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May 13, 2007

Demand Power and Supply Pressure Buy and Sell
by Robert McHugh

We've been measuring and reporting Demand Power and Supply Pressure for the Australia SPASX200 index for the past year. This week we present them graphically, but highlight for the first time the SPASX200 Demand Power/Supply Pressure buy and sell, entry and exit signal system, shown on the chart below. Aside from the astonishing correlation, the most exciting aspect about this system is the guidance it provides on exiting an established position.

The theory of this amazing indicator is as follows: What is Demand Power and Supply Pressure? They are our proprietary measures of buying interest and selling interest. They are the raw components of our highly correlative Purchasing Power Indicator. Like most of our key trend-finder indicators, they are momentum measures. We believe the best tool to find a trend of 2 percent or more is by following momentum measures. By breaking down the Purchasing Power Indicator into its two key components, we end up with a trading system that identifies 1) when we can enter on the long side (buy the market, with either cash market purchases, futures, or call options), 2) when we should exit that long position, 3) when we can enter on the short side (play the market to decline with an inverse fund, or futures, or put options), and 4) when it would be wise to close that short position. There are never guarantees in this business, however, a look at the chart shows that our odds are pretty good with this system.

One thing we really like about this trading system is that it will very rarely leave us holding a short position when we shouldn't. A lot of money has been lost on the short side over the past year due to increasing liquidity and market intervention, taking advantage of shorts, causing surprise rallies, or sustaining rallies indefinitely. By focusing on buying interest and selling interest momentum, we can know that even though an Elliott Wave labeling is calling for a top, one may not be coming quite yet if Demand Power is dominating Supply Pressure, guiding us to hold off from going short too soon.

So how do we use this market timing trading system? It is simple. The blue line represents Demand Power. The red line represents Supply Pressure. Simply, whenever the Blue line crosses above the red line, the odds are very high that a rising trend is starting. So we enter a long position on the date the Blue crosses over the red line. If we want to be conservative, we can wait for a decisive crossing before taking a position. Perhaps one might elect to enter where Demand Power rises more than 10 points above the Supply Pressure reading. Remember, we present these measures every night as part of our daily market updates, and include them on page 1 or 2 of each report.

Once the Blue line rises above the red line, we hold our long position. We can always exit at any time, especially if we have a profit we are satisfied with. However if we want to try and get the maximum out of a move, we can hold that position until the blue line drops down and intersects the red line again. That would be the latest time we would close the long position. Most of the time, the trend has not reversed when these two lines intersect, or if it has reversed, only a small portion of the reversal has taken place. Sometimes the intersection does not mean a new reversal of trend, but merely means a sideways move is coming, thus if we are holding options (where sideways moves are death), we can get out before too much time decay steals from a paper profit.

Should the red line (supply pressure) rise decisively above the blue line, we would consider that an entry signal to take a short position, if so inclined. We could buy put options at that point. We would then hold that position until the red line returns to intersect again with the Blue (Demand Power), at which time we want to get out of our short position if we haven't taken a profit and gotten out by then.

It is virtually impossible to catch a trend's life expectancy without a detailed analysis of Demand Power and Supply Pressure. We provide this information. We have a formula that considers each day's data, and convert that to DP and SP measures. We consider price in these calculations, but as or more importantly, we also consider other data, and the momentum change of that data. In combination, these determine Demand and Supply on any given day.

We plan to present this chart on a regular basis in the expanded weekend newsletters, and hope you find your market timing trading and investing strategies more profitable than ever because of these indicators. The Australia chart of Demand Power/Supply Pressure, while shown here, will be presented in the Australia reports going forward.

As far as the current analysis for the Australia SPASX200, as of Friday, May 11th, the Demand Power and Supply Pressure readings are within one point of intersection, which is extremely close to an "exit long positions" signal. Conservative investors should exit at this time, and wait to reenter either a long or short position once the two measures move more than 10 points apart from each other. Aggressive traders can choose to wait for the Supply Pressure line (shown above in red) to rise above the Demand Power line.

Again, as stated many times in the past, any body of technical work we present, which is not one of our key trend-finder indicators, is simply background. We do not trade off cycles, analogs, Elliott Wave analysis, patterns, moving averages, or Dow Theory. We trade off our momentum key trend-finder indicators of demand and supply (the Demand Power/Supply Pressure, and Purchasing Power Indicators), and off of breadth momentum (the 30 day and 14 day Stochastic indicators, and the Advance/ Decline Line indicators).

"For I am convinced that neither death, nor life, nor angels,
nor principalities, nor things present, nor things to come, nor powers,
nor height, nor depth, nor any other created thing, shall be able
to separate us from the love of God, which is in Christ Jesus our Lord."
Romans 8: 38, 39

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Robert D. McHugh, Jr. Ph.D.
Main Line Investors, Inc.

Robert McHugh Ph.D. is President and CEO of Main Line Investors, Inc., a registered investment advisor in the Commonwealth of Pennsylvania, and can be reached at www.technicalindicatorindex.com. The statements, opinions and analyses presented in this newsletter are provided as a general information and education service only. Opinions, estimates and probabilities expressed herein constitute the judgment of the author as of the date indicated and are subject to change without notice. Nothing contained in this newsletter is intended to be, nor shall it be construed as, investment advice, nor is it to be relied upon in making any investment or other decision. Prior to making any investment decision, you are advised to consult with your broker, investment advisor or other appropriate tax or financial professional to determine the suitability of any investment. Neither Main Line Investors, Inc. nor Robert D. McHugh, Jr., Ph.D. Editor shall be responsible or have any liability for investment decisions based upon, or the results obtained from, the information provided.

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