Opening Whisper

Who of us can predict where this market is going? Yes, there are seasonal, month-end and year-end statistics that might provide an historical basis for a positive bias through year-end. In order to reach an objective forecast of the next few weeks, we will take a look at some current ratios that might provide non-seasonal input for our decision making process.

First, we will look at the Russell 2000 (symbol: $RUT) relative strength to see what it is telling us. (All symbols are for StockCharts.com)

1Year - Russell 2000 / S&P 500 Relative Strength

Here we find a leading trend indicator in the Russell 2000 vs. S&P 500 in a rather negative shape. We must see this ratio turn to the upside (and somewhat above the downward sloping green line) before we get a Buy signal attributed to this indicator. So far the turn in this ratio is nowhere in sight. This ratio gave a very significant trend turn indication in early May of this year.

Next we will focus our attention on the Semiconductor Holders (symbol: SMH) relative to the S&P 500 (symbol: $SPX).

1 Year - Semiconductor HLDRS / S&P 500 Relative Strength

It doesn't appear that the Semi's are holding their own here. This leading indicator does a good job in providing us with what seems to be a 2-3 week lead on potential market rallies. While the current dramatic downturn in this ratio is pretty severe, we need to be careful not to read anything into the absolute numbers on this chart. The January bounce in this ratio coincided with a bounce in the averages, however, the April up-turn in this ratio preceded the market rally by 2 weeks! This ratio has not turned up yet, but when it does we should be buyers of the market indexes. Watch for the MACD histogram to turn positive before buying.

Please notice that finding the "Buy" signal on these charts is NOT difficult, but since the ratio rolls over slowly at tops, it is more difficult to identify a "Sell" signal with these ratios.

And finally, we will look at Financials Select Sector SPDRS (sym: XLF) relative strength ratio. All I can do is gasp at this chart. The financial sector has had an extreme relative strength move up which started early in October. What is this chart telling us? Perhaps it is the result of good earnings announced on the part of the financials which make up this SPDR in spite of a near-inverted yield curve (trading profits of course). This ratio does not seem to correlate too well with prior market rallies, with the exception of March-April of this year. For whatever reason, this ratio may be telling us to keep our heads up for some kind of market move soon. Or, it may be revealing a blow-off top in financial sector relative strength that is going to collapse soon. Note how the stochastic peaks indicated ratio failure points in the past.

2 Yr Financial Sector Relative Strength

ML Listening Focus: Today we got the 3.8% GDP advanced number for the 3^rd quarter. I agree with Cramer, the economy has likely seen the peak with that 3.8% number.

This week we re-visit the OEX chart from last week (below). Did we get the bounce that starts the year-end rally? Or did we just get a "dead-cat bounce" off of a low and we might see more downside to come? The rally seems late this year. Is it possible that the "expected" might be undeliverable?

The weekly stochastic on the OEX has not yet crossed above the 20 level. The CCI and StochRSI have nudged above their Buy levels, but there is not any kind of overwhelming evidence yet that we are off to the races with these large cap stocks. The faster Histogram has nudged up for one week. We need to see another 2+% move next week to confirm a Buy signal on this chart.

6 Month Weekly - OEX

The large caps (sym: $OEX) are still in negative territory on the year. They need +3.6% to get back into the black. Will the money managers plug their remaining cash in to the markets to juice up their year-ending commissions? Do they have any cash at all?

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The fact that the Nasdaq tech did not keep up with the other indices this week can be attributed at least in part to the semiconductors. The question of the day is this; Is the poor performance in the Nasdaq this week telling us something about the market direction in the short-term? Selling into rallies and buying the dips is the name of the game recently. Even after the Friday rally, you can be sure that the bear is not finished off.

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.

TREND FOLLOWING COMPLIANCE:

1 Year - NDX ZigZag Trend Compliance Chart 5%

The ZigZag chart of the NDX above has done a u-turn and has wiped out most of the contra-trend rally of the last 2 weeks. The ZZ indicator and the stochastic on the NDX seem to be telling us that the down-trend is back.

Our Trading System - What The Numbers Are Telling Us

Here is our review of the NDX weekly model chart (below).

Slow Sto - Stochastic : Remains in down trend sell signal. This signal is moving very slowly on the weekly chart, but is in sell mode nevertheless.

StochRSI - This indicator has gone fully oversold and attempted a recovery last week, but never made it and has succumbed to being underwater again this week.

MACD - Our upper MACD ( 12-26-18) made a crossing of the zero line two weeks ago and has continued its steady downward histogram. Of the voting of the faster indicators, only CCI votes to rally, so the MACD overrules and this chart is giving us a Sell indication.

(You can read more about these indicators at: http://stockcharts.com/education/)

NDX - 1 Year Weekly Chart Model

On Thursday night we looked at the daily and monthly charts of the NDX to try and filter some of the market oscillation noise from the recent price action. As a result of that study, we issued a conditional Sell signal to our subscribers in our Thursday Night Set-up. That set-up called for jumping out of our Cash position and entering a Sell signal (Buy Rydex RYVNX - Venture 100 or ProFunds USPIX UltraShort OTC at the close on Friday IF the NDX closed anywhere below 1590. NDX closed the week, down 0.51% at 1557.

Last week I concluded that "the NDX rally of 3% off of recent lows had nearly run its course." After the big sell-off of the NDX on Thursday it became apparent that the NDX leadership was waning. It recovered only slightly on Friday and did not keep pace with the other indices. Our SELL signal is now in effect as of the close on Friday.

Our Fault Tolerant Cash Safety Stop is calculated as of the close on Friday to be 43 points. Since we are on a Sell signal, we add 43 points to the Friday entry price (close) of 1557 to get 1600 even. How did we happen on that round number? Since the NDX is has lagged the other indices on the week, we are expecting the NDX to lead us lower next week. If, on the other hand, the NDX leads us higher next week, our Sell signal will be busted and we must exit quickly. Since we don't like big round numbers we must move our stop Up or Down. The SPX closed the week at 1198. Any broad rally in the markets next week could push the SPX well beyond the 1200 resistance point leaving us with a possible extended rally in the markets and an NDX stop that could cause some pain (2.7% stop margin x2 leverage = 5.4% potential loss). So we will decrease our stop margin to 23 points making our exit to cash at 1580.

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RISK ASSESSMENT: SPX remains below 1200, but just barely. This level appears to be the make or break level for the next rally. But will the Nasdaq tech lead the markets next week or are there other forces at work to muster the obligatory year-end rally. Our sell signal is very tenuous and could be pulled quickly. We need to see which way sentiment is moving because the week will be filled with lots of economic news that could either rattle or juice the markets.

Gold Bugs Want to Know - What About Gold? - Newmont found some support at $43 per share this week, but could not muster much of a charge and closed up 0.62% on the week. The XAU and HUI fared slightly better, up 1.78% and 1.4% respectively.

This week we have included a ratio chart of Newmont Mining vs. the US Dollar Index. The ratio seems to be in a steady declining pattern of lower highs. A breakout of this ratio above the green line would be bullish for NEM and could be countered by a decline in the dollar to amplify this ratio.

1 Year Daily - Newmont Mining / US Dollar Index Ratio

I also thought that we should look at the USD chart on its own merits. By using the ZigZag indicator, set at 5%, we can see what is shaping up to be a potential double top (at 90.77) formation in the Dollar. This could be good for gold if the pattern is telling us the truth. Both the stochastic and the MACD are in agreement that the dollar appears to be headed lower. The USD is finding support at the 50 DMA. A break below 88.80 would put some shine back on gold.

6 Month Daily - US Dollar Index

What Is The Current Market Sentiment?

The 8 and 18 day moving averages (DMA) of the VIX are both at high levels right at 15. These high levels are not historical extremes by any means, but are high enough to be telling us that something is about to "break". That break could show itself in a market rally or a dramatic decline.

One Month - CBOE Total Put/Call Ratio (Daily)

The CBOE Total Put/Call Ratio (sym: $CPC) and other sentiment indicators are also leaning toward a bullish interpretation, i.e., too much bearish sentiment which is a contrarian sign and therefore bullish.

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

Sentiment is telling us that a rally could be near, however this week technology issues refused to participate in the broader index rally. The Russell 2000 relative weakness is puzzling as are expectations for a year-end rally which seem to be withering on the vine.

The Nasdaq Summation index (chart below) has slowed its descent but has not yet made a significant turn to the upside.

6 Month Daily - Nasdaq Summation Index ($NASI)

The SPX is knocking on the door of 1200 again wanting back into the 1200-1250 level. If the bulls get their way next week, that door may signal a lot of short covering.

We must also keep our eyes on the ratio charts mentioned at the top of this report. The Russell 2000 and the Semiconductor stocks (sym: SMH and $SOX) could signal a final run for the 2005 finish line if they turn around quickly.

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

The Markets Are Whispering - Are You Listening?

FAULT TOLERANT PLAN - Every trading plan needs to have a fault tolerant exit strategy. We ask ourselves this question, "What if we are wrong"? If we are wrong, we want the negative impact to be minimized. Here is our Fault Tolerant Plan for the week;

For The Week of Oct. 31 - We are in full Sell mode which is likely contrary to many chart watchers. If a rally begins on Monday, we must watch the strength of that move and remove our Sell position if we get to 1580 on the NDX. If some selling occurs on Monday, we must trail our stop down with the NDX closing price.

ML Signals & Results

Recent Signal	Slo. Stoch. (fast)	StochRSI (fast)	ROC (fast)	MACD (Variable)	ML Signal 3
Oct 28, 2005	Sell	Sell	-	Sell	Sell
Oct 19, 2005	Sell	Buy	-	Sell	Cash
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

Listen To What He Says

KJV Isaiah 61:1-2a "The Spirit of the Lord GOD is upon me; because the LORD hath anointed me to preach good tidings unto the meek; he hath sent me to bind up the brokenhearted, to proclaim liberty to the captives, and the opening of the prison to them that are bound; To proclaim the acceptable year of the LORD,"

Mark 4:16 And he came to Nazareth, where he had been brought up: and, as his custom was, he went into the synagogue on the sabbath day, and stood up for to read. And there was delivered unto him the book of the prophet Esaias. And when he had opened the book, he found the place where it was written, "The Spirit of the Lord is upon me, because he hath anointed me to preach the gospel to the poor; he hath sent me to heal the brokenhearted, to preach deliverance to the captives, and recovering of sight to the blind, to set at liberty them that are bruised, To preach the acceptable year of the Lord." And he closed the book, and he gave it again to the minister, and sat down. And the eyes of all them that were in the synagogue were fastened on him. And he began to say unto them, "This day is this scripture fulfilled in your ears."

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

Best Profits,