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Trading range will be resolved – to the downside

(February 18, 2002)

To begin tonight's commentary, we show you the chart we have been tracking for the last several trading days:

DJIA Closes (January 18 to March 22, 2001 vs. December 21, 2001 to February 15 ,2002)

Since we initially showed you this chart exactly two weeks ago, the correlation has between the two time periods have been pretty uncanny. During the last few trading days, we have seen a slight deviation but the trend (and psychology) remains the same. We believe the intermediate trend is now down.

As we noted previously, we believe the bounce during most of the last week was mostly due to short-covering. The chart below illustrates that perfectly. Note that during the rally from mid to the end of November, the NYSE enjoyed relatively good volume. Not good, but relatively good. Volume, however, decreased as the Dow marched towards its bear market rally high immediately after the holidays.

Meanwhile, the end-of-January decline was accompanied by heavy volume, indicating that the selling pressure is high. As the market rallied again last week, volume turned out to be dismal. The market rallied not because investors liked a bargain but because of the lack of selling pressure coupled with short-covering. Once again, the lack of volume has confirmed that the latest rally is another fake-out, and this week should bring another week of heavy declines.

DJIA Price and NYSE Volume Information (November 1, 2001 to February 15 ,2002)

Over the weekend, the big news was still IBM's accounting. No sooner has that been uncovered, another one is popping into the news. This time, it is GE. And here we were wondering how they always beat consensus estimates by a penny?

Going to the macro side-for those who are interested, the latest Weekly Leading Index from the ECRI has turned down. For those who are still waiting (or hoping) for an economic recovery, we wouldn't hold our breaths. On the contrary, please read our 1/27/02 article on our discussion of the WLI from ECRI.

By the way, the model portfolio has been updated.

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