Bi-Weekly Stock Barometer No. 169
11/4/2007 8:30:23 AM
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The following chart shows our seasonality and 10, 20/40 week cycles:
Seasonality is a measure of what has normally happened in the past. As you can see, seasonality is pretty choppy. There's the initial advance period in January that usually consolidates around the 15th. The market tends to advance over time, but there is the period from May through august that the market generally moves sideways. More of a traders environment than an investors. As investors like to say, go away in May. Finally the market likes to put in some sort of low in September and rally to some extent though the end of the year.
Cycles are way to monitor the likely direction of the market. We monitor the popular 10, 20, 40 Week Cycles, with the 40 week being dominant, the 20 and 10 week merely being harmonic points of the major 40 week.
What you can't see on this chart (because it stops at 12/31) is that the 40 week continues higher into 1/17.
Also note that when the 40 week extends into the 20 week, we revert to the 20 week because periodically, the 20 week can be dominant and you'll get a reversal that follows the pattern of the 20 week.
Why do we follow it? Here's a view of the cycles since 2001, which includes the bear market. As you can see, the markets generally will follow either of these cycles - which some translation (either right or left) - but overall the cycles are worth monitoring to get a big picture view on the market.
Another thing you will note is the frequency of 20 week reversals. We've had two in a row now and these usually alternate. So the likelihood of getting 3 in a row is low.
On to the charts.
Message From The Markets
Market action is ruled by sentiment and by monitoring market internals and studying sentiment you can 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 5 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, 10/19, 11/29. We publish these dates up to 2 months in advance.
So far, the 10/19 reversal date is holding. The market tested recent lows on the S&P - and the Nasdaq is relatively much stronger. We are leaning towards the markets remaining strong into 11/29.
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.
| • | 11/19 | Projected SELL Signal (19 days from last signal) | |
| • | 10/29 | BUY (13 days) | |
| • | 10/10 | SELL (3 days) | |
| • | 10/5 | BUY (2 days) | |
| • | 10/3 | SELL (2 days) | |
| • | 10/1 | BUY (1 days) | |
| • | 9/28 | SELL (12 days) | |
| • | 9/12 | BUY (4 days) | |
| • | 9/06 | SELL (3 days) | |
| • | 8/31 | BUY (3 days) | |
| • | 8/29 | SELL (7 days) | |
| • | 8/17 | BUY (3 days) | |
| • | 8/14 | SELL (4 days) | |
| • | 8/8 | BUY (16 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) | |
| • | (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
The barometer remains in Buy/Trend Mode and we expect the markets to remain resilient here - even with the high oil and gold prices.
The last sell mode of the barometer lasted (a Fibonacci) 13 days, however, the market moved sideways for the most part.
Friday's action was somewhat bullish across the board. The markets had a chance to breakdown, but reversed and closed relatively flat. On a 10 minute chart it forms somewhat of a smile, and it is a smile that the bulls want to see. The volume associated with the day was high enough to suggest that the market may want to test Friday's lows before they move forward.
And on the Qs, we had a bounce off the 9 day moving average - another bullish thing to note.
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 TRADE TUTOR newsletter to get up to date advice from our Pro Traders.
As always, if you have any questions or comments, feel free to email me here at jay@stockbarometer.com.
Regards,
