The ULTRA Timer Report

The recent weakness in the SPX should be just about overdone. A bottom should occur in the next few days between 1060 (S2) and 1080 (S1). Considering the downside in the last two days, I expect to see a little bounce back up to R2 and then down to S1 similar to what occurred a few weeks ago (circled). If this scenario (S1 Retest) occurs, I will be tempted to buy at S1. Buying lows is risky business but it can also pay off big with call options. If you are more conservative, you could wait for an upside break of R2 which will be very well-defined after turning the SPX downward one more time.

The importance of this bottom will remain to be seen. Theoretically, we should see a bounce back up to R1 at 1140. If the SPX cannot manage this move it will indicate intermediate-term weakness.

ULTRA users have long known that one could have drastically outperformed the SPX by simply selling at the close of the third trading day of May and buying at the close on the second to last day of October (invested the last two days of October). (Tested with a Composite Strategy of the SEAS2 and MONTH systems.)

Historical Results (01/12/42 to present trading the SPX):
Winners: 76%
Maximum Drawdown: -26% (vs. -49% for SPX)
Annual Return: +10.3% (vs. +8.0% for SPX)
2000-Present Return: +4.8% (vs. -24.5% for SPX)

I've seen a lot of press concerning similar strategies this year which doesn't surprise me because it doesn't work historically in election years. If you allow yourself to be fully invested during the election year your annual return rises and your historical maximum drawdown stays about the same. The months May-October are usually bearish. However, during election years they are mildly bullish with the SPX appreciating at an annual rate of around 9% and winning 75% of the time.

Having said that, I must admit that 2004 may be different considering the risk of a pre-election terrorist event similar to the horror that occurred in Spain. If this is to occur, I suspect there will be some serious weakness in the market during Aug04-Oct04.

I will go 100% long the SPX if the NDX Head-and-shoulders Top (HST) does not confirm (see below) and the "S1 Retest" scenario detailed above unfolds or upon an upside break or R2.

Nasdaq 100 Technical Price Analysis

NDX Head-and-Shoulders Top (HST)?

Further weakness in the NDX will be extremely bearish. If NL fails to support the NDX, a HST will be confirmed that will imply a downward move in the NDX to below 1250.

On the other hand, until the HST is confirmed it's relatively meaningless. Since we are due for a bottom, I wouldn't be surprised to see the NDX bounce off NL and rally to R1 (1450). R1 has resisted and supported the NDX many times in the last six months. I would not be surprised to see the NDX bounce between NL and R1 out to the intersection of R1/R2. This movement would complete a large Descending Right Triangle. Such a pattern usually fails to the downside.

NDX Relative Strength (NDX-RS=NDX/SPX)

The NDX-RS broke down out of a yearlong uptrending channel (S3) and had been falling for the last few months supported by S4. In the past, I predicted that a channel was forming bound at the top by R4 that has obviously come true. As you can see the NDX has actually strengthened in the last month forming uptrending support S5.

I think that whichever of R4 or S5 breaks, it will be very indicative of the future direction of the market. A downward break of S5 will probably indicate that the NDX HST is going to confirm and the entire market is going significantly lower. An upward breakout of R4 will indicate money confidently moving into speculative issues which is bullish for the market going into the election..

Summary

I am scared of the potential HST in the NDX and will therefore avoid it except for trying to catch some short-term bounces with QQQ options specifics of which are beyond the scope of this commentary.

RUT Technical Price Analysis

Broadening Formation in the RUT

Last time while the RUT was exactly at R1 (near the 4/1/2004 dotted line) I said simply, "This is a bearish formation common at significant tops. Buying at the top of a broadening formation is not a wise choice." Hopefully some of you took my advice a little farther and bought some RUT put options which would be have made a quick fortune. I wish I had...

Now I will say that buying after the confirmation of a Broadening Formation is not a wise choice. I fully expect the RUT to rally back up to test S1, but this is a VERY bearish looking pattern that could spell the end of the amazing performance in the last few years of the small cap sector.

RUT Relative Strength (RUT-RS = RUT/SPX)

RUT-RS has broken down below horizontal support S2. This is bearish.

Summary

Considering the confirmed Broadening Formation, I will not consider non-mechanical positions in the RUT at this time.

XAU Technical Price Analysis

Is the Huge Head-and-Shoulders Bottom (HSB) still intact?

Technically no. The retest of NL that I've been predicting for months has now occurred. However, NL was unable to support the XAU on a monthly basis which technically makes the HSB implication of XAU 160 unreliable. Having said that, the XAU is noisy. It historically doesn't make perfect patterns. If the XAU were to skyrocket from here to 160, people would look back and call this a successful HSB fulfillment.

Secondly as you can see above, the XAU is testing a support line (S1) that has been in effect for four years. Support does not get much stronger than this.

Lastly, assume that S1 holds and the XAU begins rising again. What that means is that all this talk of drastically rising interest rates is overdone. If the stock market weakens (see NDX HST above) the Fed will likely put off rate hikes fearing a double dip recession. That will again cause inflation fear and gold will rise again.

Summary

I am buying the XAU at S1.

Interest Rate Analysis

Major Downtrend Resistance Break

As you can see in the weekly chart of the US 5-year Treasury Note Yield above (TN), TN was resisted by R1 since early 2000. This line was finally overcome in early Late 2003 or April 2004 depending on how you look at it. But as I type, R1 is overcome.

In the move off the bottom, TN formed a nice flag bound by R4 at the top. The upside implication of this flag is the pre-flag move projected above the break of R4. This makes the objective just about R2 which is the level of and old low. (Old lows are often points of resistance on the way back up).

There is also uptrending support setting up as S1. If you project a parallel line you end up with R5 and an uptrending channel. (Since all markets often setup channels it's wise to expect that one form.)

Having said all that, I expect TN to continue upward inside the channel formed by S1/R5 until the upside implication of the flag is met at R2. At that point we should see TN consolidate sideways and begin to fall back to S1.

The scenario of