Bi-Weekly Stock Barometer No. 164
8/26/2007 11:57:24 AM
Now that I have your attention, here's my real forecast.
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The DOW INDUSTRIALS are in an upward channel after a significant monthly correction that lasted from 2000 to 2002. We're starting to see wide price swings indicative of the current volatility. Also looking at the fibnonacci projections, the market is in the midst of the 79% fib level - and having a little trouble getting through it. It's also pierced the 100% projection from the current bull market advance. So from the short term perspective (in respects to the time frame on this chart) we're likely to get a larger pullback from this 100% projection.
The 162% projection level is the longest projection that you'll likely see before a more significant bear market comes into play. That'll come around the 16,000 level.
So Dow 20,000? Sure, sometime, but not in this decade.
All the news seems negative right now - but as a contrarian who's put together a contrarian system that tries to position against the crowd, I like when all the news is negative. It puts the market in position to rally.
That doesn't mean it will.
Talking about forecasts, here's our 2007 forecast that we issued back in 2006.
As you can see, we we're looking for a major pullback into the end of the August. Have we seen the pullback already? I think so. However, I still think we'll get a retest of the lows from earlier in August - similar to the August peak in 2002. Put a little more scare in the market - followed by a more significant year end rally.
I'm not a big fan of forecasting. It puts a 'pride' bias on your trading and 'pride' bias is difficult to overcome. I don't really care what the market does, just that it fits into my system and delivers subscribers gains.
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 6 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.
8/29 is a 9 month cycle low. The low came in a couple weeks prior. This could set up a quick move lower into the beginning of August. However, if the market hangs up here, our next date is also a couple months out, so we could be getting more bearish in the intermediate term.
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.
| • | 8/29 | Projected SELL Signal (8 days from last signal) | |
| • | 8/17 | BUY (3 days) | |
| • | 8/14 | SELL (4 days) | |
| • | 8/8 | BUY (15 days) | |
| • | 7/17 | SELL (3 days) | |
| • | 7/12 | BUY (15 days) | |
| • | 6/20 | SELL (4 days) | |
| • | 6/14 | BUY (20 days) | |
| • | 5/15 | SELL (27 days) | |
| • | 4/5 | BUY (7 days) | |
| • | 3/27 | SELL (13 Days) | |
| • | 3/8 | BUY (34 days) | |
| • | 1/18 | SELL (4 Days) | |
| • | 1/11 | BUY (17 Days) | |
| • | 12/22 | SELL (6 Days) | |
| • | 12/14 | BUY (0 days) | |
| • | 11/24 | SELL (0 days) | |
| • | 11/14 | EXIT/CLOSE/CASH (9 days) | |
| • | 11/01 | SELL (18 days) | |
| • | 10/26 | BUY (18 days) | |
| • | 10/2 | SELL (4 days) | |
| • | 9/26 | BUY (14 days) | |
| • | 9/6 | SELL (15 days) | |
| • | 8/15 | BUY (4 days) | |
| • | 8/9 | SELL (12 days) | |
| • | 7/24 | BUY (10 days) | |
| • | 7/10 | SELL (29 days) | |
| • | (historical reversal dates and performance figures are published at the bottom of the home page and updated annually) | ||
The following work is based on my spread/momentum indicators for the QQQQ, GLD, USD, USO and TLT. They are tuned to deliver signals in line with the Stock Barometer and we use them only in determining our overall outlook for the market and for pinpointing market reversals. The level, direction, and position to the zero line are keys in these indicators. For example, direction determines mode and a buy signal 'above zero' is more bullish than a buy signal 'below zero'.
Gold Spread Indicator (AMEX:GLD)
To trade Gold, utilize the Gold ETF AMEX:GLD. This gives us a general gage to the overall health of the US Economy and the markets, as well as to assists us in the entry of positions in our stock trading service.
US Dollar Index Spread Indicator (INDEX:DXY)
To trade the US Dollar, I'd utilize the Power Shares AMEX:UUP: US Dollar Index Bullish Fund and AMEX:UDN: US Dollar Index Bearish Fund.
Bonds Spread Indicator (AMEX:TLT)
To trade Bonds, I recommend Lehman's 20 year ETF AMEX:TLT. Note that the direction of bonds can have an 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*
To trade OIL, utilize AMEX:USO, the OIL ETF. We look at the price of oil as its level and direction can have an impact on the stock market.
Summary & Outlook
We remain in Buy Mode as the market raced higher on Friday - but on significantly lower volume. This should be setting up a retracement as selling kicks in. The retracement should set up the next larger move in the markets.
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,
