Bi-Weekly Stock Barometer No. 145

Dear Subscriber,

In this bi-weekly report, we take a look at several indicators to determine the direction of the market.

Sorry for the tardiness of this weekend's report - vacationed in an area with no internet access (will never do that again). I'm back, so let's get on to the charts.

Message From The Markets

Market action is ruled by sentiment and by monitoring market internals and studying sentiment; you can gain reasonably predict future market movements. The basis of the Stock Barometer system is overlaying extremes in sentiment with sound technical analysis to predict the likelihood of future price movement. Each indicator and chart measures the hope, fear and greed of investors and traders from different angles. Follow along with my charts and over time, you'll also learn to understand how to read the markets, which is essential prior to setting up each and every trade.

STOCK BAROMETER CHART

The Daily Stock Barometer is a proprietary measure of market energy. The direction of the stock barometer determines our short-term outlook on the market's direction. A BUY or SELL signal is triggered when the indicator clearly changes direction. If the line is moving up, we are in BUY MODE and if it's moving down, we are in SELL MODE. The black line is a 5-day moving average that we use to confirm changes in direction.

EQUITY PUT CALL RATIO CHART

The CBOE put/call ratio is comprised of two sets of data; equity options and index options. The index component contains items that are used as a hedge, thereby distorting the correlation and interpretation of the indicator. I use the equity put/call ratio. This is one of the most accurate read of investor's fear and complacency.

TRIN/ARMS CHART

Richard Arms developed the arms index. It is also referred to the Trading Index or TRIN for short. It is a measure of the ratio of up stocks and down stocks divided by the ratio of up volume and down volume. Our Spread Chart converts the arms index data into momentum Buy and Sell Signals.

TICK CHART

The tick index is represents the sum of all stocks ticking higher minus all stocks ticking lower (a stock is said to be trading on an up tick when it trades at a higher price than the last sale). It's utilized as a day trading tool as it gives you an up to the second read of the intensity of buying and selling.

BREADTH (ADVANCE - DECLINE) CHART

Each day several thousand stocks either advance, decline or remain unchanged. The number of advances and declines normally ranges from +2500 to -2500. A high number of advancing stocks normally marks a top just as a high number of declining stocks normally marks a bottom. Monitoring the 5 and 13-day moving averages of this allows us to better predict future prices.

VXO CHART

The VIX is a measure of volatility on options pricing. We use the old VIX, which is now called the VXO. The higher the volatility, the more likely the market is close to a bottom, as traders are willing to pay more premium for puts, which act as Insurance on their long positions.

Cycle Time

Monday is day 5 in our DOWN CYCLE. It is apparent from the last few signals that the system is out of sync with the market advance. There's nothing you can do about a system getting out of sync as usually that's what happens just before a large move that fits within the system. One cure for being out of sync is to skip a signal.

The Stock Barometer signals tend to follow a 5, 8 and 13 and sometimes 21 day Fibonacci cycle that balance with 'normal' market cycles. Knowing where you are in the current market cycle is important in deciding how long you expect to maintain a position.

Potential Cycle Reversal Dates

2006 potential reversal dates: 1/16, 1/30, 2/25, 3/19, 4/8, 5/8, 5/19, 6/6(20), 7/24, 8/20, 8/29, 9/15, 10/11, 11/28. We publish these dates 2 months out.

We use these dates as targets in conjunction with the movement of the barometer. So if the barometer is in Buy Mode, we look to the next date as a top and if it's in Sell Mode, then we look at the date as being a bottom.

*Accordingly, we're looking at 10/11 as a potential low, but with the action of the current market, it's just as likely that 10/11 will mark a top. I know that doesn't make you all warm and fuzzy, but look at it this way. Sometimes the road ahead isn't as clear - but it's not the road you're on that's as important as the road you're going to. So we look at the current move as always setting up the next move. That's the perspective you should always have. There's nothing you can do about what already happened - but you can do everything as respects the next move - and that's always our focus.

My timing work is based on numerous cycles and has resulted in the above potential reversal dates. They're predictive and have nothing to do with the barometer cycle times. However, due to their accuracy in the past, I post the dates here.

2005 Potential reversal dates based on 'other' cycle work were 12/27, 1/25, 2/16, 3/4, 3/14, 3/29, 4/5, 4/19, 5/2, 6/3, 6/10, 7/13, 7/28, 8/12, 8/30-31, 9/22, 10/4, 11/15, 11/20, 12/16.

Stock Barometer Buy And Sell Signals

QQQQ or SPY Chart: A chart is provided in every bi-weekly report and shows the barometer Buy and Sell Signals (which are provided in my morning updates) as well as showing the next highlighted 'reversal' window. The numbers adjacent to the buy and sell signals are the number of days between signal (cycle time).

Here's one years of our end-of-day buy and sell signals for the Stock Barometer over the past year. They're marked on the QQQQ chart with red and blue lines (or red and blue arrows).

The following work is based on my price based spread/momentum indicators for the USD$, XAU, GLD and TLT. They are tuned to deliver signals in line with the Stock Barometer. Combined with up/down indicators and you have a powerful tool for pinpointing market reversals.

Gold (GLD:AMEX & INDEX:XAU.X)

I monitor Gold in the form of GLD and the XAU as well as the US Dollar Index as a general guide to the overall health of the US Economy and the markets, as well as to assist us in the entry of positions in our Gold Stock Service.

Bonds (Amex:TLT)

I include bonds in our studies and use Lehman's 20 year ETF, as the direction of bonds can have an inverse impact on the stock market. Normally, as bonds go down, stocks will go up and as bonds go up, stocks will go down.

Summary & Outlook

We remain in Sell Mode, expecting the market to move lower into 10/11.

This was our position two weeks ago and in the interim, we had to move into Buy Mode to act as a stop and we them moved into Sell Mode as the market tested and held the current 45-degree trend.

One stage of the barometer signal is called "trend mode" where we remain in a trend, regardless of the barometer signal. It's a simple rock/scissors/paper relationship, where trend trumps the barometer. However, trendlines are in a category of hindsight indicators that are easy to identify after they're established. However, in hindsight, I should have given more weight to the current trend and remained in the previous buy signal until that trend was broken. Unfortunately, I didn't and it's put us in the current losing position and we remain in a drawdown.

But that's the past and regardless of the past, our focus is on the future. And in looking at the future, we see the market in position to move lower in either of two scenarios - 1) move lower into the 10/11 date - setting up a continuation of the current advance - or 2) consolidating higher into 10/11 and then setting up a larger move lower.

I know that's not comforting since we remain underwater in our current position, but we've been here before and we'll be here again and if I can teach you one thing, it's to remain focused on the next trade - getting lost in your current position will divert your focus from where it needs to be.

Macro-economically speaking, we're looking at a larger sell signal for Bonds. The Bond market is substantially larger than the stock market and accordingly, the money at times will likely seek out other investments. Since commodities are crashing, that leaves stocks. The money normally moves into safer NYSE stocks and then moves into Nasdaq Stocks - and that final move into Nasdaq Stocks is the normal cycle. At the very end of the cycle, money will be moving into low-priced low-quality stocks. These final stage moves around the holidays are pretty exciting events - and can result in some large low priced stock moves, which we hope to exploit in our stock trading services.

Again, if you're new to the biweekly stock barometer, welcome. This article comes out every 2 weeks and gives a big picture view of the market and our recent activities. If you're interested in following our signals and learning more about our system, then I invite you to click here and subscribe to the daily service - since the market can turn on a dime and so to can our interpretation as the market gives its daily clues to the future.

As always, if you have any questions or comments, feel free to email me here at jay@stockbarometer.com.

Regards,