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Trend Watch

Terminology

For those who are first time reading Trend Watch, please click here to understand the term definition and/or how to interpret it.

Part I - Market Comments

The market started off the week with a depressing tone but ended up with a surprising reversal in the final two hours of the last day. Total volume on the Nasdaq surpassed 2.4 billion shares and volume on the NYSE came close (3.2 billion), doubling from lunch to the close on account of quadruple witching options expiration and completion of the S&P's rebalancing initiative, providing even further conviction behind the market's broad-based rally.

The market declined in the first few days of the week. In the meanwhile, the WATTS signal readings also stopped rising and moved closer to issuing a new reversal signal. A good sign we usually wanted to see is that the WATTS signal readings go up relentlessly at the beginning stage of a new trend start no matter the market price is down or up. That didn't occur this time. Therefore, we were very concerned about a quick reversal again. The worst thing can happen to a trend timing system is a market of no trend. It seems that we are in such a market.

Fortunately, WATTS didn't issue any reversal signal last week but did moved from a "trend locked phase" to "trend unlocked phase" on Friday. The system design of WATTS is quite complex and has a definite quantitative model to define if a trend is locked or unlocked. After a new trend reversal occurs, WATTS continues to detect the strength of the new trend and will put the new trend into the locked phase if the underlying strength of the new trend is strong enough.

As long as the trend is locked, a profitable investing based on this new trend is almost guaranteed. Most of the past losing signals issued by WATTS regardless of the live signals or historic data back-testing were because the new trend was never locked. In other words, WATTS caught a trend reversal in the market and the new trend was in the unlocked phase, but later on, the market trend reversed again and the short-lived trend never had the chance to be locked before the reversal happened. In such a case, WATTS might have issued a losing signal with a minor loss (usually between 1% to 3%). If, however, a new trend had been "locked" by the system. It was usually a profitable signal.

This new uptrend since 9/1/2005 was locked after a few days of trend reversal. We were so grateful that this signal would not be a losing one. We were not so sure when we saw the market was declining and the system readings were slightly down along with it in the first half of the week. But the market action on Friday gave us hope again. The huge volume and the dramatic reversal in the last 2 hours is a very positive technical sign. If this technical positive means anything, the market should continue its strong move for a few days and WATTS will soon lock the trend again.

WATTS is on the verge of issuing a new reversal but let's hold on for a while. The strong market action may clear everything up. Please stay alert next week. WATTS may issue a new signal any day if the Friday's market action doesn't have any follow-up.

The other negative signs come from the leading indicator and the WATTS intermediate-term signals.

The Nasdaq Composite was evidently the lagging index in terms of performance. That's usually a bad omen to the market, hinting a weaker market ahead. The leading indicator broke its August's low and continued to decline confirming it. In the past few years, the Nasdaq was always leading the market down and up. Unless this leading character stops working, we can't be happy with what will happen.

Another negative sign is that the WATTS intermediate-term signals still refuses to confirm the short-term signals and issues the intermediate-term trend reversal up signals. We regard this as negative evidence. We had talked about this in the last week's update. We like to see that WATTS issues its intermediate-term signals following the short-term signals about 2 weeks later. It has been more than 2 weeks and still has no sign of that that will happen.

The market is at a critical juncture now. We really don't know what will happen next since we have evidences supporting bullish and bearish view at the same time. Let's keep our investment strategy simple -- just follow what Mr. WATTS says. It looks like that the WATTS system is smart enough not be fooled by the first half week of market weakness and finally the reinforcement, the Friday's dramatic market reversal arrived.

Will it be the case? Let's wait and see.

Part II - Signal Update

WATTS Short-term Signal Status

Index Signal Type Issued Date Closing Price
When Issued
Closing Price
Last Friday
Hypothetical
Return*
NASDAQ BUY 9/1/2005 2147.90 2160.35 +0.58%
S&P 500 BUY 9/1/2005 1221.59 1237.91 +1.34%

Last Closed Short-term Signal

Index Signal Type Issued Date Closing Price
When Issued
Closing Price
When Liquidate (9/1/05)
Hypothetical
Return*
NASDAQ SELL 8/5/2005 2177.91 2147.90 +1.40%
S&P 500 SELL 8/5/2005 1226.42 1221.59 +0.40%

WATTS Intermediate-term Signal Status

Index Signal Type Issued Date Closing Price
When Issued
Closing Price
Last Friday
Hypothetical
Return*
NASDAQ SELL 8/18/2005 2136.08 2160.35 -1.12%
S&P 500 SELL 8/18/2005 1219.02 1237.91 -1.53%

Last Closed Intermediate-term Signal

Index Signal Type Issued Date Closing Price
When Issued
Closing Price
When Liquidate (8/18/05)
Hypothetical
Return*
NASDAQ BUY 5/27/2005 2075.73 2133.08 +2.76%
S&P 500 BUY 5/27/2005 1198.78 1219.02 +1.69%

WATTS Bottoming Zone Alert

Index Current Signal Issued Date Last Signal Issued Date
NASDAQ None None Level-I Alert 4/15/2005

Part III - Model Portfolio Update

Model Portfolio provides investor who doesn't know how to react to the WATTS's signal a simple guideline of how to manage his/her portfolio. If you are interested in following this guideline table, please Read This Important Note first.

Model Signal Account Type Equity Type Most Aggressive Portfolio Least Aggressive Portfolio
WATTS Short-term Signal Stock Trading Account (Margin Account) Stock & ETF 100% QQQQ long,
0% cash
100% SPY,
0% Cash
Mutual Fund None None
Stock Trading Account (Non Margin Account)Self-managed Retirement Accounts (IRAs, 403b...) Stock & ETF 100% QQQQ long,
0% Cash
100% SPY,
0% Cash
Mutual Fund 0% POTSX None
Company-managed Retirement Account (401k) Stock & ETF Not Available Not Available
Mutual Fund 0% POTSX, 100% High-growth Fund, 0% Money Market or Short-term Bond Fund 50% High-growth Fund, 50% Balanced Fund, 0% Money Market or Short-term Bond Fund
WATTS Intermediate-term Signal Stock Trading Account (Margin Account) Stock & ETF 0% QQQQ, 100% Cash 0% QQQQ, 0% SPY, 100% Cash
Mutual Fund None None
Stock Trading Account (Non Margin Account)Self-managed Retirement Accounts (IRAs, 403b...) Stock & ETF 0% QQQQ, 100% Cash 0% QQQQ, 0% SPY, 100% Cash
Mutual Fund None None
Company-managed Retirement Account (401k) Stock & ETF Not Available Not Available
Mutual Fund 0% High-growth US Stock Fund, 100% Short-term Bond Fund or Money Market 0% High-growth US Stock Fund, 100% Short-term Bond Fund or Money Market

PART IV - Optional Reading Material

1. What is the VIX really telling us?: http://www.marketwatch.com/news/story.asp?dist=morenews&param=archive&siteid=mktw&guid=%7B50E1AAC0%2D5F57%2D46A5%2DB85A%2DCD99ADCE989F%7D&garden=&minisite=

If you don't know what the VIX is, you probably can stop here. For those of who know it and think it's worth to track, please read this article carefully. The VIX is a famous tool for gauging the market sentiment. Lots of savvy investors and professional traders track its reading closely. Is it really worth to follow? Read the article and you'll know the answer.

The market changes fast. If you are interested in getting the latest signals and model portfolio update, please subscribe to the 1-month trial offer. Click on the "Get Free Trial" at http://wealthanchor.com/subscribe.html. If you are interested in the past performance of WATTS, please click here.

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