BISHOP’S  MARKET  OUTLOOK, 5-31-02

CRB: From 5-13: “…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 its components are now captives awaiting greater clarity on the condition of the American economy…” Note our comments on the “clear as mud” American economy under “Forex”.  The CRB is whipsawed by weakening energies and the speculative metals rally. But we still see the 4-18 high as very secure at this point.

ENERGY:  Energies have generally topped for the moment, and commercials remain very net short. We’re generally standing aside for the moment.

CL: From 5-13 (@28.38 basis Jul): “…bulls should adjust their trailing stops to the low of today’s bar (27.35)…upside progress from here will be tough…”  This stop was taken out on 5-16 and crude has traded straight down.  More importantly, 5-14 saw a 5-wave completion from the 11-19-01 low. Now at 25.76, CL is poised for a short-term upside blip given the 5-29 reversal bar in territory likely to see a Wave 4 bounce.  But this rally is likely to fail. The not-yet-bullish commercials and the weak summer season ahead all point to 5-14 as the top in crude for some time to come.

HO: From 4-26: “…HO looks weaker than CL technically, and is very unlikely to take out the 4-04 high…”  From 5-13: (71.68 basis Jul) “…The 4-04 high (73.00) still looks quite safe at this point. Beware a very likely summer selloff …HO is vulnerable to a downside price surprise…”  Well HO topped out on 5-14, failing to take out the 4-04 high and selling off to a low of 63.70 over the next 10 days. The 5-29 reversal bar brought us hope that HO might blip-rally and set up some nice short side opportunities over next week or so. This may yet develop. Meanwhile commercials remain hugely net short from the 5-14 high and the bearish mid-summer season is just ahead.

HU: The gasoline chart remains erratic. Failure to make a marginal new high on 5-13/14 with the rest of the energies just accentuates HU weakness. Commercials are bearish and the seasonals are toppy.

NG: From 5-13 (@ 3.820 basis Jul): “…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…Commercials remain massively net short and options are very complacent and vulnerable to a downside price surprise…”  NG topped the next day then sold off to hit 3.33 on 5-29! At least a blip rally is technically likely in the next few days and a WAVE-BASED case can be made for testing the 5-14 high.  Remember that NG often behaves independently of the crude complex. Any rally play should have an initial stop-and-reverse strategy and aggressive trailing stops.  Commercials remain very net short so rallies are best seen as short-side setups at this point.

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

GC: We’ve included GC on our favorite short watchlist for 2 weeks and nothing has materialized.  Gold is now the most glaring speculative bubble on the horizon as the recent rally is widely misunderstood as a sign of impending economic strength. Two important points: 1) GC is a reaction to the weakening dollar. Note that Gold stopped rallying vs. the JY and SF in late Feb and vs. the EC in early April.  Thus, GC is VERY exposed to any rally in the greenback.  2) Gold buying is a sign of fear, not economic bullishness. The recent monthly report from Kitco.com is very insightful: the standout region seeing an increase in gold demand is Japan.  The reasons? From the report: “…in Japan economic and financial UNCERTAINTIES caused buying to rise nearly fourfold from Q1’01 levels…nervousness over large supermarket chain collapse…the Enron saga…Japanese government reducing the bank guarantee limits…fears over bank stability, low interest rates…fears over the economy…a growing desire for risk diversification…”  Industrial demand is zilch, lease rates are falling, and Commercials are hugely net short.  If you’re trading GC from the long side, keep the tightest of stops.

SI: From 5-13: “… 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..” Now that silver has punctured it’s “sideways box resistance” in the 475 area, longs should keep super-tight stops and look for short entry opportunities. At this point the upsloping trendline from the 5-14 and 5-23 lows is an excellent low-risk entry trigger if broken.

HG: A mixed picture. We’d expected to add copper to our favorite long watchlist but the situation remains indecisive.  Commercials have backed off a bit and the pattern is erratic. At this point there’s nothing to make us believe the current rally will threaten the 4-02 high.  Wait for more clarity.

PA: Still bearish. Palladium looks determined to re-test the Nov. lows in the 310 range. A PL-PA bull spread makes sense technically.

PL: A bullseye call from the 5-13 report (@ 523.3 July): “…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…”  Now at 544.30, we’re still technically looking for a test of the 4-18 high (558 Jul) with outside targets to 575 by mid-June. Meanwhile commercials are adding to net shorts so keep very tight stops.  Another worrisome sign: the failure of sister PA to rally.

BONDS/ NOTES:   From 5-13: “…The current retracement looks more like “curve re-adjustment” flowing to the shorter end than a broad-based selloff…” This is exactly what we’ve seen over the past 2 weeks with 2’s, 5’s, and even 10’s taking out both their Feb and May highs while the 30-year US failed to test them.

US: So far a near perfect call from 5-13: “… 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)..We narrowly favor a re-test of the triangular resistance highs … 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…” Well the 4-18 low held and US June rallied to top off at 102-28 on 5-31, within 2 ticks of our 102-30 target!  Commercials continue to move net shorter but not yet quite at extreme levels. Optimists see the daily technical wave chart taking out the 5-01 high (103-04) and targeting 103-22 to 104-05 by early June. However the 60 minute chart says “the top is in on 5-31”.  Either way the rally from the 3-15 and 5-14 lows now looks very toppy.

TY, FV, TU:  From 5-13 (@TY 105-02 basis June): “…Commercials remain loftily net long. Indicative of a curve shift from 30’s to 10, 5, and 2-year maturities…Bottom line: the “final upside retest” story is intact until the 5-09 lows are broken (104-190 basis TY June)…”  Now at 106-145, longs keep very tight stops near 106.  TU continues to look like substantial upside in this rally from the apparent Wave 4 bottom in March.

CORPORATES: Mid and lower-grade corporate closed end funds are holding their own after a 3-year slide.  Credit spreads likely have maxed out.  We think it’s an ideal environment to accumulate these corporate bonds. If the economy is weak the higher yields (over 11 %!)  will be attractive and there’s the perception corporate risk is declining by “cost-cutting” measures at most firms. Alternatively, if the economy picks up there’s the perception that top and bottom lines will benefit. Heads you win, tails you win. Meanwhile pocket the interest.

STOCKS:  Economic uncertainty rules (see specific economic report comments under “Forex”.  The commercials aren’t stepping up meaningfully from their persistent net short positions and retail demand is zero (ask any US stock broker if their phones are ringing).

OTC/ NDX: From 5-13: (@1652 OTC composite cash): “…Technically the rally from the 5-07 pivot low 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…”  Well the rally capped off as expected on Friday the 17^th with a bit more power (reaching 1754).  Technically a break of the 5-07 lows is a toss-up.  The pattern points to it, but probability indexes favor 5-07 to hold.  The single most bullish sign in US stocks is the increasing net long position of the commercials. However, this is out-of-sync with the persistent net shorts in the S&P and the RUT commercials just heading to neutral.  We’re sticking with our 5-04 forecast at this point: that OTC will bottom above the 1500 to 1550 range in late May, early June.  How much above, and whether the 5-07 low will hold is unclear.

SPX: From 5-13 (@1074.56 cash):   Commercials are now moving off net short levels but appear to need lower prices before getting seriously supportive…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…” Now at 1069.55 the wave technicals still point to a break below 5-07 targeting, say 1035 by early to mid June.  Note this is entirely consistent with our 5-04 forecast of an S&P bottom in the 1025 – 1050 range.  Importantly, we don’t see any ensuing rally doing much more than touching the Jan and March highs at this point, keeping SP locked in a frustrating sideways box for awhile.

DOW:  The Dow is waiting for the broader indexes at this point.  The 5-30 pullback to narrowly take out the April and May lows qualifies as a completion of downside expectations from the March high.

RUT:  From 5-13 (@499.72 cash): “… 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…”  Well the RUT low on 5-30 hit 482.60.  We see today’s action as a few days of a blip rally, likely followed by a final re-test of 5-30 early in June.  RUT commercials need to move a little further long and then we can set up for what looks to be a mild summer rally likely starting early to mid-June. 

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 4-01: ORCL (12.84, out 5-15 @ 9.30,  27%) RATL (16.01, out 5-14 @ 13.10, 18%) From 5-13: SEBL (22.88, 18.33, 19%, 20.60) YHOO (15.98 out 5-14 @17.55, -10%) ADRX (44.84, 43.59, 2%, 46.10) HPQ (19.98, 19.14, 4%, 19.50)

SPECIFIC STOCKS LONG: Long selections open as of 4-01: (entry price, current price, % profit, current stop) from 2-15: LION (7.45, 10.60, 42%, 10.31) From 4-01: CKFR (15.32, out 5-29 @ 22.25, 45%) ITRI (30.40, out 5-16 @ 32.00, 5%) From 5-13: AMAT (25.58, out 5-24 @ 23.99, -7%) NVLS (49.40, out 5-22 @ 46.70, -6%)  KO (56.89, out 5-24 @ 55.15, -3%)  MCD (30.41, out 6-03 29.50, -3%)  SBC (32.05, out 5-30 @ 33.65, 5%)  JPM (36.34, out 5-30 35.05, -4%)  VIA (48.04, 49.34, 3%, 47.19)  DD (45.65, 44.65, -2%, 44.40)  UTX (69.55, out 5-21 @ 67.50, -3%)  SLB (56.54, out 5-21 @ 53.20, -6%

FOREX:  From 5-13: “…A Forex selloff would coincide with an important bottom in U.S. stocks forecast in May… [and a top in US bonds]…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…”  Well the ensuing economic reports were clear as mud. Strong Retail, Durables, Personal spending, Existing homes, and Chicago PMI contrast with weak Inventories, housing starts, leading indicators, the Philly Fed, and New Homes that rose only in the Midwest. Our MAJOR FINANCIAL THEME continues to be an impending reversal of fortune with the S&P and DX bottoming vs. tops in US, Gold, and most Forex.  The continuing weak position of SP commercials is the major fly in the ointment.  They need to move net longer to support a serious US stock rally.  Stay tuned.

            DX: From 5-13 (@ 114.30 continuous): “…  We technically favor one final re-test of the May DX low…” That’s exactly what we got.  Now at 111.28, at least a blip rally is likely as Commercials are very net long and DX is near the 9-17 low which forms support in the sideways DX “box”.  The strength of the selloff from the Jan 28 high leads us to believe we’re likely to see a re-test of today’s levels after such blip rally, however. Meanwhile the commercials remain very net long ahead of at least an intermediate bottom.

Euro: Triangle congestion is now completely cleared and the next major resistance is at the top of the horizontal “box” going back to June 2000 in the 9500 area (the bottom of the box is now 8400-8600).  Why has EC continued to rally? From 5-13: “…a selloff in the EC is likely to coincide with a [rally] in the S&P and a [selloff] in the US T-Bond…” Neither one of which has yet materialized. The power of the recent rally indicates that after any blip pullback, a final surge to test the 9500 resistance is technically probable.  Longs should keep the tightest stops as EC commercials are off-the-charts at 3-year net short extremes and open interest is sky high: a speculative accident waiting to happen.

BP: From 5-13: “…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...” Now that the blip is underway, I’m now able to pinpoint a topping zone forecast on BP: 1.4700 to 1.4820 by early to mid June. MIGHT THIS BE THE SAME TIMEFRAME FOR AN S&P BOTTOM AND A US TOP ??  The odds are very good.  Meanwhile commercials are hugely net short ahead of this top. How will we know when the BP peaks?  One clue: watch for the catatonic BP option volatility (now at 2 year lows) to pick up!

SF:  By taking out the 9-21 high, SF has completed a 5-wave rally from the July ’01 lows. Technically we’re now looking for a completion of the smaller rally from the 1-31-02 cash low (.5818). We would expect a blip pullback here followed by a final leg up to top out in the 6500-6600 range in June.  Note the hugely net short commercials now at levels consistent with EVERY important top in the SF in the past 3 years.  We expect ALL of these FX (BP, EC, SF) to retrace vs. the DX in unison, likely triggered by a US stock rally and rising US interest rates.  But the US stock rally is the “when and if” key trigger.

            JY: From 5-13 (@ .7844 basis June):"… the 5-08 lows in both EWJ (8.32) and JY (.7780) are critical to keeping the rallies from the February lows intact…catatonic option volatility points to one last blip to take out 5-03…”  Well the EWJ low held and JY hit only .7777 before both commenced strong rallies to take out their 5-03 highs.  The 5-30 exhaustion gap is an ideal Wave 3 top. If so we expect a pullback in JY to at least the 7850 – 7900 area before a final speculative rally to test the 8300-8400 “multiple resistance zone”.  One of the first observations we can make regarding the early 2002 scenario of multiple symbols seemingly “boxed” in sideways resistance is that the yen has broken decisively to the upside from it’s early 2002 box in the 7500-7900 zone.  We’re watching these developments to give us critical insight into market direction for later 2002 and 2003.  The key to JY remains the Nikkei.  JY is not as exposed to an S&P rally as the Euro currencies.  The Nikkei is extremely toppy looking here, consistent with at least the Wave 4 JY pullback as described above, as are the net short JY commercials.

ME: From 5-13: “…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…” This is exactly what we got with both May lows taken out on 5-24 and a perfect reversal bar on 5-30 setting up for what looks to be a sharp sucker rally.  We expect the current rally to reach perhaps 10.50 or so, then selloff to test the 5-30 low and put in a very tradable bottom.  Note that ME commercials are now moving to net long levels consistent with important tradable peso bottoms. VERY IMPORTANTLY, this pattern would likely coincide with a bottom in DX also.  Note the timeframe for an ME bottom is likely by mid-June, the same forecast timeframe for a top in BP.  All signs are now pointing to this mid-June area as a period of major shifts in current financial positions: stocks, bonds, & Forex.

            AD: Strength in EWA (the Aussie stock WEBS) points to another rally after a short-term pullback here.  Ditto the strength in AD. Meanwhile the previously hugely net short commercials are coming off their shorts somewhat, leaving us scratching our heads over what it all means.  Note the rising option volatility points to an impending change in trend.  Net-net we still believe a final rally in EWA and AD will leave a lot of long-side speculators lonely at the top.  Longs keep very tight stops.

            CD: From 5-13 (@ 6429 cash): “… The technicals point to a short-term pullback followed by a resumption of the rally to marginally take out today’s high…”  Well we took out the 5-13 high and then some, now at .6548.  The Canadian economy is very strong and the domestic demand for currency shows it. The strength of the rally from the Jan lows points to one final upside test after any pullback.  Longs should be very cautious as commercials are very net short and only speculators will be participating in that final upleg.

MEATS:  A final downside test for LC as Hogs begin to bottom.

LC: A bullseye short call from the 5-13 Outlook: “…Now at 63.125 (June), we’re targeting the downside to test and takeout the 4-25 low (59.325).  Commercials remain hugely bearish…” Now at 60.475, LC is a very interesting setup for a final Wave 5 plunge. Look for cattle to take out the 4-25 low (59.325), targeting 57.5 to 58.0 by mid-June.  Commercials remain very net short and the bearish early summer season is upon us. Keep tight stops on shorts as falling option volatility says the forecast selloff may be an important bottom.

LH: From 5-13 (@54.350 basis June): “…a final retest of the 4-12 and 4-30 lows is technically plausible over the next few days...” Now at 46.750, commercials are very net long and Hogs have completed a 5-wave downward sequence. We look for a bottoming formation to begin in the days ahead. Note the collapsing option volatility which peaked at recent congestion. An LH-PB bull spread is interesting.

PB: From 5-13 (@ 65.100 July): “…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…” Well we got the retest and then some, hitting a low of 55.05 on 5-30. The strength of the last leg of the selloff makes a blip rally here followed by another re-test the most likely scenario.

GRAINS:  We knocked the white off the rice in the 5-13 Outlook.  Did Corn and Wheat make major bottoms in May?

W: We believe this rally is for real and the 4-29 low may be a very important pivot. Net long commercials should provide plenty of upside fuel over the next few weeks.  Expect nervousness near 285 then a likely follow-thru to the 290-300 range. Clearing the 3-point downsloping resistance from the Jan. high (now at 290-292) will be another chart milestone. Note also the low open interest of this “forgotten” market, another bullish indication.  

            S: Another bullseye from the 5-13 Outlook (@ 477 July): “… 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…” Well, from 477 on 5-13 we hit a high of 510 today! Longs keep tight stops at 500 or tighter. Given the increasing net short commercials this rally is likely to top out by 525.  When will Beans peak?… look for a blowoff in option volatility that’s been steadily increasing since the Feb lows.

C: We continue to believe that the May 6 low may be a major bottom in Corn. Commercials have pulled back their net longs a bit. Long traders should adjust stops to the low of 5-28 (204.25) or higher.  Best to give this market a little time to form a more discernable bottom.

RR:  From 5-13, one of our all-time best market calls (@3.710 basis Jul): ‘…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…” Now at 4.285, Rice has rocketed nearly straight up since 5-13.  Keep very tight stops on longs…after any blip pullback we should have at least one more surge in this phase of the major bottoming process.

SOFTS / FIBERS:

            CO: Given the short-term ascending triangle from the April lows, short term we can envision a final upside blowoff (to, say 1650-1690 by early June). However, 5 wave upside completions are in place from the 12-00 and 9-01 lows and commercials have reversed and gone precipitously net short. Note also the 5-31 reversal bar, a sign of market shakiness.  Watch this market for low-risk short side entries. A final collapse of the falling option volatility to the catatonic levels of Nov/Dec ’00 and Sept ’01 would create a perfect topping scenario.

            SB: We believe a major Sugar low is in place as of 5-01-02.  Short term, the commercials have moved to rally-capping net short levels so we expect a pullback in the days ahead to hold above at least the 5-01 if not the 5-28 low.  Longs should keep very tight stops here. Once commercials return to neutral in any selloff, look at 3-4 day pullbacks as lower-risk long-side entry setups.

OJ: One of many bullseye calls from the 5-13 Outlook (@ 89.50 basis Jul): “…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…” Now at 91.80 we still look for at least a test of the Nov highs in the 96.00 area with a solid technical shot at 100-103 by mid to late June.  Commercials remain very supportive. Great risk/reward with stops near the 5/23 (89.90) and 5/25 (90.80) pivot bar lows. 

CT: From 5-13: “…Bears beware the increasing commercial net longs…” which indeed blew our otherwise bearish setup scenario. The 3-22-02 high (41.50 July) is a key level to watch.  Under this pivot, CT remains in a bearish weekly wave formation from the 1998 and 1995 highs and the peak May season is behind us. IF Cotton takes out the 3-22 high, the likelihood increases that Oct ’01 was a major low.

KC: We favor the view that Coffee will retest at least the 5-14 low (48.60 basis July).  Note the bearish Jun/Jul/Aug season ahead.  However, given the proximity of KC to its’ turbulent recent low zone, we’re standing aside.

LB:  A mixed picture.  We’re on the sidelines.