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The Plan Before The Plan

Bi-Weekly Stock Barometer No. 170
12/15/2007 11:09:54 AM

Before the trading plan, there's another plan that's more important.

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

FYI - Our 2008 Forecast should be out around December 29/30. This is our most popular article and it only goes out to subscribers. So stay tuned.

The Plan before The Plan

For anyone who has ever attended one of my sessions, I'm a firm believer in the trading plan. I have my students print out charts and write their buy point, sell target and stop level and give an explanation as to why they took the position.

But there's another plan.

If you step back and look at the big picture, it's the plan that spells out all the other details:

When you're available to trade
What broker you're going to use
What happens if your broker's systems go down

I have many students who want to be daily swing traders, but simply don't have the time to be so active. Your availability time to trade determines your ability to trade various styles and time frames.

Obviously, you can not be a day trader if you are not around to trade all day long (or at least around in the morning pivots).

And if you're planning on being in a position only 2 to 3 days, then you need a mechanism to enter and exit your positions intra day. While you could use limit orders to limit your entry and exit prices, they don't solve all the problems. There will be times you will need to be in front of the screen to take evasive action.

Broker is another consideration. For the most part, people stick with what they know, which is usually the first broker they signed up with. Or, if you have enough extra money, I suggest opening accounts with other brokers - maybe one a year - and learn their system. You might be surprised to find that some brokers are better than others. But if you don't try them, you'll never know.

I recommend to my students and 1-on-1 clients that they maintain at least 2 accounts just in case. The reason is that there are periods where one of your brokers may go down. And if you trade a serious amount of money, you may want to hedge your trade on your other brokerage.

Say you're short csco and some great news comes out and the stock starts to run. You can't access your position, accordingly, you log on to your other account and establish an equivalent long position until you can get access to your other account and close the position.

Plan for the worst, hope for the best.

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. We may wait for the QQQQs to break support or resistance before changing mode.

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 23 in our UP cycle. The market has been consolidating upward since we entered buy mode.

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, 12/13, 12/24. We publish these dates up to 2 months in advance.

If you look at our chart of the QQQQs, you can see our key reversal dates and how they could play out over the next month or so.

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.

 

01/11

Projected SELL Signal (44 days from last signal)

 

11/13

BUY (4 days)

 

11/07

SELL (7 days )

 

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)

  (historical reversal dates and performance figures are published at the Performance Page on the home page and updated at least 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)

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 continue to expect the market to hold support here and rally into the end of the year - even into January 11th.

There is a lot of negativity in the market - which is reflected in the equity put call ratio - and emails I get from readers. This isn't an extreme level, but a level which if we reverse here should support a retest of the previous highs.

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 traders.

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

Regards,

 

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