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Visual Cognition Test - Are You Listening?

Opening Whisper

Once again I begin my weekly blog with an interesting topic that makes you think,... and wonder. This visual cognition test will give you some indication of how well you can observe fast-moving events, a good trait for a "listening" trader.

First, here are the instructions;

In the short video segment you will see, there will be young people in white and others in dark clothing. Your assignment, should you decide to accept it, is to COUNT the number of basketball "passes" made by the WHITE SHIRTED TEAM ONLY. The video will move fast so keep your eyes on the white shirts. The correct answer is later in this report.

When you have a few minutes, click on or cut-and-paste the link below into your browser. The video is contained in a Java applet and it will only play if you have Java installed on your machine (and active in your browser). The applet is fairly large (7MB) so it may take a while to load. When it has finished loading, press the play button to view the video.

Visual Cognition Lab - http://viscog.beckman.uiuc.edu/grafs/demos/15.html (Opens in new window)

How many passes did you count by the WHITE SQUAD?

If you want to see how you did, go to the heading marked "Visual Cognition" later in this report.

The Market News

This week the equity markets continued the selling which began last week. The markets appear to have broken out of their topping oscillation mode and are earnestly seeking the next level of support. Is it not obvious that we are seeing a trading market as opposed to an investing market? Trading markets are identified by increasing volatility which trader's love, but which investor's nervously avoid.

This trading market can be characterized by wild swings on a daily basis. This can cause difficulty in trying to filter out the trading noise and trying to find a well-defined trend. However, the fact that the markets are gyrating may give us a clue that an interim top in the market is behind us and a correction of some degree may be at hand.

There was not much economic news on the week. On Friday the Commerce Department reported that the U.S. trade deficit soared to an all-time high of $725.8 billion in 2005. Our deficits with our major trading partners reached all-time highs. The 2005 deficit was a 17.5% increase over the 2004 period. I wonder who will pay for this deficit. There is increasing pressure on the U.S. dollar. But it does not seem to be crumbling under that pressure yet.

3 Year Weekly - US Dollar Index

The USD Index has bounced off of late 2004 lows around 80 and appears to be strengthening. However, the slow MACD (25-42-12 week) appears to be waning and is alerting to the divergence with price index action.

The following charts are from the US Bureau of Economic Analysis (BEA). You can see the entire year-end report on our foreign trade at this URL.

Visual Cognition

Sometimes I wonder why institutional money managers linger so long in hanging on to stock market investments when the evidence is mounting that the US equity market is likely due for a correction. Evidence is growing for rising bond and interest rates, growing numbers of personal bankruptcies, housing market reversion and likely recession. Can they not see the 800 pound gorilla in the room?

By the way, in your visual cognition test,.... did you see the gorilla in the room? You didn't? Sorry, the test was not about counting passes between the white shirts. It was to see if you were aware of what will be obvious to you the next time you run that video. The gorilla even beat his chest to try and get your attention. Now slide the little button back to the left on that video and watch it again.

If you still didn't see him, check your pulse. There were 14 passes.

If you didn't see the gorilla on the first viewing, you're in good company. But we must not make the same mistake in our investment and trading accounts. Education, reading, and training are necessary. We hope that you will be an informed investor. We believe that your best investment may be the time spent in getting the balanced input that you need to understand where to find and how to recognize the next major tradable trend in the markets.

I believe that the economic market-bruising gorilla is in the room. Be prepared for the damage he can inflict.

Our Market Model
{Our Market Model and trading signals are only available to paid subscribers.}

Trend Compliance

The problem for the bears is that even in a bear market environment, both bulls and bears get ripped apart. Why? Because the bears are selling on weakness and then get reversed and stopped out and the bulls are buying on strength which then gets reversed and they get stopped out. Both will be losers until the market resolves itself in a major capitulation sell-off clearing the decks for a wave-style retracement rally.

The NYSE Summation Index ($NYSI) has made a definitive cross below the 18 ema. The Nasdaq Summation Index ($NASI) has also crossed below the 18 ema. These are very good indications that we are in a downtrend.

6 Month Nasdaq Summation Index ($NYSI)

The MACD on the above NYSI chart is confirming a bearish trend.

1 Year - Bullish Percent Nasdaq 100

The BPNDX chart above is fully bearish though we should note that this indicator is either going to fall off the edge as it did in March-April of 2004 or it is sufficiently below the 20 DMA to cause a bounce of some degree. The BPCOMPQ chart, not shown, is not yet in a bearish crossing of the 20 DMA or 18 EMA.

2 Year - NDX/SPX Relative Strength ZigZag

The above ZZ chart of the NDX/SPX ratio confirms that the NDX is currently leading the markets lower.

Now just one more chart to give you a longer term perspective on whether we are at an overbought extreme or oversold extreme.

2 Year - Nasdaq New Highs-New Lows

This breadth chart of the NAHL confirms that we are nearer the higher end of recent market ranges (more overbought than oversold). Certainly a bounce can happen from anywhere, but we seem to be ready for a lower value of this index.

Moving On to Sentiment

In general, our sentiment evidence taken from VIX and Put/Call ratios is not screaming at us one way or another. Those indicators are relatively close to what we would call mid-range. Larry McMillan seems to be leaning toward a bearish interpretation of the put/call ratios which he reviews:

The chart below shows the inverse of the CBOE Equity Put/Call Ratio superimposed over the NDX. Here we need to see the inverse CPCE (StockCharts.com symbol: $one:$CPCE) get down into the 1.45 - 1.55 level before we get to buy signal alert territory. At this time, with this inverse indicator at 1.75, we have a long way to go before the options market tells us that major buying is at hand. That does not prevent a bounce from these levels.

1 Year - Inverse CPCE with NDX

1 Year - Inverse Volatility Index ($VIX) with NDX

The inverse VIX chart above shows the VIX to be mid-range between potential buy and sell indicators and therefore not definitive. It is currently bearish, but could be nearing a bounce level as was seen in April of 2005.

Risk Assessment

The charts we have reviewed above have given us a bearish bias. However, as you can see on the VIX and VXN charts, volatility is at mid-range levels. The degree of volatility means several things that affect our risk going forward:

1. The market's future pricing is slightly fuzzy, still volatile, with a bearish intermediate term bias. This past week the Bulls were successful in defending the QQQQ 41 level after things almost got out of hand on Friday morning.

{The remainder of our report, including additional Risk Assessment comments, Stop Calculations and the plan for next week's trading is available to paid subscribers.}

Listen To What He Says

NAB Luke 15:1 Now all the tax collectors and the sinners were coming near Him to listen to Him.
2 Both the Pharisees and the scribes began to grumble, saying, "This man receives sinners and eats with them."
3 So He told them this parable, saying,
4 "What man among you, if he has a hundred sheep and has lost one of them, does not leave the ninety-nine in the open pasture and go after the one which is lost until he finds it?
5 "When he has found it, he lays it on his shoulders, rejoicing.
6 "And when he comes home, he calls together his friends and his neighbors, saying to them, 'Rejoice with me, for I have found my sheep which was lost!'
7 "I tell you that in the same way, there will be more joy in heaven over one sinner who repents than over ninety-nine righteous persons who need no repentance.

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

Best Profits,

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