Bi-Weekly Stock Barometer No. 163
8/12/2007 10:28:36 AM

The barometer has moved into Buy Mode after returning 10.6% on our last Rydex trade. What's next?

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Well, it's sure been a wild ride over the past several days. And people are acting like this is something different - but it's not. It's the normal process of the market working out excesses, which it has - to an extent we'll talk about below.

That's the first thing you need to set a bottom. The next thing you need is buyers to come in. That process can take a while. And that's the difference between rallying now or continuing lower. Friday was the first evidence of buyers coming in.

Techncially, what we saw on Friday was the market attempting to bounce back into the trading range/consolidation set over the past 9 days. This consolidation is going to set up the next move in the market - here's how:

On another level, our technical indicators on breadth and rate of change are approaching lows consistent with significant lows. Even if we're in a larger sell-off, you still need to have bounces that position the market to move lower.

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 will be day 3 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, 5/6, 6/15, 8/29. We publish these dates up to 2 months in advance.

Last time I wrote here, I said: "I remain in the camp that 6/15 appears to be a top (More-so on the NYSE), suggesting a move lower into 8/29." I can tell you that this 8/29 date aligns with a 9 month cycle low - so any amount of left cycle translation and we have to be close to a bottom - as 9 month cycle dates normally don't come right in on the specific date. Lately, I've been going back and forth on how the 8/29 date will come into play.

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 (AMEX:GLD)

I monitor Gold in the form of GLD 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.

OIL Spread Indicator (AMEX:USO) *NEW*

We look at the price of oil as its level and direction can have an impact on the stock market, which we'll examine over the coming months and years.

Summary & Outlook

We remain in Buy Mode as Friday's retracement wasn't enough to move the system back into sell mode - plus our current position is only underwater 1.2%, so we have some room to move within our 2% cap.

The Q's and most the indices set up a technical spring - which should take them up to the top of the current range (49). They'll face downtrend resistance, which will be the first test. However, another weak day and the system could place us back into Sell Mode.

To follow our daily signals and trades and learn more about our system, click here and sign up for a free trial. Sign up for our free weekly newsletter to get up to date advice from our Pro Traders.

Have a great Sunday.

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

Regards,