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The Primary Trend

This weekend, we would like to focus on the performance of our Primary Trend Indicator. A Massive Bear Market typically consists of three Primary Trends, the first a declining Primary Trend, the second, an advancing Primary Trend, correcting the first decline. Then the third and final phase is another declining Primary Trend. We are currently finishing the second of these three Primary Trends inside a Grand Supercycle Bear Market, labeled by some as the Great Recession, however we believe that will change to the second Great Depression before all is said and done.

DJIA Primary Degree Trend

The above chart updates our Primary Trend Indicator as of January, 2011, the long-term view, which has nothing to do with the short-term view. It generated a new long-term trend "sell" signal two years ago, September 30th, 2008, just as the autumn stock market crash started. when the DJIA closed at 10,850.66, the first change from the buy signal October 31st, 2003, five years earlier, and the first sell signal since 2000. We saw a 4,400 point drop after this sell signal was triggered. On May 31st, 2010 the PTI generated a new buy signal, and it remains on a buy signal as of January 31st, 2010. Since that buy signal, the Industrials have risen 2,145 points (21.2 %).

Here is how the Primary Trend Indicator works: One of the tools we have in our arsenal to identify the status of a Primary Degree trend is a simple analysis of the 14 month moving average versus a Slower moving average calculation, the 5 month MA of the 14 month. It has been terrific at identifying multi-year trends, both up and down. While it is a little late in generating the buy and sell signals, it triggered a "sell" near the start of Primary degree wave (4) down, in mid 2000. What followed was a two and a half year, 39 percent drop into the wave (4) bottom on October 10th, 2002. It took a while for this indicator to confirm that the rally that started on October 11th, 2002 would in fact be a multi-year primary degree wave up, wave (5) up. But in October 2003, this analytical tool did in fact trigger a Primary Degree "buy" signal, which led to a four year further rally to new all-time nominal highs on October 11th, 2007 at 14,198.10. We got a near "sell" signal in mid-2005, but the rally rejuvenated itself, continuing on its "buy."

As of January 31st, 2011, our PTI is now on a "buy." The spread between the Fast and the Slow went positive in January 2010 for the first time in 20 months.It improved to positive + 410 in April, 2010, and came in at 417 in May, 2010, but interestingly, has fallen to + 228 as of January 31st, 2011, perhaps an early indication this buy signal will not last much longer. This compares to a 1,744 positive spread in December 2003. We require a 5 month moving average of the Spread between the Fast and Slow to reverse in a new direction for 3 consecutive months in order to declare that a new primary trend, a new multi-year trend, is underway. March 2010 generated the first of the three required consecutive positive readings in the 5 month moving average for a buy, April generated the second, and May 2010 generated the third, so a new buy signal was triggered. While we need to respect this new buy signal, the 20 Month/40 Month has not confirmed, and there are a host of dangerous warnings suggesting prices could turn back down hard. If so, this new buy signal could reverse to a new sell signal by mid-2011.

There had only been three signals since 1997 before the new buy signal in May 2010, so this tool is useful for long-term investors, as it filters out the noise of up and down corrections of significance in favor of the primary trend. September 2008 was the third signal, and May 2010's was the fourth.

This chart is useful for our Conservative Balanced Investment Portfolio since once we get a new signal, in the past we have been able to rely upon that signal for years. Further, it tells us which direction surprises are likely to occur, so when playing speculative options or futures, we will know the direction where a surprise trend turn is most likely. Knowledge of the primary trend is also useful for trading. In this case, we can be more aggressive when entering a position in the same direction as the primary trend, and less aggressive when entering a short-term trend play against the primary trend.

DJIA 20-Month versus 40-Month Moving Average

Next, we look at the chart shown above as a confirming indicator of the Primary Trend Indicator.. It is a comparison of the position of the 20 Month Moving average versus the 40 month. As of February 28th, 2009, the 20 Month/40 Month Spread went negative, which was the first time that happened since August 2004. In February 2009 the 20 Month fell 145 points below the 40 month, down from May 2008's peak positive 1,026 spread. It worsened to negative -345 March 31st, 2009, to negative -751 in May 2009, and worsened to negative -1,723 in March 2010. It remains negative in January 2011, at -205, but is moving toward confirming the May 2010 Bull Market Signal. Unless stocks fall soon and hard, this signal could confirm a Bull Market signal by March or April. What is helpful about this indicator, is that once we get this indicator's confirming "buy" or "sell," we can look forward with high confidence to a large chunk of the primary trend's move still being ahead of us.

For example, the 20 month MA crossed below the 40 month MA in February 2002, with the Dow Industrials at 10,106. From that "sell" signal point, the DJIA dropped 2,909 points, or 28.8 percent. That suggested a great spot to purchase Leaps Put options.

Then, going the other way, the 20 month MA rose above the 40 month MA in August 2004, at DJIA 10,174. The Dow Industrials then rose 4,106 points, or 40.35 percent. Here, your strategy could have been to either play long-term leaps call options, or to simply go long in the cash market and stay there, in other words, increase your long investment position.

There were no false crossovers or cross-unders with this confirming 20 Month/40 Month MA measure over the past decade. Once it turned negative, the trend was down. Once it went positive, the trend was up. Short-term countertrend moves can occur within the primary trend.

So, what we can conclude is there are now conflicting signals between the PTI and the confirming 20 Month/40 Month, so conservative investors may want to seek a neutral corner until the picture clears up.

We update these primary indicators regularly for our subscribers.

 


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"Jesus said to them, "I am the bread of life; he who comes to Me
shall not hunger, and he who believes in Me shall never thirst.
For I have come down from heaven,
For this is the will of My Father, that everyone who beholds
the Son and believes in Him, may have eternal life;
and I Myself will raise him up on the last day."

John 6: 35, 38, 40

 

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