Weekly Wrap-up: A Renewed Focus
Trading is about efficient use of time. Heres how we're going to improve on that.
First and foremost, we have a bit of news. Our previous editor has advised us that he's moving into the securities brokerage industry and unable to continue. Accordingly, I will take over the helm of Dynamic Trading. We wish him the best.
So how are things going to change?
First, we'll be implementing our version of the Dynamic Trading System. The focus of the service will remain short term trading, with the ability to stay in intermediate term trends (we'll leave the long term moves for investors). You see the market is all about picking a time frame to trade. There are 3 primary trends, short, intermediate and long. And since you never know which you're in (until after it's over) when you design a system you must pick one.
The focus of the Dynamic Trading System's indicators is a 5 day moving average to establish the short term and a 13 day moving average to establish the intermediate term. We're not talking about the market moving average - but proprietary indicators that we've developed over the past decade. We'll be trading the short term within the intermediate term. We'll have a whole slew of additional new indicators in our Daily MORNING CALL that we'll begin to feature tomorrow.
As the editor of the Stock Barometer, another extremely successful service, I designed a system that looks to profit primarily from intermediate term trends. In developing that system, I also built a series of short term indicators. I periodically would provide them in support of my daily forecast and they're extremely reliable.
What are the other changes?
Efficiency: If you know anything about me, I am all about efficiency. I don't think you should waste a second reading anything other than data that's focused on our calls. So there will be no commentary on anything that's 'outside' the system. That means no talk about the economy or the fed or other news that doesn't mean anything to our system. This just wastes your time. And as we all get older we realize that time is the most valuable commodity of all. Plus I'm of the opinion that you can line up all the economists in the world from head to toe and still not reach a conclusion.
A Single Focus: We're only going to trade NDX based instruments. Another rule of trading is that it's just like gambling. And professional gamblers don't run around from game to game, they trade one game and they trade it better than anyone else. While trading more instruments makes the downside more palatable, it also can wash down large single trade gains.
Always In Methodology: This is something that I've coined over my years in the industry, which basically answers the question, "If you're selling, why isn't that also the best time to buy?" This methodology means fewer decisions and fewer chances for mistakes. And it also allows you to take more from each market move. Less time 'out of the market' means you'll likely be invested when the market makes its big moves. Over time, you'll see how this works and begin to appreciate it.
AM Alerts versus PM. Entering a position at the close never made sense for me as any floor trader will tell you that there's more risk when the market is closed than when it's open - just because it's closed much longer than it is open. By initiating trades in the AM, we'll eliminate over 17.5 hours of position risk. Over a course of a year, that's significant.
Earlier Daily Alerts: Our MORNING CALL will be delivered before 8am - each trading day, so you get an extra hour and a half to prepare your daily trading plan.
So as you can see, there are a few changes going forward, and I'm excited to get a chance to work with you each day in not only deciphering the markets, but profiting from them.
As for the focus of this article, while the title is Weekly Wrap Up, I'm not one for looking back and regurgitating the previous week's market action (you can get that for free from YAHOO). The focus is looking at 5 intermediate term indicators to forecast the direction of the market over the coming weeks. Our MORNING CALL will focus on our short term forecast.
10/20/40 WEEK CYCLE
The following chart shows our 10/20/40 week cycles. The 40 week is also referred to as the 9-month cycle. Cycles are not short term tools for determining precise entry and exit points, they're primarily used for intermediate or longer term positioning and forecasting.
There are two things that I would derive from this chart. First, the market is under the influence of the 20 week cycle, which is moving towards a 9/25 top. Second, the 40 week cycle low is due later this year. So if you're expecting good things ahead, be patient, that's about to change.
INVESTOR'S INTELLIGENCE BULL BEAR SPREAD
Each week, Investor's Intelligence polls a number of newsletter writers. The poll results in a number of bullish advisors and a number of bearish advisors. The difference between those two numbers produces the following chart. It's believed, that when a majority of newsletter writers (like us) are bullish, that the market is near a top, and vice versa. I'm also under the belief that the direction of this line is as critical as the number.
This indicator is on a buy signal, rising from a low level, and suggesting that there's plenty of room for the market to rally here. It also suggests that a sell off initiating here could be limited. So we'd prefer to see the market rally for a couple more weeks bringing this indicator to higher levels before a larger sell off initiates.
EQUITY INDEX OPTION VOLUME RATIO
The market is all about risk, and there are two primary classes of participants in the market, the individual investors and the institutions. Individuals primarily trade equity options and institutions primarily trade index options. So the relationship between the two gives us an idea of how much risk the individual is willing to take on. At tops, the individual tends to take on too much risk, making this indicator rise. At bottoms, the individual is usually washed out of the market, making this indicator fall.
This indicator is climbing from oversold levels, so it's bullish, as the individual takes on more risk. This is in alignment with our view that the market can continue to rise here.
QQQQ v. SPY RELATIVE STRENGTH
Risk tells us a lot about the market. This indicator looks at risk from another perspective. When market participants overall increase their willingness to take on risk, it's bullish for the market. That risk shift is shown on the above chart as a shift in relative strength from the Nasdaq to the NYSE. Note when we refer to Nasdaq, we're primarily looking at the QQQQ - since that's the focus of our service. And when we say NYSE, we look at the SPY.
This is one indicator that contributed to our bullish forecast in the past as there was a sharp change in the market's relative strength. Also note the bounce off the 13 day moving average, which is also bullish.
This indicator looks at the flow of money in and out of various investment vehicles. For the most part, when money flow reaches an extreme, in either buying or selling, the market is at a top or a bottom, respectively.
This is an indicator I started following back in 2004. My usual process includes evaluating an indicator for over a year before incorporating it into my through process. This indicator, while not perfect (and by the way, no indicator is, otherwise we'd all be mega millionaires) is not at an extreme high. So it also supports the markets ability to rally further, even allowing for a short term retracement.
It's difficult to run through these indicators and not believe that the market has a bit more room to rally here. However, you also have to note that these are intermediate based indicators, and our short term indicators are positioned for a short term retracement - as we'll discuss in Tomorrow's MORNING CALL. How this retracement sets up will allow us to utilize Fibonacci to project the extent of the advance.
But as our cycle indicator shows, there's a potential storm on the horizon as the 40 week cycle shifts into a dominant position later in September. This could result in a significant sell off, one that we'll position for when it comes to fruition.
Of course anything can change in the market - and at a moments notice. So we'll continue to monitor these indicators week in and week out in the development of our intermediate term forecast.
Best regards and good trading!