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R.B.I. T r a d e r' s U p d a t e

   Big Picture Special Issue
        

8 / 8 / 99
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As you know, on a day to day basis we focus on the trees rather than
the whole forest as that is our nature as short term traders.
However at this juncture in the market some may want to know our
bigger picture outlook - in other words, we will step back and look
at the forest. The market is the place where we as traders come to
"agree to disagree", so your bigger picture viewpoint may be
different and as valid as ours. However we see two distinct
possibilities that lie ahead, and will put them out there for all to
ponder over the next 6 to 12 months as we work and wind our way
through the biggest poker game on the planet.

As of Friday, August 6, all the major indices we follow have gone
into a "correction" by Wall Street terms, with the exception of the
DJIA. Wall Street defines a "correction" as a selloff of 7% -10% and
the Nasdaq Composite, SP500, NYSE Composite now fit this category -
showing losses of 11.05%, 8.35%, and 7.85% respectively from their
record highs just three weeks ago. The DJIA has been spared this
label so far, down only 4.42% from its high.



** Preferred Scenario **

As we have been mentioning for several weeks now, the weekly chart
of the SP500 cash index looks very similar to that of this same time
last year. And the similarities there alone continue to be
astounding. Here's another perfect fit from last year to put in that
bag, as the symmetry continues. From the record print high (at that
time) on Monday, July 19, 1998, the SP500 cash fell 133.23 points to
its intra-week low three weeks later, peaking at 1190.58 and
bottoming at 1057.35. Now look back at the record print high made
intraday on Monday, July 20, 1999 at 1420.14 and subtract an equal
133.23 points. That gives 1286.91 as a target for a three week low -
and the low this week, the third week down was 1287.30, a difference
of just.39 points! So if the weekly chart continues this symmetrical
pattern, then the next two weeks will be choppy trading and lead to
a high during the option expiration week ending Friday, August 20.
This oversold bounce will be very ragged, but eventually could rally
40 - 50 SP500 points from our low. Then from that reaction high,
likely coming mid-week this week, the market would see an even
harder selloff than we have seen thus far. With the Fed meeting and
likely raising rates on August 24, a mini-crash not unlike last year
could unfold into that date.

Now we are not going to hang our hat on the chart pattern alone. It
can change form but still have the same eventual outcome. We have
additional evidence that this may play itself out pretty much like
last year however. We've also been mentioning just how grossly
oversold this market have become. Again, the most recent time that

our daily and weekly internal oscillators dipped near this oversold
was this time last year. These exaggerated extremes on our
indicators demonstrate a tremendous amount of downside momentum, and
as we've stressed over and over in our publication over the years
momentum almost always peaks or troughs before prices do. As of
Friday's close we have only a few bullish divergences, as most of
our indicators fully confirm this low. Under normal conditions we
would expect to see lower price lows with nearly across the board
bullish divergences on our daily and weekly momentum oscillators
before a good, solid bottom is put in place. This setup is not in
place at the current time, so we suspect lower lows ahead.

So, this all has the earmarks of another August - October bottom.
Should this come to pass, then what? Since we are looking way out
here it is hard to pinpoint a timeframe, however what we see ahead
by mid Y2K is a big boom-then-bust possibility. First, the boom will
come off of this August -October low in grand fashion. The 'buy-the-
dips' and 'buy-and-hold' crowds will again feel vindicated and
invincible, and all of the Y2K problems will seemingly be a thing of
the past. A last gasp bull run back to record ground will probably
be a lay-up for the market, possibly gaining in the neighborhood of
25% - 35% off of our late summer / early fall lows. With the 'buy-
the-dip' conditioning process firmly ingrained in folks mind, and
the return of the momentum players to the market, we think that the
market will finally be the downfall of many of the new
investor/trader type and wipe out many over-leveraged Johnny-Come-
Lately's. The presidential cycle will have run its course, and so
may have the current economic expansion. When the bounces don't
bounce, it will be much worse for the bulls than they have
experienced thus far this summer (or last summer/fall). We envision
a 1973-1974 type correction coming, something that really wrings out
the excesses built up over the last few years, or a 'return to the
mean' as it might be described. It has been nearly 17 years since
the low of the previous year has been broken, e.g., 1999 low was
higher than the 1998 low, the 1998 low was higher than the 1997 low,
etc, and we think that this record run will finally end within the
next year.

This is our preferred scenario, much more likely than our alternate
scenario.



** Alternate Scenario **

This outlook is much shorter and to the point, arguing that the
market is making an intermediate term bottom right here in this
timeframe. It's not out of the realm of possibility that the market
has just about completely discounted the impending interest rate
hike. If the market does put in a low here, coinciding with the
grossly oversold internal indicators, and runs higher right through
the October timeframe, we feel that it will be on a death march into
late this year. The technical underpinnings will not support such a
rally unless it is extremely thin and selective, a 'nifty-fifty'
type rally where only the bluest of the blue chips rally higher.
This type of thin market move would go completely unconfirmed by our
internal gauges, and such an occurrence would be something that most
always precedes gigantic declines, not unlike the 1987 last gasp run
higher. It is important however that the SP500 cash index does not
break below 1276.00 on a closing basis, else this outlook would be
void and only our preferred scenario would be left.

We are not trying to be apocalyptic here, we just see these as
possibilities in accordance with our big picture market work. Also,
we use the word 'preferred' as a substitute for 'most likely', not
because we are fans of bear markets. As we said in the entry, the
market is the place where we as traders come to "agree to disagree."
We offer this only as food for thought.



Good Trading.

Authored by Mike Reed