BISHOP’S  MARKET  OUTLOOK, 5-13-02

CRB: Taking out the 4-18 high slightly would set the CRB up for a continuation of the selloff from the early April highs.  Given the outlook for Energy and Metals, the 4-18 CRB high looks safe. In the past several issues we’ve been talking about the “boxed-in” appearance of numerous commodities. This index and it’s components are now captives awaiting greater clarity on the condition of the American economy. This week’s economic reports may be pivotal.

ENERGY:  From 4-26: “…One more kneejerk peak season rally failure may be in the cards but these symbols are otherwise boxed in wide sideways channels...” Did the kneejerk rally top out on 5-13?  It’s interesting that on this very strong day for the stock market, among the energies only Crude is able to post a new high and then only by a few cents. Note also we are now in a PEAK SEASON for energies and a summer selloff prior to any strengthening in Aug/Sep is very likely.  Commercials are generally not supportive and option volatility reflects widespread complacency with this aging rally. Keep very tight stops on any longs in the energy complex. Watch carefully the reaction of this group to this week’s key economic reports (retail sales, housing starts and permits, and industrial production).

CL: From 4-12: “…Still looking for at least a re-test of the 4-03 high after this forecast selloff…”  From 4-26: “…The odds of a re-test of 4-03 have dwindled somewhat and now stand at even money…”  Well, Crude takes out the 4-03 high on 5-13 by pennies and completes a 5-wave rally from the Nov ’01 lows with a huge engulfing bar.  Bulls should adjust their trailing stops to the low of today’s bar.  Complacent, plummeting option volatility and commercials just off huge net short levels both signal that upside progress from here will be tough.  Watch reactions to this week’s key economic reports.  A near-term top in this peak season is the best prognosis. Along with HO, HU, and NG, Crude is likely “boxed in” a wide sideways trading range until economic prospects become clearer. 

HO: From 4-26: “…HO looks weaker than CL technically, and is very unlikely to take out the 4-04 high…”  The 4-04 high still looks quite safe at this point. Beware a very likely summer selloff prior to any Aug/Sep seasonal rally. Option volatility is becoming very complacent and vulnerable to a downside price surprise.

HU: The erratic technical pattern developing after the April highs is the fly in the ointment. Otherwise the season is toppy, commercials mildly bearish, and other energies generally vulnerable to a selloff. Best to stay on the sidelines.

NG: From 4-26: “…Very very toppy.  The rally from the 4-12 low has slightly better than 50-50 chance to re-touch or break the 4-23 and 4-02 highs…”  We took out those highs 4 days later on 4-30 and set a marginal new high again on 5-08. It’s revealing that today’s bullish price bar could not test either 5-10 or 5-08 despite the minor new high in Crude and today’s stock rally.  Note the textbook “ascending pennant” or “ascending wedge” pattern on the daily June chart. This is a classic reversal pattern.  How far might NG dip on a selloff?  I would expect a pullback to at least 3.40 assuming only a Wave 4 dip in an on-going rally. Otherwise we could be looking at a selloff to test the lower end of the channel range in the 2.00 to 2.50 area.  The greatest argument against the later “deep selloff” scenario is that NG has cleanly broken the 3.50 area and held above it for more than a month. Commercials remain massively net short and options are very complacent and vulnerable to a downside price surprise.

METALS: Note the very curious metals selloffs on 5-13, a “bullish day” for the U.S. stock market.

GC: From 4-26: “…Excellent risk-reward on the short side of this trade. GC takes out it’s 2-08 high on 4-25 and thus completes a 5-wave advance from the April ’01 low.  Commercials are hugely net short with top-like technical resistance in the 311-314 range…” GC has since failed to break 314 and commercials are now at 3-year record net short levels! Gold may be the MOST REVEALING of the many toppy commodities on 5-13, actually selling off during the stock rally. A very interesting inclusion on our favorite short watchlist.

SI: From 4-26: “…Expect the 4-02 high to contain the current rally.  Commercials are very net short and likely to box SI into what is now a 16-month sideways price channel…” We’d like to see SI get a little closer to channel highs at 4.75 in order to place it on our favorite short watchlist, but it’s unlikely to rally that far. Note the hugely bearish “reversal cum engulfing bar” on 5-13 that reverses off the 4.70 “mini channel” resistance after barely taking out the 4-26 high. Commercials hugely net short. Favor the downside.

HG: We expect the downside drift of lower highs and lows to continue, at least short term, taking out the 5-06 low in the 71.20 area basis July.  Thereafter the picture blurs a bit with option volatility getting VERY SLEEPY and commercials moving up constructively ahead of a May / June seasonal bottom.  Watch housing and industrial production reports closely.  Copper may soon find itself on our early alert long watchlist. 

PA: A favorite short from 4-16 (@ 362.00). Now at 354, keep tight stops on any shorts.  PA may still eventually test its Nov. 01 lows in the 310 area. The generally bearish short-term metals outlook supports this view.

PL: A great short call from our 4-26 report (@547.90 basis July): “…On a spec-fueled sucker rally. Likely to stall and re-trace in the days ahead. The power of the current rally points to a re-test of the 4-18 high after retracement…”  PL sold off rapidly to hit 513 on 5-01. Now at 523.30, the strength of the selloff has surprised us. However, with stops at 513 and 517, the PL chart offers good risk/reward for a blip upside rally to test the 4-18 high of 558.00 and cap the rally from the Oct ’01 lows. The 5-01 low must hold to support this rally.

BONDS/ NOTES:  From 4-26: “… Bonds and notes remain a very mixed picture, consistent with confusion over economic prospects…”  The current retracement looks more like “curve re-adjustment” flowing to the shorter end than a broad-based selloff.  Note that the shorter you go on the curve, the longer the commercial position. Bonds and stocks are really key to all markets here, as they are the most sensitive gauges of sentiment regarding the condition of the economy.  That said, they are not an easy read at this point.  Our BEST GUESS is that the “triangular consolidation” in bond prices will continue for a bit, looking for clarity on direction from key economic reports. 

US: This week is a minefield of economic releases that will either cap this rally from the 3-15 lows or drive US to a test of the 5-01 high.  Either way, the commercial selling indicates that we’re likely boxed in with resistance near the 5-01 highs. The 4-18 low (99-20 basis June) is critical to a near-term bounce in US.  Should 4-18 hold, we would look for a rally to test first the triangular downsloping resistance line drawn from the 2-22 and 5-01 highs (now near 102-30 in price) and then potentially even the 5-01 high itself (103-04). Should 4-18 NOT hold, then look for at least a downside test of the upsloping triangular support line drawn from the 12-17 and 3-15 lows (now near 98-05). The key will really come from this weeks critical economic releases (retail sales, housing, and industrial production). We narrowly favor a re-test of the triangular resistance highs but the economic reports will rule the technicals in this situation. Option volatility, having bottomed on 3-14 supports the retest view as do the commercials who are selling into the rally from the 3-15 US low but are not yet sufficiently short to cap it off. This is not a high-conviction scenario as the technical pattern since the Nov 01 high has been erratic at best. 

TY:  Commercials remain loftily net long. Indicative of a curve shift from 30’s to 10, 5, and 2-year maturities.  Note the bearish head and shoulders formations on the 5, 10, and 30, but VERY CONSTRUCTIVE Elliott Wave 5 rally underway in the 2-year.  The TY pattern appears as triangle congestion within a larger sideways rectangle after the Dec. bottom and the Feb top.  Bottom line: the “final upside retest” story is intact until the 5-09 lows are broken (104-190 basis June). A break of 5-09 points to a test of upsloping triangular support line drawn from the 12-17 and 3-15 lows (now about 102-24 basis June).

CORPORATES: Mid and lower-grade corporate closed end funds are basically holding their own after a 3-year slide.  Credit spreads likely have maxed out.  We continue to think it’s an ideal environment to accumulate these corporate bonds. If the economy is weak these higher yields will be attractive and there’s the perception corporate risk is declining by “cost-cutting” measures at most firms. Alternatively, if the economy improves there’s the perception that top and bottom lines will benefit. Heads you win, tails you win.

STOCKS:  From 4-26: “…The good news for the bulls is that a bottom is in sight and well above the 9-21 lows.  But we’re not quite there yet...”  Very positive for stocks is the reversal of the 2-month drain of dollars from all mutual fund categories.

OTC/ NDX: From 4-26: “…Now at 1663, the bottom is near, but not quite yet..  Look for a heartening kneejerk rally to develop this coming week then fail with a sharp crash to re-test today’s lows and put in an important bottom in mid to late May.  The power of the current selloff tells us the bottom will be rocky but likely to hold between 1550 and 1600…”  To remain intact the “heartening kneejerk rally” from 5-07 must hold above the 5-10 low (1599.64).  Technically the rally is likely to fail by week’s end below 1715.  The daily Elliott count suggests at least a test of the 5-07 low before an important bottom is in place.  Option volatility, which bottomed in mid-March (with the HIGH in the OTC) and has not yet reached extreme levels, is also supportive of a 5-07 low retest. Very positively, commercials are moving to net long levels and cash flows to mutual funds are picking up.  Strategically it’s a little late to be looking at broad-based shorting but too soon to put on numerous long trades. Patience is likely to be rewarded.  The bottom is near and I still expect it in May. As with Bonds, stocks are now really captive to the economic reports. If they come out strong this week, our stock bottoms may already be in, mixed or weak reports will likely bring re-tests.

SPX: From 4-26: “…the very short commercials clearly point to further downside. We might see a blip rally here but afterwards somewhat lower lows are very likely.  For a bottom that can springboard a summer challenge of the Jan highs, look for a double bottom in May, between 1025 and 1050…”  Commercials are now moving off net short levels but appear to need lower prices before getting seriously supportive.  Note that a continuing selloff in US Treasuries would likely coincide with a continuing mini-rally in the SP within an awkward, downward drift from the Jan high.  We still favor a final test of the 5-07 low to “get it over with” and drive commercials to true net long levels and put in a believable bottom.

DOW:  The likely driver will be this week’s economic reports.  If Treasuries congest further, they are likely to box the Dow between the 5-06 low (9807) and the 3-19 high (10673).  If Treasuries break to the upside on economic weakness look for a retest of the 5-06 Dow low.

RUT:  From 4-26: “…Look for an on-going selloff to bottom above the Feb lows (457 area) in May…”  Commercials are still net short and need lower prices to step up and buy. At this point we’re raising downside targets to 480-490.  The pattern in the RUT and the commercial position in both RUT and SP support the view of a broader re-test of all stock indices’ May lows before a final bottom is in place.

SPECIFIC STOCKS 1^ST QUARTER PERFORMANCE: For the period beginning 1-18 and ending 4-26: Shorts: Closed shorts average 4.07% over 25 day holding period. 5 open shorts with average 17.6% profit. Longs: Closed longs average -.45% profit over 35 day holding period. 6 open longs average 13.5% profit.  Baselines: S&P down 4.5%, OTC Composite down 13.8%

            SPECIFIC STOCKS SHORT:  Our short sale selections open as of the 4-12 Outlook:  (entry price, current price, % profit, current stop) From 3-15: TLAB (11.13, out 5-08 @ 9.74, 12%)  CHKP (32.17, out 5-08 @18.35, 43%) From 4-01: ORCL (12.84, 8.47, 34%, 9.18) RATL (16.01, 12.28, 23%, 13.00) CSCO (17.52, out 15.75 on 5-08, 11%) BMET (26.40, out 5-01 @28.80, -9%)

SPECIFIC STOCKS LONG: Long selections open as of 4-01: (entry price, current price, % profit, current stop) from 2-15: VVI (25.33, out 5-06 @ 29.00, 14%) LION (7.45, 10.30, 38%, 9.85) ROC (5.16, out 4-30 @ 4.85, -6%) From 4-01: DCN (20.90, out 5-01 @ 19.50, -7%), CKFR (15.32, 24.18, 57%, 22.40) ITRI (30.40, 33.50, 10%, 32.20)

FOREX:  Many currencies approaching resistance within apparent sideways channels. A Forex selloff would coincide with an important bottom in U.S. stocks forecast in May. As with bonds and stocks, the key may well be the U.S. economic reports to be released this week.  Stronger reports will spark the lurking rally in the DX and forex selloff while weaker reports will push forex up a bit more to their channel highs.  Technically we favor one final re-test of the May lows for DX but currencies are very much captive now to the economic reports and movement in bonds and stocks.

            DX: From 4-26: “…Very high open interest is likely to unwind in the direction opposite of the current price trend (a selloff from the Jan. high). Commercials are moving to constructive net long position but may need to accumulate for several weeks. Also, the technical pattern from the Jan high points to at least a re-test of current levels before a meaningful rally can begin.  Note … the confirming commercial shorting in EC, BP, SF, AD, etc…”  We technically favor one final re-test of the May DX low, but a US stock rally would take DX along for the ride, and the huge net long DX commercials will be ready for it.

Euro: On final legs of a sucker rally from the 1-28 cash low (.8578).  Upside targets are in the 9165-9250 range. A break in the rally below the 5-08 cash low (.9041) puts it in serious jeopardy. The highest net short commercial position in 3 years says the top is very near. A selloff in the EC is likely to coincide with the forecast May bottom in the S&P and top in the long Treasury bond. Note the pattern reeks of swing congestion with a triangle developing within a rectangle.

BP: Commercials are very bearish.  The rally from the 1-29 cash low (1.4064) may have one blip left, likely to stall under 1.4800, consistent with one final downleg in U.S. stocks.  Both BP and EC are in highly sensitive zones just touching their downward sloping upper triangle resistance lines.  These lines are very sufficient in themselves to combine with the commercial net short levels and tank these currencies immediately.  Hence the 5-03 high (1.4683) and the 5-08 low (1.4538) form very important breakout levels. 

SF: From 4-26: “…Now at 6152, keep tight stops on longs as layers of channel resistance lie just ahead...”  Now at 6270, we prefer very tight stops at the 5-08 cash low (.6213).  SF is VERY NEAR significant channel resistance (9-21 high 6361, Jan ’01 high 6266, 7-99 low 6300).  One final blip may remain to test this resistance but the commercials are hugely short at 3-year levels.

            JY: From 4-26: “… One clue: The Nikkei has mirrored JY turning points within a day! As the Nikkei looks technically bound to take out its’ March highs in the next week or so, the JY will likely go along for the ride…” The March high in the cash JY was taken out on 5-03 but the Nikkei March high was not. These charts are now starting to drift sideways. This makes the 5-08 lows in both EWJ and JY critical to keeping the rallies from the February lows intact.  JY and Nikkei commercials moving further net short while catatonic option volatility points to one last blip to take out 5-03.

ME: From 4-12: (@10.84 basis June) “…An on-going favorite on the short watchlist, has this brick finally topped?…Substantial further downside is very likely…”  From 4-26L@10.65)  “…lower lows are very likely. Commercials are still very net short…” Now at 10.44, a complicated bottoming process is likely occurring. Very short term we look to take out the 5-03 and 5-10 low (10.405) with blip downside targets to 10.36.  Then setting up for a blip rally failure and final test of the lows (holding above 10.29-10.32) before month’s end. Watch the DX closely as a rally in the Greenback is likely to be shortly followed by a sympathy ME rally.

            AD: From 4-26: “…Keep extremely tight stops on any AD longs. Both the AD and the Aussie stock market (see EWA  WEBS on the AMEX) are at important resistance and have completed 5-wave advances from their April ’01 (AD) and Sept ’01 (EWA) lows. Commercials are massively net short the AD. Great risk/reward potential…”  Now the AD and the EWA display bearish divergence. While the EWA peaked on 4-19 the AD has continued the toppy Wave 5 rally. Commercials are freakishly net short. Note also the bearish spike low in option volatility early in May. We prefer the tightest stops on longs while looking for shorting opportunities.

            CD: From 4-01: “…A major bottom in sideways pattern continues to evolve…” From 4-26: “…The upside breakout on 4-17 to take out the 3-22 high basis June is further confirmation of the bottom in the CD…”  The CD rally from the Jan major low is now ready for a breather. The technicals point to a short-term pullback followed by a resumption of the rally to marginally take out today’s high. Commercials are moving to hugely net short so this season CD will not likely trade much higher in its sideways channel.

MEATS:  Hogs getting bullish, bulls still bearish.

LC: From 4-26: (@62.775 basis June) “… LC now looks like a couple days of rallying then a resumption of the downtrend which is very likely to take out the 4-25 low…”  We got 7 days of rallying capped off with a very convincing Wave 4 reversal bar on 5-08. Now at 63.125, we’re targeting the downside to test and takeout the 4-25 low (59.325).  Commercials remain hugely bearish.

LH: While a final retest of the 4-12 and 4-30 lows is technically plausible over the next few days, LH is shaping up for a major bounce from these levels on both weekly and daily charts.  Note the very long commercial position and the collapse in option volatility. Also note strengthening in the PB outlook.

PB: From 4-26 (@ 66.85): “…Keep tight stops on shorts. In the final downleg of the selloff from the March high. Commercials are moving to a very constructive net long position ahead of a likely bottom…”  Now at 64.975, PB may have one final blip down to retest the 5-08 low (60.900) just above the huge long-term support zone at 60.000.  Both technicals and commercials are very supportive of a major bottom forming here in the weeks ahead.

GRAINS:  Peak seasonality is right here.

W: From 4-26 (@266.5 basis July): “…The easy downside money has been made and a bottom is near. Commercials are adding to net longs. The strength of the collapse from the 3-28 high points to a rally and final re-test of 4-26 before the selloff from the 1-14 high is over…” Now at 271.5, keep very tight stops on longs as we continue to expect a brief retest of the 4-29 low, targeting 261.5 over the next week or so. Said re-test would put in an important bottom in this maximum-bearish May/June season.  The VERY net long commercials are setting up for a substantial rally. A bit more complacency on the option volatility would help bottom-building as well. Note also the massive recent net longs in Minneapolis wheat.

            S: The picture of consolidation. Note the position unwinding as commercials close out shorts against funds’ long liquidations. Prices consolidating in sideways channel since the Mar high. Commercials now approaching very supportive levels which will limit the downside. Option volatility is rising with the rally from the Jan lows but is not yet at an “extreme” level. The peak season is still upon us. We look for at least a short-term pop to test 480-483 in the next few days basis July. With a 467.5 stop we like the risk / reward on this trade.  A distinct possibility of a rally to the 490-500 area sweetens the deal.

C: From 4-26 (@ 203 basis July): “…Huge recent volume, net long commercials, a completed selloff from the Jul ’01 high and the 4-12 spike low all point to at least a tradable rally here. The only blemish is a possible mini descending triangle since the 4-12 low. If so we might see a final downside test of 4-12…” This is exactly what we got. The mini triangle broke down to put in an important bottom on 5-06.  The gap open and reverse bar at the 5-06 bottom came with very net long commercials and jittery option volatility. Now at 215, Corn may easily yet rally to 225.  This may be only short-term upside. Longer-term Corn bears are heartened by the ugly weekly chart and the inability of C to rally earlier in this peak season.

RR: Keep very tight stops on any shorts, as at least a tradable rally is likely very nearby.  Option volatility has declined substantially from the Dec highs, reflecting high complacency with this selloff.  Meanwhile commercials are moving to seriously net long levels. Further, well-formed 5-wave completions from the Feb ’97, Sept ’00 and June ’01 highs give this situation the real possibility of a major low in the making. Given the bearish descending triangle since the Nov 01 low, a final spike climax bottom nearing 3.50 basis July short term is not out of the cards.

SOFTS / FIBERS:

            CO: Technically toppy in the bearish May/June season. However, commercials are moving to very constructive net long levels. We prefer to stand aside.

            SB: A bullseye long on our prior watchlist. From 4-26: “…now at 509 basis Jul, SB is a market to watch on the long side.  A major bottom is forming on the selloff from the Oct 2000 high…”  A tremendous rally started the next day. Now at 584, the turn in option volatility likely confirms major Wave 5 bottoms on both weekly and daily charts. We favor tight stops on longs as the earlier period after a bottom is often volatile and the seasonally week June/Jul season is still ahead. The months ahead should offer a number of good long side trades.

OJ: Setting up for a serious upside test.  Attractive risk/reward.  Commercials are constructively net long and option volatility is catatonic at 2-year lows. Bullish ascending triangle forming from the Jan 02 Wave 4 bottom on the daily charts. 

CT: We’ve called this market for almost 2 months. From 4-12:“…A favorite short on 4-01 (@ 38.41 basis May, 40.00 Jul), CT sold off rapidly to 36.86 May. Now at 37.37 May, the downtrend should remain under the 4-10 outside bar high of 39.10. Commercials remain bearishly net short and the possibility of a MAJOR move to challenge both the Feb ’02 and Oct ’01 lows gives this situation great risk/ reward…” From 4-26: “…Now at 33.55 May, 35.27 July, CT is due for a blip rally in the days ahead before continuing to lower lows…” Now at 34.71 July, the current blip rally will most likely fail in the next 2 or 3 days followed by a test of the 5-06 and 5-07 lows (33.05).  This trade could have a major hidden payoff of a further test of the multi-year lows (Oct 2001) in the bearish seasonality ahead. Bears beware the increasing commercial net longs, while bears take heart in the rising option volatility from the 3-22-02 high which looks like it has further to go.

KC: Another on-going great short call: From 4-01: “… Now at 57.20 May, keep VERY tight stops on any longs as the rally-ruining KC commercials are moving sharply to 3-year record net short levels…” and From 4-12 (@53.20 May, 55.50 Jul): “… The shifty KC commercials are dizzingly net short now, indicating the downside move is not over. Look for a test of 50.00 – 51.00 at this point…” From 4-26: “… Now at 49.70 May, 52.15 Jul, we expect a blip rally. However, commercials remain very net short, signaling a re-test of support at 50.00 and below basis July…Keep tight stops on shorts and let KC run as far as it will go…”  We got a 2-day blip on 4-29 and 4-30 followed exactly by a plunge to break 50.00 and hit a low of 4885 on 5-13.  Now, commercials moving to net long signal the beginning of the end of this selloff from the April highs. Look for a 3 or 4 day rally then a final downside test likely to hold in the area of the Feb lows and above the major bottom in Dec.

LB:  A great call from 4-26 (@297 basis July): “… We’re now mildly bullish LB with at least 50-50 odds of testing the 3-22 high (330 basis May) in the next few weeks…” LB rallied to hit 310 on May 6.  We favor very tight stops on longs here, just below the 5-13 bar low of 296.80. Rally targets to 326 but keep stops tight at 296.00.  Failure to rally with the stock market on 5-13 is suspicious.