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October 20, 2007

We Remain In Sell Mode
by Jay DeVincentis

Bi-Weekly Stock Barometer No. 168
10/20/2007 7:12:01 PM

But have we seen a bottom yet?

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So I'm heading to Vegas and I'm thinking about playing Black Jack. Sure I know how to play. But not really sure I know how to play from a gambling point of view. So I seek out any information I can.

That's just my personality, I can't do something without learning almost everything I can before I even try. I'm not going to jump on a table and think I know how to play. That would be foolish. (I wouldn't do it in trading as well)

It's something I learned early on in life. There's no need to reinvent the wheel. Almost anything you want to do has been done before and there is information out there on how to do it correctly.

So I jump on the internet and filter through the hundreds of sites designed to sell you their methodology and find a few sites that give away the information for free. Without getting into the details, basically you play your hand based on your hand and more importantly, what the dealer has. There's a decision grid, depending on whether you're playing a single deck or a multi deck table. You pretty much have to memorize it.

Fortunately, my friend Paul, whose birthday we're out there celebrating in the first place, brought a book on Black Jack. So I read the book at the pool before we begin to gamble.

What was most interesting to me (and something I've written about at length) was that the book described gambling just as I would describe trading. You go to the table with a limited amount of money that you can afford to lose. If you lose it, you're done and you walk away for the day. Also, like a profit target on a stock trade, you also walk away with a certain amount of winnings.

Interesting thought to treat gambling as you would in trading and have a stop price (the amount you go to the table with), have an entry price - figuring which hands to hit, stay, double down, etc., and then having a profit target - so you walk away with your winnings instead of doing what many do - get greedy and lose all their profits.

So how'd the Vegas trip go? Other than the stuff that happened in Vegas that stayed in Vegas, the gambling went well. The first day, I was down quite a bit - and close to my stop level. But I managed to claw my way back to just above break even.

The second day was my big winning day. In fact, I won enough to cover my gambling for another day. So the third day I went to the table with some of my profits and the goal to just enjoy myself. I may have lost a few dollars, but I had a great time at the table, I made a few friends and had a few drinks.

Ok, I don't recommend drinking with trading (or gambling for that matter if you want to do it right). So it's a good thing the market isn't open at night. Well, the stock market at least, there's always the futures market.

I'm sure a few of you could have used a drink after Friday's trade. We didn't, since we're short. Let's take a look at whether we're at the beginning of a new trend lower or if this strong selling has put the market in position to rally.

On to the charts.

Message From The Markets

Market action is ruled by sentiment and by monitoring market internals and studying sentiment you can reasonably predict future market movements. The basis of the Stock Barometer system is overlaying extremes in sentiment with sound technical analysis to predict the likelihood of future price movement. Each indicator and chart measures the hope, fear and greed of investors and traders from different angles. Follow along with my charts and over time, you'll also learn to understand how to read the markets, which is essential prior to setting up each and every trade.

STOCK BAROMETER CHART

The Daily Stock Barometer is a proprietary measure of market energy. The direction of the stock barometer determines our short-term outlook on the market's direction. A BUY or SELL signal is triggered when the indicator clearly changes direction. If the line is moving up, we are in BUY MODE and if it's moving down, we are in SELL MODE. The black line is a 5-day moving average that we use to confirm changes in direction.

EQUITY PUT CALL RATIO CHART

The CBOE put/call ratio is comprised of two sets of data; equity options and index options. The index component contains items that are used as a hedge, thereby distorting the correlation and interpretation of the indicator. I use the equity put/call ratio. This is one of the most accurate read of investor's fear and complacency.

TRIN/ARMS CHART

Richard Arms developed the arms index. It is also referred to the Trading Index or TRIN for short. It is a measure of the ratio of up stocks and down stocks divided by the ratio of up volume and down volume. Our Spread Chart converts the arms index data into momentum Buy and Sell Signals.

TICK CHART

The tick index is represents the sum of all stocks ticking higher minus all stocks ticking lower (a stock is said to be trading on an up tick when it trades at a higher price than the last sale). It's utilized as a day trading tool as it gives you an up to the second read of the intensity of buying and selling.

BREADTH (ADVANCE - DECLINE) CHART

Each day several thousand stocks either advance, decline or remain unchanged. The number of advances and declines normally ranges from +2500 to -2500. A high number of advancing stocks normally marks a top just as a high number of declining stocks normally marks a bottom. Monitoring the 5 and 13-day moving averages of this allows us to better predict future prices.

VXO CHART

The VIX is a measure of volatility on options pricing. We use the old VIX, which is now called the VXO. The higher the volatility, the more likely the market is close to a bottom, as traders are willing to pay more premium for puts, which act as Insurance on their long positions.

Cycle Time

Monday will be day 8 in our DOWN cycle.

The Stock Barometer signals tend to follow a 5, 8 and 13 and sometimes 21 day Fibonacci cycle that balance with 'normal' market cycles. Knowing where you are in the current market cycle is important in deciding how long you expect to maintain a position.

Potential Cycle Reversal Dates

2007 Potential Reversal Dates: 1/10, 1/14, 1/27, 1/31, 2/3, 2/17, 3/10, 3/24, 4/21, 5/6, 6/15, 8/29, 10/19, 11/29. We publish these dates up to 2 months in advance.

Here we go again. Friday was 10/19, a key reversal date and the market tanked - we'll the Nasdaq tested the lows from 10/11. Let's take a look at what these look like:

And the SPY broke the previous swing low. That suggests we're entering a down trend. But we're also approaching support (on the S&P). Monday should be interesting.

Our next key reversal date isn't for a while.

My timing work is based on numerous cycles and has resulted in the above potential reversal dates. They're predictive and have nothing to do with the barometer cycle times. However, due to their accuracy in the past, I post the dates here.

2006 potential reversal dates: 1/16, 1/30, 2/25, 3/19, 4/8, 5/8, 5/19, 6/6(20), 7/24, 8/20, 8/29, 9/15, 10/11, 11/28.2005 Potential reversal dates based on 'other' cycle work were 12/27/04, 1/25/05, 2/16, 3/4, 3/14, 3/29, 4/5, 4/19, 5/2, 6/3, 6/10, 7/13, 7/28, 8/12, 8/30-31, 9/22, 10/4, 11/15, 11/20, 12/16.

Stock Barometer Buy And Sell Signals

QQQQ or SPY Chart: A chart is provided in every bi-weekly report and shows the barometer Buy and Sell Signals (which are provided in my morning updates) as well as showing the next highlighted 'reversal' window. The numbers adjacent to the buy and sell signals are the number of days between signal (cycle time).

Here's one years of our end-of-day buy and sell signals for the Stock Barometer over the past year. They're marked on the QQQQ chart with red and blue lines (or red and blue arrows). Note we recently changed bottom and top to read buy and sell.

The following work is based on my spread/momentum indicators for the QQQQ, GLD, USD, USO and TLT. They are tuned to deliver signals in line with the Stock Barometer and we use them only in determining our overall outlook for the market and for pinpointing market reversals. The level, direction, and position to the zero line are keys in these indicators. For example, direction determines mode and a buy signal 'above zero' is more bullish than a buy signal 'below zero'.

Gold Spread Indicator (AMEX:GLD)

To trade Gold, utilize the Gold ETF AMEX:GLD. This gives us a general gage to the overall health of the US Economy and the markets, as well as to assists us in the entry of positions in our stock trading service.

US Dollar Index Spread Indicator (INDEX:DXY)

To trade the US Dollar, I'd utilize the Power Shares AMEX:UUP: US Dollar Index Bullish Fund and AMEX:UDN: US Dollar Index Bearish Fund.

Bonds Spread Indicator (AMEX:TLT)

To trade Bonds, I recommend Lehman’s 20 year ETF AMEX:TLT. Note that the direction of bonds can have an impact on the stock market. Normally, as bonds go down, stocks will go up and as bonds go up, stocks will go down.

OIL Spread Indicator (AMEX:USO) *NEW*

To trade OIL, utilize AMEX:USO, the OIL ETF. We look at the price of oil as its level and direction can have an impact on the stock market.

Summary & Outlook

The barometer is in Sell Mode, we're expecting the market to continue lower into Tuesday and then bounce. That'll be 11 days in the current mode. The height of the bounce will set up the next move, whether it is a retest of the highs or a move to a lower fib level, which would suggest a weaker market.

On the weekly charts, we also have a sell signal in the form of a bearish candlestick pattern. These are generally pretty accurate.

In addition, the II bull bear ratio is at an extreme in bullishness, which on a contrarian basis is bearish. Although this indicator can remain in at this level for an extended period as stocks reach further highs. However, seasonality during this time of year is not something to fight. In the rock, scissor, paper relationship that rules the market (seasonality, sentiment, technicals) you never know which one will rule. Obviously the price action is the key - as that's the only one you can profit from. (unless you want to take an option play on the vix - it's amazing what you can bet on nowadays.)

To follow our daily signals and trades and learn more about our system, click here and sign up for a free trial. Sign up for our free weekly TRADE TUTOR newsletter to get up to date advice from our Pro Traders.

Hope you had a great weekend.

As always, if you have any questions or comments, feel free to email me here at jay@stockbarometer.com.

Regards,

Jay DeVincentis
Dynamic Trading

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