Bi-Weekly Stock Barometer No. 150
12/31/2006 11:43:47 AM

Dear Subscriber,

Here's our annual view of the year to come and a review of our 2006 forecast. You'll want to save this arcle.

This is our most popular article and you'll want to save it in your inbox for review during 2007.

Welcome to the biweekly stock barometer. This article comes out every 2 weeks and gives our big picture view of the market. 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 too can our interpretation as the market gives its daily clues to the future. Or sign up for our free weekly newsletter, where we provide up to date articles from our various trading services. We're also going to be releasing a free trading video in 2007 - so sign up today.

Before we get into 2007, let's take a look at the projection I made for 2006:

Click to open larger image in new window.

It's important to note that these forecasts do not play into my signals - i.e. I'm not looking to play these swings in the market - because as each swing unfolds - a new fact is born and a new forecast is made. It's just fun putting everything together at the beginning of the year and forecasting forward.

That being said, the reversal dates here do play 'some' role in influencing the signals from the barometer. As you know, the barometer starts with an daily and 5 day algorithm, and depending on how the turns play out, we can delay entry based on a set of rules. The first 3 rules are driven by the algorithm. We can act on a daily turn (reversing below a previous daily reading) - or a daily cross of the 5-day - or a turn in the 5-day. Then chart action comes into play. We created Trend Mode, Resistance Mode, and Support Mode to 1) reduce the amount of action at these reversals and to increase the profit per trade.

So how do these reversal points come into play in a system with a limited amount of subjectivity? Let's look at the next key reversal date of 1/10. Say the market moves into a bottom on or around that date - we'll be looking to go long around that period. So we'll likely change our signal on a daily change greater than a previous daily reading - or a cross of the 5-day, whichever is earlier.

2007 will also be a year of greater transparency. Instead of just giving the signals as we've done in the past, we'll make a greater effort to explain exactly what we're looking at and why we're doing what we're doing. This will give readers a chance to provide some feedback on the signals and the system. 2006 turned into a poor performance year for us because I, for reasons explained in the past, deviated from the system - missed a major trending move and then misapplied rules in an attempt to make it back. A truly amateur move on my part that I will do my best not to repeat in 2007.

So where do these dates come from? We follow a number of popular cycles. I take these cycles and put the reversal points on a chart of the SPY. Why the SPY? Well, I've found that even though we don't trade the SPY, most of these dates work better with the SPY.

Here are two of the cycles we use:

We put these cycle dates in - with some of our other dates and here's our 2007 forecast:

Click to open larger image in new window.

As you can see, there are a few more signals than we've had to deal with in the past. I believe these clusters will result in a lot of retesting - especially in the mid and late January reversals. Other than some early weakness in early January, I believe we'll move back up and test new highs in early February. This will ultimately prove to be a top and the market will consolidate lower into the end of April. The earlier it pulls out of this consolidation, the higher it will travel into a June top. However, another 9 month cycle low is due in the end of August. This should be a pretty good run to retest lows. But in a traditional 3rd year of a second presidential term, the market will recover and move on to new highs by the end of the year.

I'd love to hear your thoughts on 2007.

That's it - 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

Wednesday is day 5 in our DOWN Cycle.

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

2007 Potential Reversal Dates: 1/10, 1/14, 1/27, 1/31, 2/3. We publish these dates up to 2 months in advance.

Here's a chart of previous and future dates - we'll be watching these closely as they influence the speed of our system signals.

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.

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.

2005 Potential reversal dates based on 'other' cycle work were 12/27/04, 1/25/05, 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 looking for the market to move lower into 1/10 and retest that low on 1/14.

2007 should be a year filled with new highs, a very large broadening top pattern that tops out on June 15th, and a sharp move lower (no I'm not saying crash) into August 29. Again, we don't predict price levels - just timing. We'll take whatever the market gives us as long as get the timing right.

The end of the year should see a strong rally back up to previous highs and a similar year end move where the market just keeps moving higher into 2008.

And while it is fun to try and predict the future and in 2006 I was looking right with my call for May marking a top in the market - never get married to a forecast. Each day brings a new piece of data for the market (and us) to digest.

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. Or sign up for our free weekly newsletter, where we provide up to date articles from our various trading services. We're also going to be releasing a free trading video in 2007 - so sign up today.

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

Regards,