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Sell Signal Quadrant 4 - Are You Listening?

Opening Whisper

Monday and Tuesday morning seemed to be a continuation of last week's Thursday and Friday rally. We were off to the races. But something happened on Tuesday afternoon. The three day mini-blow-off top was interrupted by the continuing effects of inflation warnings, falling oil/stock prices and little else. Has the market begun to purge after a post-bubble binge?

ECRI released its Future Inflation Gauge for the US on Friday. The FIG has risen to a 5-year high of 122.7 in September, up from August's 120.7 reading. Their Weekly Leading Index fell back to 135.1 from last week's revised 135.5.


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The markets sold off hard in what looks to be the beginning of the roll-over phase of this bull market. Quadrant 3 is in full development and Quadrant 4 is next. If we are truly in a long-term Quadrant 4, then we should sell all stocks and get ready for a wild ride before the exits get crowded. As we saw in Houston recently, it's better to evacuate before the mandatory evacuation is announced! The momentum is fading and that's a sure sign that we are on the backside of Quadrant 3. See our quadrant definition chart below.

This Newsletter is provided to those who are interested in looking for an alternative to the "buy & hold" investing mentality. This information is not intended as trading advice. It is intended for your information and education only. You should consult a Financial Adviser before attempting any trading strategy.

Momentum Quadrants Definitions
Quadrant 1 - Transition from SELL Signal to CASH
Quadrant 2 - BUY Signal
Quadrant 3 - Transition from BUY Signal to CASH
Quadrant 4 - SELL Signal

The above diagram identifies our terminology for each phase of the momentum of a market that is oscillating up and down. The oscillations are idealized and may occur within a market which is trending in one direction or the other. For the last 3 years, the trend has been up.

The following 5 year chart of the OEX is at a critical inflection point. Longer term mutual fund investors must decide in the next few weeks if we are really heading into a Quadrant 4 sell-off. You must ask yourself these questions: Is there a potential for huge upside versus significant downside in stock prices? Are we at an economic and business cycle peak and facing a GDP slow-down period? Will inflation rise and slow economic growth in the months ahead? Does it make sense at least to go to cash for a breather? Your answers to these questions will determine if it may be time to start raising cash or hedging your portfolio with some Rydex or Profunds dynamic inverse funds. Consult with your financial adviser, and do it now!

5 Year Monthly - S&P 100 ($OEX)

This Week's Technical Perspective: The major indices were down more than 2.5% and the Russell 2000 led the selling being off 3.5%. We were ready to pull the trigger on a buy signal early this week, but the rally faded by Tuesday afternoon and the selling accelerated into Thursday at the close. The Plunge Protection Team obviously stepped in at the last hour on Thursday to buy the S&P futures and keep the trading collars from kicking in. Computer program trading accounts for an average of 50% of NYSE trading and includes peaks of program trading touching 70% of daily volume on occasion. The Wall Street makers did not want their computers turned off and therefore they bought the futures until they were sure that the trading curbs were out of reach for the session.

Does the PPT intervention actually work? It may have an immediate effect on a daily basis, but it is unlikely to keep the stock market propped up for any period of time. In fact, it may have the reverse effect of actually nurturing a continuing sell-down by preventing the capitulation selling that usually marks long or intermediate-term bottoms. By soothing the fears of the dramatic sell-offs, the market public may be more contented to yield gradually to the sliding prices much the way the proverbial frog gets boiled in a gradually heated pot.

TREND FOLLOWING COMPLIANCE: The NDX selling has strengthened our profit picture and has confirmed our down trend leg compliance.

The relative strength of the Nasdaq Composite vs. S&P 500 is shown in the chart below. This chart ratio has turned back down after an upturn last week. As you can see we experienced a similar turn in late January 2005. That upturn did nothing to stem the selling over the next 3 months. Will we experience a similar selling phenomenon into year end? This chart is telling us that the Nasdaq Composite is leading stocks lower over the last 2 months and that we are on the correct side of this market with a Sell signal.

1 Year Nasdaq Composite / SPX Ratio

On Wednesday at midday, we advised subscribers to move from a 50% Sell position to a 100% sell position which was effective based on Wednesday's closing price.

Our Fault Tolerant Cash Safety Stop is calculated as of the close on Friday to be 50 points. The NDX closed the week at 1556 and saw an intra-day bottom on Thursday at 1540. I believe that we are safe in setting our stop at the low of the week; 1540 + 50 = 1590. Any daily close above 1590 next week would cause me to go to 100% cash because it would almost completely nullify our down trend compliance given the limited volatility of recent weeks. If we get a sell-off next week, you can move the 50 point stop down for each point of the sell-off to help retain profits with this trailing stop.

Subscribers will receive an email with instructions and a revised trailing stop level if the market sells off sharply next week. Market Listener Founder discounted subscriptions will be available until October 31 . For details send an email to: subscribe@MarketListener.com with "OFFER" in the subject line.

RISK ASSESSMENT: Last week we advised... "There is still considerable risk of a downside move if we are correct that the rally of the last week has been due to the window dressing of Wall Street's portfolios." That was apparently the case and the markets sold off accordingly. Our stop level of 1590 could be hit next week, but the lethargic market momentum will not likely reverse itself quickly. Any capitulation selling of NDX down into the 1500 level could generate a bounce. The SPX appears to have done what we expected and that was to turn the 1200 level from support into resistance and now looks like it is setting up for a "kiss-goodbye" of the 1200 level. SPX must break significantly above 1200 early next week to keep the technical selling from being a waterfall type action.

Our Trading System - What The Numbers Are Telling Us

This week we have returned to our weekly NDX chart as our model. The whip-sawing may have subsided and we may return to some consistency in the trend modeling.

NDX - 1 Year Weekly Chart Model - Friday Oct 7, 2005

All of this week's NDX indicators are indicating a sell signal. Last week we pointed to the series of recent lower highs. This week we have an outside reversal where the high was higher than last week and the low and close were lower than the week before. The reversal occurred on all major indices and is typically a bearish sign.

What About Gold? - The gold miners closed relatively flat on the week with NEM up 0.74% and the Gold Bugs Index ($HUI) being down 0.86%. Newmont is overbought on the weekly stochastic, but only 50% and turning up on the daily stochastic.

The US dollar index (chart below) has broken below overbought territory and looks ripe for a pull-back. Has the dollar put in a double top? The October 3 top was below the early July top which may be advising us of a down trend still in formation. The USD has dropped below the upper Bollinger Band and is about at the mid-point. This is further evidence that the USD might continue to drop. The 5% ZigZag lines are still showing a "partial" up trend, but a trend that may now suffer a reversal of some degree. A falling dollar is good for gold. Our conclusion is that NEM and the Gold Miners likely have some more upside in the short-term.

1 Year Daily $USD Dollar Index

What Is The Current Market Sentiment?

The VIX and CBOE Total Put/Call Ratio rose on the week indicating increasing fear and rising options prices as the future looks more risky to options sellers. This week I thought we should take a look at our SPX/VIX ratio chart. Here we can see that the ratio has risen on top of the 80 week EMA support average. Since the bull took over in March of 2003, this ratio has stayed above the 80 EMA with only 3 exceptions. August of 2004 was a GREAT buying opportunity after the SPX/VIX dipped below and then back above the 80 EMA. Same thing is true for the April/May 2005 stutter-step. Now, we have seen this week another penetration of that 80 EMA. Are we on the verge of another terrific buying opportunity or will this drop below the line result in something more severe?

3 Year Weekly - SPX/VIX Ratio

Where Do We Go From Here and How To Listen For the Next Signal?

Our indicators and leading sentiment inputs have reversed course this week by confirming our sell signal and it was for that reason that we moved from a partial Sell (50%) position on Wednesday to a full Sell (100%) signal before the close on that date. The window dressing is over and the longer term technicals are telling technicians that we are at a "do or die" for market index prices. The rise in volume this past week appears to indicate that our sell position is becoming more popular. The markets may be trying to find a new and lower level at which to plateau and allow the options sellers to do their thing. Where will we find that new level? Let's see where our support is located.

2 Year Weekly - S&P 500 (SPX) Support Levels

The SPX has not held the 1200-1250 levels and appears to be descending to at least the 1150-1200 level where it was previously in the Nov.'04 to June '05 time frame. The next lower level is the 1100-1150 where it was in the first 3 quarters of 2004. Below 1100 is a "no-man's" land where the only support is at about 1070.

Market Listener Trend Timing Signal Summary

Current Signal: 100% SELL (Bought RYVNX Rydex Venture 100 Fund)
Subscribers were advised by email of the SELL signal before the close on Thursday Sep. 15 and were advised to close 50% of the RYVNX position on Friday Sept 30. We then went back to fully short before the close on Wed. Oct. 5.

Fault Tolerant Cash Safety Stop - For the Week of October 10, admit failure and exit 100% to cash (RYMXX) on a daily close of NDX above 1590.

We will issue an email to subscribers next week if we get a buy signal or have a mid-week update.

NDX ZigZag Compliance Chart - 5%

ML Signals & Results

(YTD Gain/Loss with RYVYX & RYVNX approx. + 28.3 % as of Oct. 7 Close)
Recent Signal Slo. Stoch.
ML Signal3
Oct 05, 2005 Sell Sell Sell Sell Sell (100%)
Sep 30, 2005 Sell Buy - Sell Sell (50%)
Sep 15, 2005 Sell Sell - Buy Sell
Sep 14, 2005 Sell Sell - Buy Cash
Sep 07, 2005 Buy Buy Sell Buy (mod.) Buy
Sep 06, 2005 Buy Buy Sell Neutral Cash
Aug 08, 2005 Buy- Buy Buy Buy Sell
Aug 04, 2005 Buy Buy Buy Buy Cash
July 08, 2005 Sell Buy Buy Buy Buy
June 24, 2005 Sell Sell Sell Buy- Cash
May 13, 2005 Buy Buy Buy Sell++ Buy
May 06, 2005 Buy Buy Buy Sell+ CASH
Feb 11, 2005 Sell Sell Sell Sell Sell
Feb 04, 2005 Sell Cash Sell Sell Cash
Jan 14, 2005 Sell Sell Sell Buy Sell
Dec 31, 2004 Buy Buy Buy Sell Cash
Aug 27, 2004 Buy Buy Sell Sell Buy
3 This Market Listener signal is our base signal. The MACD is our primary weekly input, but can be "out-voted" by the other faster indicators on a daily basis when we need to go to cash to implement our Fault Tolerant Cash Safety Stop (FTCSS). You should not base your trading on this or any other single indicator. Our trend following system dynamically adjusts parameters based on current market conditions including volume and sentiment factors.
With Rydex Dynamic funds, we can trade in the morning and 5 minutes prior to the close during the trading day/week when we see that one or more of the fast signal indicators have changed signals. This is particularly important if we need to go to a CASH position in order to preserve capital. The above table shows the results of the Adaptive System Model Signals.

Listen To What He Says

NAB Isaiah 48:14 "Assemble, all of you, and listen! Who among them has declared these things? The LORD loves him; he will carry out His good pleasure on Babylon, And His arm will be against the Chaldeans. I, even I, have spoken; indeed I have called him, I have brought him, and He will make his ways successful. Come near to Me, listen to this: From the first I have not spoken in secret, From the time it took place, I was there. And now the Lord GOD has sent Me, and His Spirit. Thus says the LORD, your Redeemer, the Holy One of Israel, "I am the LORD your God, who teaches you to profit, Who leads you in the way you should go. If only you had paid attention to My commandments! Then your well-being would have been like a river, And your righteousness like the waves of the sea." (emphasis added)

I am working on the art of listening and hope that you are also.

Best Profits,

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