The Chart du Jour

Short Term Hourly 4th Wave Reprieve

July 11, 2001

By, Barclay T. Leib

Chart produced using Advanced GET End-of-Day

I was somewhat amazed at the aftermarket this evening as traders immediately jumped on Microsoft's comments of "improved business conditions," and simultaneously chose to ignore their $3.9 billion tech portfolio write-down. CNBC barely mentioned the latter bit -- clearly deeming a marginal improvement in operating earnings to be more important than the past devastation of the company's investment portfolio. Who cares if Microsoft's $900 million investment in Winstar Communications is now worthless, or that its $30 million investment in RhythmNet Communications now trades at 6 cents a share?

To us this is almost equivalent to the guy who comes home from work and says to his wife: "Honey, I have great news! The boss just gave me a 5% raise." But later in the evening he sheepishly admits to his wife "I'm afraid we'll need it, because I just blew half the value of our retirement savings speculating online in my IRA account." Overall, is that couple really better off -- both events considered?

Whatever the case, the Microsoft earnings announcement appears sufficient psychologically to cause a short term bounce in the S&P and other indices. When we look at the above hourly chart of the S&P 500 cash index, we discern what was likely a completed iii of iii down into Tuesday morning, with a iv wave period of minor reprieve to now follow. That said, we also think it will be highly likely that any rally beginning at this time should fail below 1225 on the S&P, and that on a more intermediate basis, we are still headed lower toward a S&P target (on the hourly chart at least) near 1134.

None of this grind lower -- together with intervening sharp rallies -- is particularly fun to trade for bear or bull alike. But there does now appear to be a more developed rhythm discernable amidst the chop. Consider it some version of a fox-trot: two-steps lower, now a step up, followed by a few steps back down once again. While it's not easy to always find the market's true beat, Elliott and Fibonacci most assuredly still govern the sodden tempo here.

And what of Microsoft up $4 in the after-market to 70 1/2? The houry chart pattern of MSFT (not shown) is most clearly a "broadening formation" indicating more volatility on the way here in the near future. If the bulls really get their verve up, maybe MSFT could vault up to 78 1/2 in a real ramp job over a few days or weeks. But mark our words: This evening's news will eventually disappoint and fade from importance. It is not a good reason to get all lathered up and start betting that a new bull market is upon us.

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