Edwards & Magee Technical Analysis of Stock Trends

	March 26 2004 Gaps galore! Not unheard of, but rare, and (according to us) significant at this time. While the Index itself did not gap, the DIA did, along with the other majors. We added to our shorts on the gap in the DIA and the QQQ. Remember, this is aggressive speculator behavior. Conservative investors will be lightening up and hedging. We also think that it would be conservative to begin liquidating long portfolios or going to a fully hedged position. See our recent letters on this subject.
	Either action is inherently conservative at this point. Either the market is going into a wide swinging trading range (most probable in view of the political realities) or is forming the top of this little bull to begin the long slide downward. (Less likely.) Remember. No one knows. Especially those who say confidently they do. Especially those.
	Although the gap was quickly covered, and, by what we call a "decisive thrust" we still consider it an augur or further downside. The quickness of the closing and the decisive thrust argue that we should see some more activity to the upside next week. Lack of upside would be especially ominous. Can it be that Bush and the gang of four (Condy, Rummy, Wolfie and Dickie -- other wise Backseat) are losing market control as well as political control? Let us note here again our determined hostility to practitioners of fiscal irresponsibility and borrow and spend and deja voodoo economics. What we have here are Wolfowitzes in conservatives clothing who are undermining the markets for a decade. The idea that taxation is abhorrent to responsible conservatives is an orange canard. Soros, Gates Sr., Buffet and a host of responsible businessmen joined us in decrying the irresponsible policies of the Bush Administration. (Actually, more modestly, we joined them.) Being realists as well as Mugwumps we see no reason not to get short and at least make a fortune in the coming bear market.

	March 19 2004 Where we are right now In six months it will be obvious what the situation was March 19 2004. It may be obvious in a month. Or if the Dow went to 11000 or 9000 next week it would be obvious what should have been done. Right now the only thing that is obvious is we have dropped out of a sideways trend (we could belabor our technician's dictionary and find other names for it) through a number of important trend lines, as illustrated on the chart. So where we are right now is in uncertainty.
	This might be the end of the bull, the beginning of the bear or the first he-haw of the mule. The drop out of the pattern could be a bear trap and we could soar on to 11000 (not very likely in our opinion, and there are only opinions at this point as NO ANALYSIS OR SYSTEM ON EARTH KNOWS WHERE THIS MARKET WILL TOP). BUT! Measuring the potential reward against the risk it seems clear that the time has come to either hedge, get out, scale back, or switch to trading strategies.
	We said several weeks ago that the NASDAQ would lead the way, or give us an idea of where the markets were headed and it appears it has done so. The trend line seen in the lower right corner is better illustrated in the following chart which went to our journalistic correspondents with the accompanying letter.
	Some one once asked the Baron de Rothschild how he made his fortune. “By selling too soon,” he is said to have replied. Quite a while back we opined that classical chart measurement techniques forecast a top at about 10500 basis the Dow. Point and figure wizards looked for 11400 and other numbers have been discovered by consulting the bird entrails. By our reckoning, using plain old Edwards & Magee chart analysis, the party is over. And if it's not over the time has come to go home anyway. Like a mountain of snow a huge ledge overhangs this market and when it starts to slide it will be Katy bar the door. There might be another 8 or 900 points here but rather than hang around we prefer to sharpen up the old bear claws and get ready for some roast bull. We sold all our longs the day before the terrorist attack in Madrid and shorted the bonds and the DIA and the QQQ. The liquidation of longs was a very conservative move, and the shorting is an aggressive speculator’s move. As always we did not commit our whole line, but committed only 1 of 5 or 1 of 7 tranches. Our calls on the market have been dead right on for five years. Save this email and see whether we get egg on our faces.
	March 12 2004 A decisive thrust Over the recent past we have conducted a laborious examination of the NASDAQ 100, results of which are in our State of the Markets letter. That exercise left us uneasy about the markets in general, feelings which were crystallized in the last four or five trading days. For six weeks or so we have been watching the markets closely, knowing that either a reversal or a continuation pattern was setting up. We expected it to be a continuation because we couldn't see the Bush Administration losing control of the markets before the election. But the ongoing storm of bad news couldn't be disguised and it appears important lows have been taken out in the major indices. Here the major 12 month trend line is taken out and surprise ! with a decisive thrust. Such breaks are not definitive until the penetration reaches 3% (m+l) but given the state of the markets and the state of the economy it is enough to send us to the sidelines. And enough to make us dip a bear claw in the water. See last chart, this week.
	This long term look at the SPY may be prophetic. The two month and three month trend lines are not marked and do not need to be. They are broken. The next cycle is down we think. How far down one never knows but why tempt fate. If the train comes back this way we can always get on again.
	The Qs show the same picture. Recently we published stops for the major indices. Very well financed and intrepid investors might wait for those stops to be taken out. Exiting here might give up 800 to 1000 (unlikely) Dow points. But since the market after that is going to be either a trading bear or a screaming bear it doesn't bother us much. Ordinarily we would wait for the stop to be taken out. Three things incline us to exit here. The grinding nature of the past six weeks the massive avalanche of resistance overhead and the most particular patterns which have manifested themselves over the past two to six weeks.
	Rejoice all ye young speculators! You are about to have the opportunity to make more money than you ever wanted. Yes, sports fans shorting the bonds will make you rich beyond belief. Or bankrupt. It will not be like taking candy from a baby, more like a bear taking honey from African Killer Bees. Pyramid the bonds! Live fast. Die young. And leave a beautiful memory. While possible, remote likelihood of more up here (See our Bond Letter). And a 100% probability of higher rates. The only question is when. In our separate bond letter we will ride the bond roller coaster. Register at edwards-magee.com/email/ and watch the fun.
	2004 March. In like a sneak thief The sideways trend continues, or appears to continue in the indices with some variation. The SPY making a new high and the Qs clawing their way off a bottom and a support line. So, over all a mixed picture. Mixed and inconclusive, but not enough yet to abandon long positions.
	A positive Friday in the SPYs and a moderate continuation of the uptrend with a new high on strong volume. The most positive behavior would be a close over this high, but for the moment this is better than a poke in the eye with a weapon of mass destruction.
	The Qs continue weak flirting with becoming a downtrend. All things considered given scandals, Martha being caught with her hand in the cookie jar a jobless economic situation it is a tribute to lying and cheating on the part of the Fed that the markets are holding up as well as they are at present. Our State of the Markets Letter examines the NASDAQ 100 in detail. To subscribe: SOM Click Click.
	In the middle of February we noted in our State of the Markets Letter that a new cycle had begun in the markets. It appears that the Euro has made a double top. It was well overbought anyway and we sense the invisible hand of the central banks -- maybe even our own. Even at 1.25 European companies are gasping to stay viable. Or stay in business.
	We noted that in January on the gap (and some other systems) that futures traders should be out of gold. It appears that the downtrend is stronger than thought and after one sally back long (quickly proved unproductive) we would be sideways gold.
	The change in cycle is even more dramatically illustrated in the yen. Frankly unless one were an experienced and intrepid shooter we wouldn't be putting on any new positions in these markets right now.