The ULTRA Timer Report

The SPX clearly broke out above R1 but that breakout has now been proven false. Welcome to Technical Analysis. The absolute best we can hope for from any type of analysis is around 70% accuracy.

In the last issue we predicted the breakout would be false and that the next significant move would be to the downside. This recent failure of technical analysis also illustrates why we depend so heavily on mechanical strategies. It was hard to imagine a major up-move getting underway with all our mechanical strategies in cash and a VIX of 15 (which usually accompanies tops). Going 100% long upon the SPX breakout would have been an expensive mistake.

As you can see above the SPX broke down below support S2. We like to draw support lines that ignore explosive up-moves off bottoms. If you draw the support line off the bottom the line is too steep to be sustainable. Steep lines are less reliable than flat lines of support.

Because of the break it now seems logical for the SPX to work lower over the next month to near S1 which will be around 1050 at that time. During the last drop to S1 there were two short term rallies. We expect the similar action this time as well. In fact, the SPX is due for a short-term bounce very soon.

As you can see above, the monthly chart of the SPX seems to be forming a very large Head-and-shoulders bottom pattern. We always assume symmetry until proven otherwise. Symmetry around the Late 2002 top has been pretty much perfect and now calls for a significant drop to 950 which is the mirror image of the drop in September 2001. This stuff isn't perfect. The down move may bottom out at S1. Or if we get a very negative news event, panic selling may drop the SPX all the way to 950.

If we get the drop to 1050 (S1) and then a rally above NL, a very bullish HSB will be confirmed that implies an upmove to new highs over 1600. That is the long term bullish case.

The long term bearish case is that the recent rally was just a bear market rally and the SPX still needs to drop to 600 to reach average valuation.

It's really impossible to predict which is more likely. We could make a 50/50 guess attempting to become the next media guru, but instead we'll watch the market confident that it will give enough clues to make for a better prediction in the future.

We will buy the SPX with non-mechanical accounts when S1 is reached. If the market turns sharply to the upside we'll be forced to jump on board at some point. But with the recent false breakout and the threat of pre-election terrorism we are not too anxious to buy highs. We will give ample notice in a future issue.

Nasdaq 100 Technical Price Analysis

NDX Trading Range

The NDX has set up a trading range supported by S1. The resistance is a range between S2 and S3. If S1 were to fail it would be very bearish for the NDX.

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

NDX-RS is at the bottom of a trading channel indicating it is now time for the NDX to outperform the SPX in a short term bounce to the upside. If NDX-RS breaks down below S1 it will be a bearish sign for the NDX and the market as a whole..

Summary

The NDX is due for a short-term bounce and then it should work lower to test S1.

If the NDX falls to S1 while NDX-RS remains strong (above S5), we'll pick the bottom by buying QQQ calls. Otherwise we'll continue to avoid the NDX.

RUT Technical Price Analysis

Diamond?

It appears that a Diamond has formed in the RUT. With Technical Analysis on the indexes we like to keep it as simple as possible and a Diamond is a little to exotic for our comfort. However, it should be noted that this is a generally a major top formation.

Ignoring the Diamond, the RUT broke down below a well-defined uptrend line S1 which implies more downside.

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

RUT-RS broke down below long term support in May04 but has found new support on S2.

Summary

Considering the break of S1 and the non-bullish nature of RUT-RS, we will not consider non-mechanical positions long positions in the RUT at this time.

XAU Technical Price Analysis

XAU Nearing Resistance

We caught the exact bottom in the XAU again and as we said in the last issue we were looking to exit around 90 which has now occurred. Considering today's strength, the XAU may have a little farther to run. We expect to see the top of this short-term cycle somewhere in the circle between R1 and R2.

Our DUALB gold system that has been spectacular in real-time for ten years is still on a buy signal. We are again looking to buy XAU calls at S1.

Interest Rate Analysis

Uptrending Channel

As expected the US 5-year Treasury Note Yield above (TN) was turned downward by R1 forming an uptrending channel. We expect rates to fall further to S1. If S1 fails to support TN we expect a retest of the 2003 lows. This event would probably correspond with a very weak stock market into the November election.

ULTRA's Recommended Strategies

Recommended Strategy Risk = LOW-MEDIUM

Recommended Index = SP500.
Strategy Positions are HERE .
Strategy Descriptions are HERE.

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