Bi-Weekly Stock Barometer No. 15

As we approach and pass key reversal dates, we take a look at the two days before and two days beyond before issuing mode changes. Here's what it means.

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.

This weekend, I had a trading class with 10 students. For those of you waiting for my free video, we recorded this class so the information was more up to date. We'll work to put this video in a format that we can present on the site.

The fun thing about doing small trading classes as opposed to large seminars is that I can give individual attention. I also get a good chance to spend half a day talking about the market, which gives me a good feel where the markets are, which I'll get into later.

One of the things I talk about is when to do your market or trade analysis. I prefer nights and weekends - avoiding doing anything while the market is open and oscillating up and down in a seemingly random fashion.

The whole point of developing your trade while the market is closed is to eliminate potential bias from the talking heads on TV. All you need is to hear the ever so bullish CNBC rambling on about why the futures are positioned one way or the other. This is all noise that you need to cut out of your head.

This was a group of newer traders and people looking to get into trading. So when I told them that it would take them a couple of years before they'd know what they were doing, they were quite surprised. I explained to them that most of them would never make it as traders. That most of them didn't have the ability to separate themselves from their bias or personal emotions, which you need to do in order to be a successful trader. But I also suggested that a few of them would have what it took. That as long as they started small and learned how to preserve their trading capital and lived to trade another day that at some point, a light would go on in their heads and they would be able to accept that losing is a part of trading and eventually become good traders - and the money would follow.

You see, so many people enter trading to make money. I tell my students that if this is their goal, then they will have lost before they started. Trade to trade well and the money will follow. Trade to make money, and then you're missing the point - and you'll never become that great trader.

So getting back to the markets, you'll note there's a common theme as you go through the indicators. The market appears to be setting up for a potential top or consolidation here. So what happens in the next few days will likely set up a top - if we haven't seen one already.

Now for 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 will be day 12 in our up 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, 2/17, 3/10, 3/24, 4/21. We publish these dates up to 2 months in advance.

We have just seen March 24th and for the last few trading days before that key reversal date we saw some slight retracements. If the market moves lower again during trading on Monday, I think we will have seen the top.

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). Note we recently changed bottom and top to read buy and sell.

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 Buy Mode as we sit amidst the days surrounding key reversal date. The last Bi-Weekly that I sent out, I had mentioned that the projected sell signal could possibly occur on March 23rd, which was 11 days from the previous signal. Now, seeing that we haven't changed modes yet, I have adjusted the projected sell signal to March 27th - or 13 days from the previous signal (since we won't be changing modes on before trading on Monday).

The number 13 has a great significance to me. 13 is a Fibonacci number and most of the time Fibonacci numbers can be used with great accuracy to time the market. While you can look at the Buy and Sell signals above and note that not all of them occurred exactly on Fibonacci numbered periods, our last change was (34 days) and there were others scattered about (some 8's and a 5), and yet still others that were close to Fibonacci numbers.

Obviously every actual market cycle turn isn't going to land on an exact Fibonacci number. That would be too easy to plan out and we would all be millionaires. Where is the fun in that? It is just something to think about, watch and incorporate in our trading plans.

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.

Have a great rest of the weekend.

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

Regards,