higher.
In other words, patience is required to determine if a bull market is well underway, still in the development stage, or heading back to test the lows. No new trades for now.
Crude–December crude is in a sharp corrective phase and traders should have been buying February call options on Monday or Tuesday (the preliminary HHS lined up at 20.97/CLX–which should have pushed the entry back to Tuesday, but the option prices would only have seen a difference of 5-10 ticks).
Wednesday's Alert advised traders to hold off liquidating these immediately since the market action made it nearly impossible to exit these on the close. (The 10/15 close did barely violate the sell stop level, so if traders exited on the 10/15 close, I would simply stay out and wait for a new entry signal.)
...End 10/18/97 Weekly Re-Lay
October 18, 1997Eric S. Hadik, Editor
Jeneric Trading Corporation
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