一个笨蛋的股指交易记录-------地狱级炒手

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September 06, 2008BREAKDOWN POINTS TO LOWER PRICESBy Chip Anderson
Carl Swenlin
On August 15 I wrote an article pointing out that an ascending wedge had formed on the S&P 500 chart. I noted that this is a bearish formation, and that the most likely resolution would be a breakdown from the wedge followed by a price correction. The breakdown did in fact occur two days after I made my comments, but the correction did not immediately follow. Instead prices moved sideways for about two weeks before finally breaking down again on Thursday, belatedly fulfilling the expectation of a correction. Now we must ask if this is the beginning of a deeper correction or if it will merely end as a successful retest of the July lows.
The first evidence to consider is that we are still firmly in a bear market, and the down trend is clearly visible on the chart below. Another worrisome sign is that the PMO (Price Momentum Oscillator) has topped below the zero line, which should always be viewed with apprehension, particularly when it occurs at the end of a rally.

The next chart shows our On-Balance Volume (OBV) Indicator Set. The Climactic Volume Indicator (CVI) measures extreme OBV movement within the context of a short-term OBV envelope for each stock in the index. The Short-Term Volume Oscillator (STVO) is a 5-day moving average of the CVI. The Volume Trend Oscillator (VTO) summarizes rising and falling OBV trends. These charts tell us if the index is overbought or oversold based upon volume in three different time frames. All three are giving us useful information at present.
The CVI recently hit a climactic top just before the price break forced a climactic CVI low. Since this CVI low occurred in conjunction with a price trend change, I assume that it is an initiation climax that will lead prices lower. The STVO supports this conclusion because it is topping in overbought territory. The VTO, is not particularly overbought, but you can see that it is topping at the same level as it did at previous price tops.

It is also worth mentioning that September is historically one of the worst months of the year, and the market is entering this dangerous period in a very weak condition. A crash is not out of the question, although, that is not a prediction, just a caution to not get too anxious to pick a bottom.
Bottom Line: While positive outcomes can and do happen during bear markets, the odds are strongly against them. Another decline has emerged out of a short, weak rally, and I think that a continued decline is more likely than a simple retest of the July lows.


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August 17, 2008ASCENDING WEDGE IMPLIES CORRECTION IMMINENTBy Chip Anderson
Carl Swenlin
The rally that began off the July lows has not demonstrated the kind of strength we normally expect from the deeply oversold conditions that were present at its beginning. Instead, the meager price advance has served only relieve oversold compression and advance internal indicators to moderately overbought levels. In the process, as the chart shows, the price pattern has morphed into an ascending wedge formation, a bearish formation that usually breaks to the downside. Since we are in a bear market (the primary trend is down), odds of the negative outcome are increased.

The next chart shows our On-Balance Volume (OBV) Indicator Set. The Climactic Volume Indicator (CVI) measures extreme OBV movement within the context of a short-term OBV envelope for each stock in the index. The Short-Term Volume Oscillator (STVO) is a 5-day moving average of the CVI. The Volume Trend Oscillator (VTO) summarizes rising and falling OBV trends. These charts tell us if the index is overbought or oversold based upon volume in three different time frames. All three are giving us useful information at present.
The CVI shows that upside volume climaxes have been quite mediocre, certainly well below the levels that we see when significant rallies are launched. The STVO and VTO show that the oversold conditions that existed at the July low have been cleared, and that the market is beginning to become overbought. With overbought internals and a bearish chart formation, we should be expecting a correction very soon.

A correction would not necessarily be a bad thing. The July low needs to be retested on a medium-term basis, and a successful retest would set up a broad double bottom, suitable to support a decent rally; however, in my estimation, prices will need to go a lot lower than they were in July before internals will be sufficiently oversold to fuel a healthy advance.
A bullish take on current conditions would emphasize that the subject ascending wedge is a short-term condition, and any downside resolution is likely to be short-term as well, meaning that a very short correction could result in a higher low that keeps the rising trend intact, albeit at a less accelerated angle. There could even be an upside breakout from the formation, but that is a long shot.
Bottom Line: While our trend-following model has us on an intermediate-term buy signal, my opinion is that we should expect a correction which, at the very least, will retest the July lows. Since we are in a bear market, there is also a strong possibility that any correction could be the start of the next leg down.


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August 02, 2008RALLY LACKS CONVICTIONBy Chip Anderson
Carl Swenlin
The rally that began nearly three weeks ago, out of the jaws of a potential crash, has become rather unimpressive in the last two weeks. As I said in my last article, the rally seemed to be contrived from the beginning, and support for the rally has faded rather than grown, as we normally see in bull market rallies. At this point (about an hour before the close on Friday), the technical chops seem to be lacking for the rally for the market to power upward to the primary declining tops line (in the area of 1375).
One of the things that is lacking is volume. As you can see on the chart below, initial volume was pretty good, but recent volume is substandard.

The next chart is one that always has my primary focus. The CVI (Climactic Volume Indicator) measures extreme OBV (On-Balance Volume) movement within the context of a short-term OBV envelope for each stock in the index. When a rally is launched from the deeply oversold conditions we have seen recently on virtually all our medium-term indicators, we expect to see the CVI move upwards to at least +50, and preferably to the +75 range. This kind of upward spike presents evidence of a broadly-based initiation climax, which indicates that most on the stocks in the index are participating in the new rally.
As you can see, over the last several weeks, the CVI has remained in a fairly narrow range, neither getting severely overbought or severely oversold (which would be a good bottom sign in these circumstances). It is clear from the chart that CVI overbought spikes do not always result in extended rallies; however, I am certainly not confident in any rally that does not have such a spike.

Finally, the chart below has three medium-term indicators -- one for price, breadth, and volume. It is typical of most of our medium-term indicators, reflecting extremely oversold conditions at the July low. While we normally expect these conditions to result in a pretty vigorous rally, so far the oversold condition is being cleared with a not very inspiring price advance. This indicates that there was not much compression associated with the oversold conditions, compression which would be needed to power prices significantly higher. Another way to say it is that there was no build up of buying pressure, even though selling pressure seemed to have become exhausted.

Bottom Line: If we keep the fact that we are in a bear market foremost in our mind, it will help us maintain our guard, and temper our enthusiasm for positive market action. If the rally continues, more buy signals will be generated by our primary timing model, but I suspect that these will result in whipsaw. Long positions should be managed on a short-term basis.


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July 19, 2008DISASTER AVERTED, SO FARBy Chip Anderson
Carl Swenlin
In my July 3 article I warned that the market was oversold, dangerous, and vulnerable to a crash. On Tuesday of this week, the S&P 500 opened down, breaking significant support, and kept moving lower. I thought to myself, "This is it. Crash in progress." Then subtle buying began, the decline was stopped in its tracks, and an advance began that lasted three days. My sense of the events was that the Crash Prevention Team had acted, but that is pure speculation about an urban myth. Certainly there were fundamental events later in the week that assisted the rally -- the president's lifting the executive prohibition of off-shore drilling, and oil prices dropping to $130 -- but the price reversal during the first hour on Tuesday seemed magical to say the least.
At this point the advance has hit the overhead resistance of a declining tops line. If that is decisively penetrated, I would conclude that the rally will continue, although, there is another declining tops line dead ahead.

While the volume for the rally has been convincing, and medium-term indicators are very oversold, I am not so impressed with two key short-term indicators shown on the next chart. The Climactic Volume Indicator (CVI) and the UP Participation Index (PI) are where I look for evidence of an initiation climax, which would confirm that an advance is receiving broad participation from both volume and price. (An initiation climax demonstrates that the initial surge of the rally has sufficient internal strength to support and extend an apparent price reversal.) So far the CVI and PI levels are far short of the overbought levels needed to reflect that an initiation climax has occurred; although, this deficiency could be remedied next week. At any rate, I recommend keeping an eye on these indicators as (if) the rally continues.

Bottom Line: A crash was averted this week, and the potential for a new medium-term rally has developed. There are plenty of reasons to believe in this rally, but be advised that important short-term evidence has not yet materialized. If prices head back down for a retest, the danger meter will be redlined. If the rally does indeed continue, there will be wide-spread belief that the bear market is over. In my opinion, that conclusion will eventually be proved wrong. Participation in the rally, if it develops, should be managed on a short-term basis and on the assumption that it is only a bear market rally.


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July 06, 2008VERY DANGEROUS MARKETBy Chip Anderson
Carl Swenlin
A bullish take on the stock market would be that (1) market indicators are very oversold, (2) there is a triple bottom setup on the S&P 100 Index, and (3) sentiment polls show a lot of bearishness. I agree that those conditions exist, but we are in a bear market and these conditions can easily see price movement transition into a crash. The reason, as I have said many times before, is that bullish setups don't always work so well in bear markets, and an oversold market can very quickly become significantly more oversold.
Let me be clear, I am not predicting a crash. If the market does crash, I will not claim to have "called" it, because that is not what I am trying to do. I want my readers to be aware of the danger and not try to pick the exact bottom of this decline. That bottom could be very far away.
Our first chart contains three indicators (one each for price, breadth, and volume), and you can see that they are all very oversold. You can also see the triple bottom setup. This oversold condition is repeated on most of our other indicator charts.

The next chart looks more closely at how prices have been behaving in response to short-term oversold conditions. Note how during the recent decline that oversold indicator readings have not resulted in anything but tiny advances that were quickly followed by continued price declines. This is typical bear market behavior, and it implies that medium-term oversold readings may be just as soft.

Our final chart gives us a view of just how much complacency exists, in spite of widely negative sentiment readings. The Volatility Index (VIX) is derived from prices on near-term SPX put and call options. Higher readings reflect a high level of fear among options traders, and lower readings complacency. Note the upside spikes on the VIX at the January and March lows. Now note how the VIX is currently about mid-range, even though prices are making new lows. This shows a surprising lack of fear, considering what prices are doing. (Thanks to Ike Iossif for bringing this to my attention.)

Bottom Line: We are in a bear market, and it is suicide to try to take positions anticipating the next rally merely on the evidence that the market is very oversold. Conditions are such that a sharp decline could materialize at any moment. This is not a prediction -- I don't suggest placing bets on it -- just something that traders should consider. Bear markets are dangerous. Wait for solid evidence that a rally has begun before sticking your neck out.
We rely on the mechanical trend models to determine our market posture. Below is a recent snapshot of our primary trend-following timing model status for the major indexes and sectors we track. Note that we have included the nine Rydex Equal Weight ETF versions of the S&P Spider Sectors. This may seem redundant, but the equal weighted indexes most often do not perform the same as their cap-weighted counterparts, and they provide a way to diversify exposure.



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June 22, 2008IT'S STILL A BEAR & THE OIL BUBBLEBy Chip Anderson
Carl Swenlin
Discussions about the price of oil are in the news every day, but my observation is that, for the most part, these discussions serve only to confuse the public more. Most popular are the conspiracy theories, blaming the high prices on shadowy behind-the-scenes manipulators. These theories have one purpose, which is to keep the public stirred up and in the dark. (Remember how mushrooms are grown.)
Most people don't understand the futures market at all. I am by no means an expert, but I have gleaned enough information recently that I think I can enlighten some of my readers. Futures markets exist primarily to serve the producers and consumers of commodities, who use futures contracts to hedge future prices of a given commodity. The producer wants to lock in a price that will ensure he covers his costs and makes a good profit. The consumer wants the same thing, and the object of both is to facilitate their business planning by having advance knowledge for what the price of the commodity will be when it is delivered in the future.
Those evil speculators, are actually necessary participants in the market who serve the purpose of market makers, and they take risks to do it.
While fundamentals play an important role in futures prices, human emotions are also a big part of the mix. Occasionally, like now, irrationality rules the day and a price bubble forms. The easiest way to tell that a bubble exists is to check the monthly-based chart for a parabolic formation. This is were prices move higher in an accelerating curve that eventually becomes vertical. On the chart below, you can see that this is the case with crude oil. This is a sure sign that prices are no longer connected to reality.
You will notice that just eighteen months ago oil was at $50/bbl. Now it is nearly three times that price. Have fundamentals changed so radically during that time? Of course not. The same kind of irrationally is at work in the oil market as we currently have in the housing bubble, and as we had in stocks in 2000.

The expansion in the number of oil mutual funds and ETFs has also placed a lot of demand for oil futures contracts. While this has helped drive prices higher, remember, it is a two-way street. When the parabolic finally breaks, there will be a stampede for the exits.
I can't guess how high oil prices will go, but eventually there will be a catalyst of some sort, and prices will fall almost vertically, quickly bringing oil prices back in to the realm of reality. The most obvious catalyst would be if congress lifted the ban on domestic drilling. While that doesn't sound likely now, the rising price of gasoline may eventually turn the screws enough to change some minds.
As for the stock market, the bear market clearly remains in effect. Our long-term sell signal has never wavered during the recent rally, but there were certainly plenty of plenty of positive signs (see my June 6 article) that suggested the bulls were about to take charge. One of the strongest signs was the price breakout above the declining tops line drawn from the bull market top. Obviously, this was a fakeout because prices failed to remain above support and are now headed for a retest of the March lows. Fakeout breakouts are common in bear markets -- I have identified two that occurred in 2001-2002.

The next chart shows our primary intermediate-term price, breadth, and volume indicators, which we use to determine the condition of the market. All are becoming oversold, but not so much so that there isn't room for further price decline. And, remember, in a bear market oversold conditions can mark the threshold for further price declines.

Bottom Line: Current high oil prices cannot and will not be sustained. Bubbles eventually burst, destroying all the foolish logic that said that prices would never go down again. I personally believe that, if congress lifts the drilling ban, oil prices will drop by about 50% within a few months of that action.
The stock market's bullish breakout has failed and prices are headed for a retest of the March lows. Bear market rules apply!


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June 08, 2008THREE MARKET VIEWSBy Chip Anderson
Carl Swenlin
There are three market indexes that capture the most attention: The Dow Jones Industrial Average (DJIA), the S&P 500 Index (SPX), and the Nasdaq 100 Index (NDX). Together they represent about 80% of the total U.S. market capitalization. While they are normally more or less in sync with one another, this is not always the case, and now is one of those times where they don't look a lot alike.
Currently, the DJIA is the weakest of the two. It is on a long-term sell signal (the 50-EMA is below the 200-EMA), as well as an intermediate-term sell signal generated by our primary timing model. Looking at the chart we can see that the price index had broken above horizontal resistance and an important declining tops line that defined the bear market. Unfortunately, this breakout was a fakeout, and prices dropped below the support, leaving the DJIA in an unambiguous bear market configuration. The DJIA has only 30 stocks, but it has the most psychological impact on the public.

The broadest of the three markets is the SPX. Consisting of 500 stocks, it is the least likely to be distorted by individual stocks or sectors. The SPX is also on a long-term sell signal, but the intermediate-term signal is a buy. It has managed to break above the declining tops line, but is struggling the resistance of the 200-EMA and, as I write this, it is making a strong effort to break down again.

The NDX presents the most positive picture of the three. It switched back to a long-term buy signal about three weeks ago, and it has a nice profit on an intermediate-term buy signal. While I will treat the NDX strength at face value, I will also acknowledge that it is the odd-ball.

Bottom Line: Rather than being in agreement, the three major indexes we follow present different pictures. The DJIA and SPX present similar pictures, but one is negative and the other is still slightly positive. The NDX, on the other hand, is strongly positive. Will it lead the rest of the market higher? I have my doubts.
The problem the market faces at this time is that the rally from the March lows is in the process of being corrected, a process that will probably take several more weeks. The DJIA has already succumbed and turned negative, and the SPX is not far behind. And while the NDX has rallied faster than the broad market, it will probably move faster in reverse, turning negative in the end.


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May 17, 2008LOOKING BULLISH BUT OVERBOUGHTBy Chip Anderson
Carl Swenlin
Our long-term model remains on a sell signal, so we have to assume that we are still in a bear market; however, the rally from the March lows has taken prices far enough to cause important bullish signs to appear: (1) The intermediate-term model for the S&P 500 is on a buy signal and has a gain of +5.6%; (2) all but one of the 27 sectors and indexes we track are on buy signals with an average gain of +6.6%; (3) prices have moved above the declining tops line drawn from the October top; and (4) the weekly PMO has bounced from oversold levels and generated a buy signal by crossing above its 10-EMA. I can put up a pretty good argument for the bullish case, but the long-term sell signal stands in the way of excessive optimism -- it takes a lot of negative energy to generate the sell signal, and it will take a lot of positive energy to reverse it. Fortunately, our medium-term model lets us be cautiously long early in the rally just in case a new bull market really has started.
While things are looking pretty positive, a few negatives are beginning to appear. One is an ascending wedge formation that you can see has formed since the March low. I have observed that this formation is one of the most reliable there is -- it most often resolves to the downside. Another negative is that the market is getting overbought. Note that the daily PMO is in the overbought zone.

More evidence of the market's overbought condition is the OBV (on-Balance Volume) suite of indicators on the chart below. Note that the CVI has topped and the STVO has reached the top of its range. Combine this with the ascending wedge price formation, and the overbought PMO, and I think the market is setting up for a short-term pull back at the very least.

Bottom Line: The market is showing many positive signs, but it is getting somewhat overbought and we should be looking for at least a short-term correction.


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May 04, 2008SIX-MONTH UNFAVORABLE SEASONALITY PERIOD BEGINSBy Chip Anderson
Carl Swenlin
Something you will be hearing a lot about for a while is that for the next six months the market will be carrying extra drag caused by negative seasonality. Research published by Yale Hirsch in the "Trader's Almanac" shows that the market year is broken into two different six-month seasonality periods. From May 1 through October 31 is seasonally unfavorable, and the market most often finishes lower than it was at the beginning of the period. November 1 through April 30 is seasonally favorable, and the market most often finishes the period higher.
Back testing of a timing model using the beginning of these periods as entry and exit points shows that being invested only during the favorable period (and being in cash during the unfavorable period) finishes way ahead of buy and hold. As I recall, the opposite strategy actually loses money. (See Sy Harding's book "Riding the Bear" for a full discussion of this subject. Seriously, I really, really recommend this book.)
While the statistical average results for these two periods are quite compelling, trying to ride the market in real-time in hopes of capturing these results is not always as easy as it sounds. Below is a chart that begins on May 1, 2007 and ends on April 30, 2008. The left half of the chart shows the unfavorable May through October period and the right half shows the favorable November through April period. As you can see, the seasonality periods performed exactly opposite of the statistical average. The point to be made is that, regardless of how the market performs on average, every year is different and presents its own challenges, and there is no guarantee that any given period will conform to the average.

Whether or not you find the seasonality strategy compelling enough to use, the statistics tell us that the next six months are apt to be dangerous, and that is something to keep in mind when evaluating the overall context of the market. The fact that this negative seasonality period is taking place during a bear market, makes it even more dangerous.
Bottom Line: We are in a bear market, and the 6-month period of negative seasonality has begun. Expect price reversals when the market gets overbought. When the PMOs (Price Momentum Oscillators) begin to reverse downward, that would be a good time to consider tightening stops and/or closing long positions.


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April 19, 2008SUSPICIOUS GAPSBy Chip Anderson
Carl Swenlin
On Wednesday and Friday of this week the market opened up with large gaps from the previous closing price, and I think this activity is suspicious, possibly contrived. It is, after all, options expiration week, and weird market action can be expected. This week it is likely that the big money wanted to stick it to the bears and put holders, as usual, and they did so quite skillfully.
These large up gaps can be contrived by heavy buying of S&P futures just before the market opens. There is usually a bullish cover story available to use as justification for the initial buying spree. When the market opens, many bears are forced to cover in order to limit losses, so the price advance is supported by real buying. Next, the reluctant bulls are sucked into the move as they begin chasing the market.

While I tend to believe that price action speaks for itself, we are in a bear market, and I expect that volume should confirm such enthusiastic price moves. In these two cases, I don't think it does. As you can see on the chart below, volume is only average, not explosive like price movement. So what we have is a breakout on modest volume, and strong overhead resistance dead ahead in the form of the 200-EMA, the declining tops line, and the long-term rising trend line.

Bottom Line: We are in a bear market, and the 6-month period of negative seasonality begins at the end of this month, so we should expect bearish outcomes. In this case, the rally should fail before it penetrates the 1450 level. Having said that, you will note that all but one of the 27 market and sector indexes are on intermediate-term buy signals. That is because our primary model is designed to enter rallies relatively early. Because the long-term model is still on a sell, we should expect that the intermediate-term signals will fail in a short time. When the PMOs (Price Momentum Oscillators) begin to reverse downward, that would be a good time to consider closing long positions.


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April 06, 2008A LOOK AT (COUGH, COUGH) FUNDAMENTALSBy Chip Anderson
Carl Swenlin
As a technician I rarely look at fundamentals, primarily because they are not directly useful in making trading decisions; however, while fundamentals are not primary timing tools, they can be useful in establishing a broader context within which technical indicators can be interpreted. For example, one of the reports the Decision Point publishes daily is The Overview of Market Fundamentals. The following is an edited excerpt from that report.
First, notice that, in spite of a substantial market decline, the current P/E is 20.7, which is slightly above the overbought limit of the historical range. Notice also that GAAP earnings are projected to drop to 55.15 by the end of 2008 Q2. Compare that to earnings of 84.92 at the end of 2007 Q3. In spite of the fairy tale projections of "operating" earnings, real earnings are crashing.
************ S&P 500 FUNDAMENTALS ************
The real P/E for the S&P 500 is based on "as reported" or GAAP earnings (calculated using Generally Accepted Accounting Principals), and it is the standard for historical earnings comparisons. The normal range for the GAAP P/E ratio is between 10 (undervalued) to 20 (overvalued).
Market cheerleaders invariably use "pro forma" or "operating earnings," which exclude some expenses and are deceptively optimistic. They are useless and should be ignored.
The following are the most recently reported and projected twelve-month trailing (TMT) earnings and price/earnings ratios (P/Es) according to Standard and Poors.

[/td]2007 Q4Est 2008 Q1Est 2008 Q2Est 2008 Q3[/tr]
TMT P/E Ratio (GAAP)	20.7	22.5	24.8	23.6
TMT P/E Ratio (Operating)	16.6	16.9	16.9	16.1
TMT Earnings (GAAP)	66.18	60.95	55.15	57.92
TMT Earnings (Operating)	82.54	81.08	81.17	85.20

Based upon the latest GAAP earnings the following would be the approximate S&P 500 values at the cardinal points of the normal historical value range. They are calculated simply by multiplying the GAAP EPS by 10, 15, and 20:
Undervalued (SPX if P/E = 10): 662 Fair Value (SPX if P/E = 15): 993 Overvalued (SPX if P/E = 20): 1324
The following chart helps put current events into an historical perspective, showing the earnings crash that accompanied the last bear market, as well as the current earings decline. I don't know how anyone could be optimistic about this picture.

Now let's turn to the technical market picture. The chart below shows that the long-term sell signal is still in force; however, a nice looking bottom has formed and could be a solid base for a medium-term rally. As I write this the market is still open on April 4 and the S&P 500 is trying to break out of a three-month trading range. Also, most of our medium-term indicators (not shown) have reached very oversold levels and have formed positive divergences. Finally, we have medium-term buy signals on most of the indexes and sectors we track. Evidence is pretty strong that we are beginning a rally that will challenge important overhead resistance, possibly around the area of 1450 on the S&P 500.

Bottom Line: The earnings picture is abysmal, and there is a solid long-term sell signal in progress. Playing the long side looks promising, but keep a tight reign on long positions because we are in a bear market until proven otherwise. Remember: "Bear market rules apply! The odds are that support levels will be violated, and, if against those odds the market manages to rally off support, odds are that the rally will fail before it can change the long-term trend."
We rely on the mechanical trend models to determine our market posture. Below is a recent snapshot of our primary trend-following timing model status for the major indexes and sectors we track. Note that we have included the nine Rydex Equal Weight ETF versions of the S&P Spider Sectors. This may seem redundant, but the equal weighted indexes most often do not perform the same as their cap-weighted counterparts, and they provide a way to diversify exposure.



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March 15, 2008GET A LONG-TERM PERSPECTIVEBy Chip Anderson
Carl Swenlin
One of the reasons that Decision Point has spent so much time and money to create dozens of long-term historical chart series is that we must often compare current price and indicator behavior to prior periods where market action has been similar. For example, we are currently in a bear market, so, if we describe indicators as being oversold enough to hint that THE bottom is nearly in place, we need to look at prior bear markets to verify that assertion.

Currently, many analysts are claiming that deeply oversold long-term indicators are solid evidence that the bear market is nearly over. A good example is the chart of the Percent Buy Index (PBI) below. Clearly the PBI has reached its lowest level in three years, and the PMO (Price Momentum Oscillator) is also deeply oversold. Often a three-year history would be sufficient to make historical comparisons, but in this case it is woefully inadequate.



The next chart shows an eight-year history of the same indicators, encompassing the progress of the last bear market. Note that during that bear market the PBI first reached current levels at about the half-way point in the decline, and it reached the same or lower levels three more times before the bear market was finally over. Also, while the current PMO is very oversold compared to other low readings during the recent bull market, it has only gone half the distance to the lows set in 2001 and 2002.



Bottom Line: Oversold conditions in a bear market can mean that the trouble is far from being over. In fact, when the PBI reached current levels in September 2001, it was 18 months before the new bull market began. It is a virtual certainty that the current bear market will not play out the same way as the last one did, but comparing today's market action to past bear markets gives us a genuine long-term perspective, and allows us to put today's market activity in the proper context. Don't be short-sighted when performing your chart research.

Bear market rules apply! The odds are that support levels will be violated, and, if against those odds the market manages to rally off support, odds are that the rally will fail before it can change the long-term trend.



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March 01, 2008WHIPSAW!By Chip Anderson
Carl Swenlin
All mechanical models have weaknesses, and our Thrust/Trend Model is no exception – it is vulnerable to whipsaw. Whipsaw occurs when the market moves just enough in one direction to trip the signal triggers in the model, then it reverses direction and moves just far enough to trigger a reverse signal. This results in a loss on the previous signal. This has happened a number of times in the last several months.

Our model is designed to capture intermediate-term trends and to ride out the zigzag movements and minor corrections that occur as the market trends up or down; however, when the market is in the process of forming a top or bottom, the associated chop can be sufficient to whipsaw the model a lot. Also, bear market rallies can be quite violent and often exceed normal expectations, so whipsaw is quite common then.

Looking at the chart below, you can clearly see the numerous 20/50-EMA crossovers that have occurred in the last year, something that would not happen if the market were in a solid trend. More important, let's look at what is probably the most recent whipsaw.

The Thrust/Trend Model (T/TM) generates a buy signal any time the PMO (Price Momentum Oscillator) and the PBI (Percent Buy Index) have both crossed up through their moving averages. This is a relatively short-term event, and the signal should be considered short-term until the 20-EMA of price crosses up through the 50-EMA. This action confirms or "locks in" the buy signal, and the PMO and PBI become irrelevant. Next a sell or neutral signal would be generated when the 20-EMA crosses back down through the 50-EMA.

Getting back to the current buy signal, notice that I have marked with green arrows the moving average crossovers that generated it. At this point, it is highly likely that this signal will prove to be a fakeout, because the 20-EMA is a long way from managing an upside crossover of the 50-EMA. The next most likely event will probably be the PMO or PBI crossing down through a moving average, which will generate a sell signal.



It is important to remember that T/TM buy signals, particularly in a bear market, are short-term events, and discretionary decisions are necessary to avoid the losses whipsaw can cause. How do we know we are in a bear market? Again, when the 50-EMA crosses down through the 200-EMA on the daily chart, we assume a bear market is in force. On the next chart, a weekly-based chart of the S&P 500 Index, we use the 17/43-EMA crossover as a bear market signal. Clearly, the total picture on this chart is pretty grim.



Bottom Line: Oversold market conditions and a fair amount of manipulation from the sidelines has not been sufficient to move the market out of the consolidation range of the last several weeks. This should not be a surprise because we are in a bear market, and in a bear market we should expect negative outcomes.



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February 16, 2008BOTTOM STILL NOT RESOLVEDBy Chip Anderson
Carl Swenlin
When the market began to rally this week, it looked as if a successful retest of last month's lows had occurred and that another up leg had begun; however, what looked like the start of a new rising trend, has now morphed into a triangle formation with the price index trying to break through the bottom of the triangle. While the triangle itself is a neutral formation, we are in a bear market, so the odds favor a break down from the triangle and another retest move on the January lows.

The next chart, a weekly-based chart of the S&P 500 Index, continues to confirm that we are in a bear market. There has been a moving average downside crossover, and the moving averages and PMO (Price Momentum Oscillator) continue to move downward.

The following chart illustrates how oversold conditions in a bear market do not provide the degree of internal compression we normally see in bull markets. Note how the two most recent oversold lows on the price, breadth, and volume indicators failed to produce the kind of price gains that we see from the August 2007 lows. You can also see other examples of bull market reactions to oversold conditions on the chart.

Bottom Line: Whereas the charts had begun to look as though we had a short-term bottom in place, we are now faced with an unresolved triangle pattern in a down trend. Odds favor a downside resolution, but, even if it resolves to the upside, it is doubtful that there will be enough steam behind the rally to overcome bear market drag and penetrate major overhead resistance.
Regardless of my personal opinion, we rely on the mechanical trend models to determine our market posture. Below is a recent snapshot of our primary trend-following timing model status for the major indexes and sectors we track. Note that we have added the nine Rydex Equal Weight ETF versions of the S&P Spider Sectors. This may seem redundant, but the equal weighted indexes most often do not perform the same as their cap-weighted counterparts, and they provide a way to diversify exposure.





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February 03, 2008RESISTANCE THREATENS RALLYBy Chip Anderson
Carl Swenlin
In my January 18 article I asserted that we had entered a bear market based upon long-term sell signals generated by downside moving average crossovers on the daily and weekly charts of the S&P 500. My bottom line summary was as follows: "Probability is very high that the bull market top arrived in October 2007 and that we are now in a bear market that will continue for another year or more, possibly until mid-2010. Until we have evidence to the contrary, remember that bear market rules apply. The next thing to expect is a reaction rally back toward the recently violated neckline support, which is now overhead resistance."

Just a few days later the expected rally began, and the neckline resistance has been penetrated, albeit not decisively. While the market's recent performance has been good for bulls, you can see on the chart below that strong overhead resistance in the form of the long-term rising trend line lies dead ahead.


The next chart shows the S&P 500 on a weekly basis. Note that the weekly PMO (Price Momentum Oscillator) has dropped below the zero line for the first time since the bull market began. Observe also that the recent moving average downside crossover is the first since the last bear market began.


Not only is there a lot of resistance to overcome, our short-term indicators show that the market is becoming overbought. Two of my favorites, the CVI and STVO, are shown on the chart below. Both are well into the overbought side of their range, and we should be expecting a short-term price top very soon. Once that top is in place we should expect the recent lows to be retested. Since we are in a bear market, the retest is likely to fail.


Bottom Line: We are in a bear market, and we should expect that most situations will resolve negatively. The recent rally has pushed into a heavy resistance area, and short-term internals are becoming overbought. It is likely that the market will top soon, and that a retest of the recent lows will commence.



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January 20, 2008BEAR MARKET RULES APPLYBy Chip Anderson
Carl Swenlin
On January 8 the 50-EMA crossed down through the 200-EMA on the S&P 500 daily chart, generating a long-term sell signal and declaring that we are now in a bear market. This was confirmed this week when the weekly 17-EMA crossed down through the 43-EMA. Let me say that these signals are not 100% reliable, but there is a ton of additional supporting evidence, such as the decisive violation of the long-term rising trend line, and the violation of the double top neckline, seen on the chart below.



The next chart presents a long-term view, which makes it more clear how serious the situation is.



An important point is that this long-term sell signal is not so much an action signal as it is an information signal. What this means is that we need to begin interpreting charts and indicators in the context of a bear market template. For example:

- Oversold conditions should be viewed as extremely dangerous. Whereas in bull markets oversold lows usually present buying opportunities, in bear markets they can often resolve into more heavy selling.

- Overbought conditions in a bear market are most likely to signal that a trading top is at hand.

- While bear market rallies present great profit opportunities, long positions should be managed as short-term only.

The questions remain as to how far down prices will go and how long the bear market will last? In the shorter term we have a minimum downside projection from the double top neckline of about 1160 on the S&P 500 Index. That could mark a medium-term low from which a bear market rally could rise. For the longer-term, let's look at the 4-Year Cycle chart below. As you can see, the last cycle low was in mid-2006, so the next projected low is in mid-2010. Assuming that the cycle low and bear market low will be the same, we have a long, bloody road ahead. The most obvious downside target is the support at the 2002 lows, about 750 on the S&P 500.



I think the basis for my conclusions is fairly easy to see and understand, but please keep in mind that these are educated guesses – somewhat better than wild guesses – and they are subject to radical revisions as reality unfolds. If it actually turns out that way, no one will be more surprised than I.
Bottom Line: Probability is very high that the bull market top arrived in October 2007 and that we are now in a bear market that will continue for another year or more, possibly until mid-2010. Until we have evidence to the contrary, remember that bear market rules apply. The next thing to expect is a reaction rally back toward the recently violated neckline support, which is now overhead resistence.



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January 06, 2008RETEST STILL IN PROGRESSBy Chip Anderson
Carl Swenlin
Currently, the stock market is still in the process of retesting the November lows. This process needs to end now or some serious technical damage will be done, specifically the long-term rising trend line is in danger of being decisively violated. On the chart below you can see the long-term rising trend line is being tested, and a decisive violation would be a decline to about 1375, where coincidentally there is another support line. Unfortunately, that doesn't give me much comfort because that line looks a lot like the neckline of a rounded or double top, and considering that a decline to 1375 will generate long-term moving average sell signals, my guess is that the chances of the neckline holding or surviving a retest would be slim to none.



The next chart gives us a view of the S&P 500 on an equal-weighted basis, and the picture is not pretty. Normally, an equal-weighted index will out-perform it's capitalization-weighted counterpart because the index is boosted by the smaller-cap components. However, in recent months the equal-weighted index has been under-performing the S&P 500 Index to the extent that the 50-EMA has already crossed down through the 200-EMA, a long-term sell signal. What this tells us is that money is focusing on the large-cap stocks the S&P 500 Index is being supported by fewer and fewer stocks.



If you are wondering if the 9-Month Cycle has made a low, so am I. I have tentatively identified the trough as being in mid-December, but, since prices have fallen below the mid-December level, I'll have to rethink that after things have shaken out. This is not a satisfying conclusion, but this is often the way it is – cycle projections are good for a longer-term estimate, but it is hard to nail down the exact trough until after the fact.
Bottom Line: It is not impossible for the market to complete a sucessful retest and for the bull market to continue, but the tecnicals are worse than they have been since the last bear market ended, and it is difficult to be optimistic at this point.



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December 15, 2007RETEST IN PROGRESSBy Chip Anderson
Carl Swenlin
Two weeks ago I stated that the rally off the November lows signaled that a bottoming process had begun, and that, after the short-term rally topped, we should expect a retest of the November lows. Last week the rally was still in progress, and I told Ike Iossif during our interview that I still expected a retest, but that I also feared that the rally would extend j-u-u-u-s-t far enough to trigger a Thrust/Trend Model buy signal before prices reversed downward. As you can see on the chart below, sure enough, the rally topped on Monday (generating a T/TM buy signal), and prices reversed on Tuesday, initiating what ought to be a retest.

I say "ought" to be a retest because so far, in spite of a lot of volatility, it isn't much of a retest in terms of magnitude. I would like to see prices drop to the area of 1425 – at that point I would consider that sufficient technical work has been done to provide a good base for the next rally. Of course we don't always get what we want from the market.



The next chart gives us a view of three medium-term indicators representing the condition of price, breadth, and volume. As you can see, all three indicators risen from very oversold levels and are in the neutral zone. While it is possible for the indicators to rise from oversold to overbought in a single, uninterrupted move, it is more usual for them to reverse once or twice as prices put in a bottom. If prices continue lower, we will see these indicators turning back down.



Another prominent feature on this chart is the trading range in which prices have been moving for most of this year. This is also called a "continuation pattern" – a consolidation that takes place before prices continue moving in the same direction they were moving before the consolidation began, in this case, up.

On the other hand, others may consider the formation to be a double top, which has bearish implications. While I can see the double top argument, we are still in a long-term bull market, and a new 9-Month Cycle is due to begin, so, at this point in time, I expect a bullish resolution.

Bottom Line: Odds are in favor of the retest moving lower, but my guess is that long-term support will hold, and that the retest will be successful.



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November 17, 2007MARKET ENTERING OVERSOLD RANGEBy Chip Anderson
Carl Swenlin
Two weeks ago I stated that market strength was mixed, and that I thought that the correction had several more weeks to go before it was over. Since then further breakdowns of support have occurred, most notably on the Nasdaq 100 Index chart, which experienced a major break of its rising trend line, eliminating the one area of strength that supported a "mixed" assessment for the overall market.

Currently, a correction is in progress that is affecting all major indexes, and my opinion is that it is likely to continue into mid-December. One of the reasons I believe this is that, while the market is approaching oversold levels, it is not as oversold as it needs to be, and more technical work is needed before we can have confidence that a solid bottom has been made.

On the first chart below we can see that the three primary indicators of price, breadth, and volume are well below the zero line, but they have not yet hit the bottom of their normal ranges. Even after they hit bottom, a lot of work is needed to put in a solid bottom. I have put a box around previous bottoming actions. Note how several weeks and more than one indicator bottom is normally required to get the work done.



Also note how the August bottom differs from the others. It is what we call a "V" bottom, and there was no retest to make the bottom more solid. From a technical viewpoint, I believe that is why the rally ultimately failed.

Another reason for my assessment is that the 9-Month Cycle is projected to make a trough around mid-December. As you can see by the cycle chart below, cycle projections are somewhat subjective, and cycle lows don't always appear where we think they should, but current market action and technical factors as described above make me believe we have a good chance of being right about the current cycle projection.



Bottom Line: While the market is becoming oversold, I believe that it will take several weeks before the decline is over and a solid bottom is in place. This belief is supported by what we can observe as historical norms for corrections, and by our 9-Month Cycle projection. Any rally that emerges before the proper amount of work is done is likely to fail.



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November 03, 2007MIXED MARKETBy Chip Anderson
Carl Swenlin
Two weeks ago I stated that a correction had begun, and that the initial selling had resulted in an initiation climax – a technical condition that indicated that the initial down pressure was probably near exhaustion, but that signaled the beginning of a new down trend. My expectation was that there was going to be a bounce (reaction rally), but that more selling would follow after that rally was finished.

This week the rally ended and the selling resumed. It is still my opinion that the selling will probably continue into mid-December where my 9-Month Cycle projection calls for a price low for the correction. A reasonable price target for that low would be 1375 on the S&P 500 Index, but the market segments are very mixed in terms of strength, and there is not conclusive evidence that the market is just going to fall apart.

In spite of the dramatic price moves of the last several weeks, we can see on the chart below that the S&P 500 Index is only about 5% off its all-time high, and strictly speaking a declining trend has not officially been established – it needs to make a lower low.



While the S&P 500 Index is slipping, the Nasdaq 100 Index remains in a rising trend and fully in the bullish mode. We can see on the chart below that it has recently failed to rise to the top of its rising trend channel, indicating some weakness; however, while a correction is virtually assured, there is no reason to expect this segment of the market to enter a bear market.



There are, however, market sectors that are officially in a bear market – Consumer Discretionary and Financials to be specific – and weakness in these sectors is the reason the S&P 500 is struggling.. The chart below is of Financials, but the Consumer Discretionary chart is very similar. Note that a long-term sell signal was generated when the 50-EMA crossed down through the 200-EMA. This signaled the beginning of a bear market for this sector. Once the bear market background had been established, a medium-term sell signal was generated the next time the 20-EMA crossed down through the 50-EMA.



Bottom Line: Technically, the condition of the market is neither overbought or oversold. This leaves room for movement in either direction; however, I am inclined to think that the correction will continue for several more weeks. While there is strength the NDX and in certain sectors, there are a few sectors that are unusually weak. It is not clear which side of the mix is going to prevail.



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October 20, 2007CORRECTION UNDERWAYBy Chip Anderson
Carl Swenlin
Two weeks ago I wrote an article that stated that it was a good time for a pullback. As it turns out the pullback started four trading days later, and it appears now that a full blown correction is in progress. It will probably take at least two or three weeks to complete the correction, and there will probably be something of a bounce before the correction low is found.

Friday's down move was quite violent, but it also provided evidence that the market is getting short-term oversold. The following chart shows the Participation Index (PI), which measures short-term price trends and tracks the percentage of stocks pushing the upper or lower edge of a short-term price trend envelope. As you can see, on Friday the Down PI reached an oversold level similar to the down spike last summer. While this kind of selling climax indicates that a short-term bottom is near, it is most likely an initiation climax, meaning that any bounce will most likely be followed by more selling. (See last summer's correction.)



Other indicators show that the market is just coming off overbought levels, and that more corrective action is needed to work off the excesses of the last rally. The next chart shows price, breadth, and volume oscillators. Note that they are moving down, but at least a few weeks will be needed to get them to oversold levels.


Bottom Line: There may be a few more days of selling, but the market is short-term oversold, and we should expect a bounce in a few days. Since it is October, there is a lot of talk about a market crash. With the usual caveat that "anything can happen," my opinion is that conditions are not typical of what we have seen before major crashes. (See my 12/8/2006 article, Crash Talk is Premature.) That does not mean that selling won't continue for longer than I anticipate based upon the above chart. The 9-Month Cycle projection is for a price top in this time frame, with a cycle low projected for mid-December, so, as usual, I'd caution against trying to pick a bottom.



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October 06, 2007A GOOD TIME FOR A PULLBACKBy Chip Anderson
Carl Swenlin
The market has had a good run since the August lows, but it is challenging all-time highs, and the technical support has been somewhat anemic. With many indicators reaching into overbought territory, and overhead resistance becoming an issue, it looks like a good time for a pullback or consolidation to digest recent gains.

As for technical weakness, the first thing that strikes me is the failure of volume to confirm recent price gains. Note on our first chart that most of the volume bars supporting the recent rally are well below the moving average line.



The next chart shows the failure of new 52-week highs to confirm new price highs, and we can observe an uncomfortable level of expanding new lows that accompanied minor pullbacks during the rally.



Finally, we have the Rel-to-52 chart, one of our more unusual indicators. The Relative to 52-Week Hi/Lo (Rel to 52) chart tracks each stock in a given market index and determines the location of its current price in relation to the 52-week high and 52-week low. We express this relationship using a scale of zero (at the 52-week low) to 100 (at the 52-week high). A stock in the middle of its 52-week range would get a "Rel-to-52" value of 50.

This chart shows the average "Rel-to-52" value for all the stocks in the S&P 500 Index. Not only is there a negative divergence between the indicator and the price index, but the indicator value is only 60. So while the Rel-to-52 value for the S&P 500 is 100 (it is making new 52-week price highs), the indicator value of 60 shows that the number of stocks participating in making the new price highs is unusually low, probably indicating that prices are being supported by larger-cap stocks.



Bottom Line: While the market is making new highs, technical support is fading and a corrective pullback should be expected within the next week or so.



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September 22, 2007NEW BUY SIGNALBy Chip Anderson
Carl Swenlin
Ever since the market hit its correction lows in August I have written three articles, each emphasizing that the odds favored a retest of those lows (see Chart Spotlight on our website). As it turns out, we haven't had any decline that I would classify as a retest, and the market has broken out of a triangle formation on high volume. When the breakout happened, it eliminated any reasonable possibility of a retest, in my opinion. Sometimes the low odds take it.

One thing I have been cautioning about is to not get too bearish, because many of our key indicators had remained bullish. Another thing I should mention is that we should never get too invested in a forecast. I have watched as many of my bearish colleagues, after being proven wrong by the market, are still tying to justify their being bearish rather than trying to get aligned with the market. The market will eventually prove them right because, because, because . . . Maybe they will be right sooner than we think, but for now the market looks as if it will be moving higher for a while.

My bullish stance is due to our S&P 500 timing model having switched from neutral to a buy on September 13, three trading days prior to the Fed-induced market breakout. Also, prior to the breakout, about half of the market and sector indexes that we track with our primary timing model were also on buy signals. On the day of the breakout, the other half switched to buy signals.

The chart below shows the two components needed to generate a buy signal – the Percent Buy Index (PBI) crossed above its 32-EMA, AND the PMO (Price Momentum Oscillator) was above its 10-EMA. Note that the PBI is only at 59%, but it is trending up, which is most important.



Bottom Line: The long-awaited retest did not materialize, and. in my opinion, the market has begun another leg upward that should challenge and exceed all-time highs for the S&P 500 Index.



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September 07, 2007SCARY RETEST ON THE HORIZONBy Chip Anderson
Carl Swenlin
It is well known that October is the cruelest month on average, but sometimes September beats October to the punch. This may be one of those times. Looking at the chart below we can see that the market has bounced out of the August lows and has formed two short-term tops, the last being higher than the first. Corresponding with those rising tops are two sets of declining tops on the two short-term technical indicators. This is known as a negative divergence, and it is a short-term bearish sign that probably is announcing an impending retest of the August lows.
The fact that we are looking for this retest in September, a sometimes cruel month, could mean that the retest will be more scary than most people are expecting. I would not rule out a failed retest that sees prices fall past the August lows and plunges us into a bear market. This is not a prediction, just a possible scenario that ought to be considered.

What I really want to see is a successful retest and a resumption of the bull market, but, as we all know, "you don't always get what you want." For one thing the bearish outcome discussed above could be the ultimate outcome, but it could break the other way as well. By that I mean that we may not get the retest that would put our minds at ease and prepare us mentally for the next big rally. Instead the market could already be in the beginning of the next big rally.
Bottom Line: The odds favor a retest, and that decline could turn nasty in a hurry. Unless we see more buy signals on the major market indexes, I will be staying out of the market until the retest (or whatever) is complete.
Regardless of my personal opinion, we rely on the mechanical trend models to determine our market posture. Below is a recent snapshot of our primary trend-following timing model status for the major indexes and sectors we track. Note that we have added the nine Rydex Equal Weight ETF versions of the S&P Spider Sectors. This may seem redundant, but the equal weighted indexes most often do not perform the same as their cap-weighted counterparts, and they provide a way to diversify exposure.

Technical analysis is a windsock, not a crystal ball. Be prepared to adjust your tactics and strategy if conditions change.

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August 25, 2007EXPECTING SHORT-TERM TOPBy Chip Anderson
Carl Swenlin
In my August 17 article, Looking For A Retest, I speculated that we would get a bounce from the extreme price lows hit in mid-August, but that a retest of those lows needed to occur before we could be reasonably certain that the completion of a solid bottom had been accomplished. As it happened, the bounce was initiated before I posted the article. At this point I think the evidence suggests that the reaction rally has just about run its course, and that we should be expecting a price top to mark the beginning of a decline into the retest of recent lows.

The evidence of which I speak can be seen on the chart below (and on many other short-term indicator charts). There are two versions of the Swenlin Trading Oscillator (STO) – one is calculated from advance-decline breadth (STO-B) and the other from volume (STO-V). On the chart I have outlined two corrective phases – the February/March correction, and the current correction, which, in my opinion, is not yet complete.



Note that there were three separate down thrusts in February/March. The first was into the initial price low, which also registered the lowest of the STO readings. The second was the retest of the first price low, which registered a slightly lower price accompanied by higher STO readings. The third move down was a pullback after a breakout. Note that the breakout was accompanied by very high STO readings, indicating an initial impulse for a new rally, and after that third pullback, the price configuration was clearly bullish.

The current correction has a more bearish slant. The price decline has been more violent, and the second down thrust has led to a much lower price low. The market has rallied out of that low, but you can see that the STO has reached overbought territory, and we should be expecting a short-term top leading to a retest of the correction low. There is no guarantee that the support will hold, so it is no time to be trying to pick a bottom.

Bottom Line: Good arguments are being made by both the bulls and the bears, and the possibilities being presented range from the market being up 22% a year from now to the danger of a 2000 point down day on the Dow. Rather than trying to decide which scenario might materialize, I am comforted by that fact that we are currently 100% neutral in the event the bottom falls out, and I am confident that our primary timing model will pull us into the market in time to catch a good part of any significant up move that occurs.




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August 04, 2007MARKET OVERSOLD AND DANGEROUSBy Chip Anderson
Carl Swenlin
A month ago I wrote an article stating that I thought that the 20-Week Cycle was cresting and that we should expect a decline into the cycle trough that would probably break down through the support provided by the bottom of the trading channel, setting up a bear trap. So far so good. As you can see on the chart below, the S&P 500 has broken down through the horizontal channel support, as well as an important rising trend line. The trend line break is not decisive (at least 3%), but this break down has gone farther than I had expected.



In the process of the recent decline the market has become very oversold, as demonstrated by the next two charts. The first is our OBV suite, which includes the CVI (Climactic Volume Indicator), STVO (ST Volume Oscillator), and VTO (Volume Trend Oscillator). All three of these indicators have hit very oversold levels, levels from which rallies normally emerge.



The same is true for the ITBM (IT Breadth Momentum) and ITVM (IT Volume Momentum) Oscillators, which reflect a substantial internal correction, and tell us that we should start looking for a bottom.



As usual I would caution against trying to pick a bottom. For one thing, our primary timing model switched to neutral on July 31, which I think is a good place to be while the market is still displaying weakness. Another thing to consider is that the bears could be right about new bear market just beginning. If this is the case, oversold readings are extremely dangerous and can actually signal the likelihood of even more severe declines. To reiterate, oversold in a bull market means a bottom is near, but in a bear market it means "look out below!"

Bottom Line: The market has become very oversold, and I expect to see a bottom forming over the next several weeks. I am still overall optimistic because of the 20-Week Cycle alignment with the current decline, and because we are still in the beginning of the 4-Year Cycle; however, caution is recommended until our timing model switches back to a buy signal.



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July 21, 2007GOLD: LONG-TERM PICTURE LOOKING SHAKEYBy Chip Anderson
Carl Swenlin
On Thursday our trend model for gold switched to a buy, which means our medium-term posture is bullish on gold; however, when I looked at a very long-term chart of gold I saw something that gave me a slightly queasy feeling. What I saw was that gold is forming a pattern now that has very similar dynamics to the one that preceded gold's crash in the early 1980s. Note the huge parabolic blowoff top in 1980, followed by a failed rally top, followed by the crash.

While the current pattern is not as exaggerated as the earlier one, the dynamics are the same – a blowoff top, followed by a rally that has so far stalled below the previous top. To be objective, we must acknowledge that the rising trend line is still intact, but the similarity between the two patterns should keep us on edge until the current pattern is resolved.



One of the factors that will have a strong influence on the future price of gold is the strength or weakness of the dollar. On the chart below we can see that the U.S. Dollar Index is challenging major long-term support. If it breaks down through that support it will be great news for gold, but, if the dollar rallies off the support, we should expect to see gold break down through its rising trend line.



Bottom Line: The outlook on gold is positive at the moment, but there are technical and fundamental issues that could result in a nasty downturn for gold. If this happens, I would expect the support at $500 to be challenged. It appears to me that this situation should be resolved in a matter of weeks.


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March 04, 2007UPDATED CRASH ANALYSISBy Chip Anderson
Carl Swenlin
In light of this week's sharp decline (mini-crash?), the most obvious subject for discussion in this week's article is to question whether or not we are on the verge of another major crash. In my 12/8/2006 article, Crash Talk Is Premature, I stated:
". . . my analysis of the price structure and internal indicators leads me to the conclusion that there is not a crash anywhere in sight. This does not preclude a crash triggered by an external event of which we can have no advance knowledge, but the visible deterioration that typically precedes a crash does not currently exist."

"To illustrate, we can look at charts (below) of the two most famous crashes of the last 80 years – the Crash of 1929 and the Crash of 1987. There are two chart configurations that preceded these two major crashes. First, was the price action – a major price top, followed by a lower top, followed by a break below the price low between the two tops. This kind of event doesn't always lead to a major crash, but it is always a sign of danger, and can be part of a market correction."

"The second element is internal deterioration visible in a breadth indicator. In the case of the two charts below we can see that, when the second price top formed, the ITBM Oscillator also topped, and it topped below the zero line as a result of an extended period of deterioration. Below zero indicator tops are another danger sign that should not be ignored."





Now let's take a look at a current chart of the ITBM/ITVM Oscillators. We can see that prior to the mini-crash, the indicators were overbought and showing a negative divergence; however, we can also see numerous instances where negative divergences and overbought conditions did not lead immediate, serious declines. In other words, there was nothing on this chart that would hint at a crash. The most logical actions prior to the decline would have been to hold current longs and wait for better (oversold) conditions before opening new longs.
The important point to be made here is that we currently do not have the kind of setup that preceded the 1929 and 1987 Crashes; and, while the recent decline was rather precipitous, the market has only declined about 4% from its recent highs. Having said that, it is unlikely that the correction is over, and continued negative action could indeed lead to a technical setup similar to the ones that formed prior to the Big Crashes.



One big positive that the market has going for it is the major support that can be seen on the next chart. The recent rally pushed the S&P 500 above the top of its long-term rising trend channel. Where the top of the channel used to be resistance, it is now support, and the remainder of the correction could be played out above the support line.



Bottom Line: We have gone seven months without a medium-term correction, and, while I am surprised at the violence with which it was initiated, I am not surprised that a correction has begun. I personally do not believe that we are setting up for a big crash or a bear market, but I will be guided by future market action. Regardless of my personal opinion, we rely on mechanical trend models to determine our market posture. Below is a recent snapshot of our primary trend-following timing model status for the major indexes and sectors we track.



Posted at 05:04 PM in Carl Swenlin | Permalink


February 14, 2007A NEW OPINION ON RYDEX CASH FLOWBy Chip Anderson
Carl Swenlin
In my 2/16/2007 article, Cash Flow Shows Wall of Worry, I asserted that the dearth of bullish Rydex cash flow was a sign that the rally would probably continue because the bulls were still not committing in a big way. For the sake of variety I try not to repeat a topic too soon, but I received an unusual amount of mail about this, much of it asserting that ETFs and other products are siphoning bullish funds from Rydex and other mutual fund groups. The following letter makes the point very well.
Hi Carl,

While I don't disagree with your overall opinion about the market 'climbing a wall of worry', I do think you're missing the boat regarding what the Rydex data is telling us. If you look closely at the Rydex Asset Analysis Total Bull+Bear+Sector+MM chart you will notice that total assets have been diminishing since the beginning of '06. How could this be? Well I'll tell you. I've been trading Rydex funds for over 10yrs. It's a bears den. It does not make for a valid picture of overall market sentiment during bull markets.

The reason total assets have been declining is because the funds/investors/etc. that use Rydex for bearish positioning are now bullish and allocating their assets outside of Rydex. A long time ago I realized that there is no better vehicle than Rydex to establish short positions. Where else (except other Rydex clones) can you establish a short position with a limited downside risk outside of the options markets? Thats why Rydex is the (smart) bears choice. There are however far more efficient vehicles to establish bull positions. During an extended bull market like we have right now, assets leave the Rydex funds in general. This is normal as Rydex is an expensive place to ride a long position. When (if) the market starts heading down for any extended period you will see money flow back into Rydex. The bears will be back.

The total asset data doesn't tell us where these previous assets have gone, but I assure you its generally long. That means the data is still useful because its telling us there are very few bears in this market right now . . . a dangerous (if you're long) situation for sure. Bull markets can and do continue far longer and higher than most of us can guess or even stomach. Thats their nature to flummox the disbelievers into submission, and then they're done for awhile.

I really appreciate your efforts to organize the Rydex data. I use it all the time. I do however respectfully disagree with the way you divine overall market sentiment from it. You are taking one slice of market participation (a bears den) and applying far too much importance to it, especially in an extended bull market.

Respectfully,
Tim Herbert
DecisionPoint.com Subscriber
I want to thank Tim Herbert for giving me much food for thought. I don't agree with all his points, but, after much thought and chart gazing, I believe he is correct that the migration of bull money from Rydex into ETFs and other instruments is now a significant factor, but it is a relatively recent one. In any case, it does make me have second thoughts about my conclusions in last week's article.
Under this new concept, we are going to have to develop new techniques to analyze the Rydex data. This will not be the first time. As you can see by the chart below, the Ratio has had three distinctive phases and ranges. In the early days the range was very wide because there were fewer assets involved in calculating the ratio. During the bear market the range narrowed, and, when the bull market began, the range shifted lower and was more regular and stable than ever before.
During the period between the beginning of 2003 to mid-2006 the Ratio was a superb measure of extremes in bullish and bearish sentiment. That it was not such a good top picker, is not a weakness that is limited to the Ratio. During bull markets, there are virtually no indicators/oscillators that can reliably identify price tops.



In the next chart we look at bull, bear, and total cash flow. On the Bull plus Sector panel you can see three cash flow peaks followed by cash flow declines that I have emphasized with sloping trend lines. What we are observing here is money going into bull funds, then being withdrawn during the topping process that takes up to several months. Is the withdrawal evidence of money moving into ETFs? That is not a reasonable assumption. Why would a person who is using Rydex bull/sector funds suddenly close profitable positions to open bullish ETF positions?
The first real evidence we have of Rydex bull funds being abandoned for ETFs is the period following the June/July 2006 lows. Note the absence of an upward surge in bullish cash flow associated with the rally. Last week I concluded that this was evidence of a "wall of worry", and that the bulls had not yet accepted the rally. I now believe that conclusion was wrong, and that investors are shunning Rydex bull funds in favor of ETFs. I think this conclusion is borne out by the bottom panel on the chart which shows total cash flow beginning to trend downward.



Finally, notice how in the last few months bull cash flow is declining and bear cash flow is rising. This is a similar pattern to the three prior bull cash flow peaks, albeit much smaller. As in the previous cases, I think this shift is a precursor to a correction or consolidation.
Bottom Line: The Rydex Cash Flow Ratio is probably being influenced by a significant lack of interest by investors in Rydex bull funds – ETFs now being the vehicle of choice. This shift in emphasis will necessitate our being more cautious in our interpretation of the Ratio until we can see what kind of new pattern, if any, emerges.



Posted at 05:04 PM in Carl Swenlin | Permalink


February 03, 2007BOND TIMINGBy Chip Anderson
Carl Swenlin
Timer Digest has ranked Decision Point #1 Bond Timer for the 52-week period ending 1/26/2007. We were also ranked #3 Bond Timer for the year 2006, and #5 Bond Timer for the last five years. Since past performance does not guarantee future results, this information is not particularly useful, except to highlight that we have done something right in the last year or so. Perhaps it would be more accurate to say that the market has favored our methodology, because sometimes it does not. Rather than focusing on the capture of the elusive prize, I thought it would be useful to describe the methodology we are using.
Nearly two years ago I stopped making discretionary calls for bonds (my best guess for market direction), and decided to use a mechanical model that I call the Trend Model, so named because it is driven strictly by trend-following tools, and relies only on the movement of the price index to generate decisions.
The model uses crossovers of the 20-, 50-, and 200-EMAs (exponential moving averages) of price to generate buy, sell, and neutral signals. The relationship of the 50-EMA to the 200-EMA determines if the price index is in a long-term bull or bear market. For example, it the 50-EMA is above the 200-EMA, it is a bull market.
Crossovers of the 20-EMA and 50-EMA actually generate the signals. If the 20-EMA crosses up through the 50-EMA, a buy signal is generated. When the 20-EMA crosses down through the 50-EMA a sell signal is generated if the 50-EMA is below the 200-EMA, otherwise the model switches to neutral. This is an important feature, because we don't want to be short in a bull market.
The chart below shows important signals generated in the last year. As you can see, the Trend Model is an effective decision-making tool under favorable market conditions.



Then there are unfavorable market conditions. On the next chart we can see how the model gets chopped up when a price index decides to move sideways for an extended period of time. On a positive note, it is also clear why the model goes neutral instead of short during a bull market.



Bottom Line: Trend-following models can be very effective when prices move in one direction for extended periods, but whipsaw is always a problem. This is why money management is important. It is also important to apply a timing model across a broad range of price indexes with different price behavior (multiformity), rather than put all your money in a single index/position.
Below is a recent snapshot of our primary timing model status. The indexes marked with an asterisk (*) have signals generated by the Trend Model.







Posted at 05:04 PM in Carl Swenlin | Permalink


January 20, 2007ENERGY SECTOR CORRECTION ALMOST OVERBy Chip Anderson
Carl Swenlin
Energy stocks as represented by the Energy Spider (XLE) have been moving in a more or less sideways direction since crude oil topped out in July and entered a bear market. I find it peculiar that energy stocks have consolidated at the same time that crude oil was crashing, but it does give us a clear sign of strength from that sector. Now I am seeing evidence that the correction in energy stocks is nearly over.
First, on the chart below we can see that crude oil is very oversold and is probably ready for a bounce. I would not care to speculate whether or not the bear market is over, but a 42% decline certainly entitles crude oil to a reaction rally or at least a correction. Either way, this would benefit energy stocks.



On the next chart the evidence is even more compelling. The Percent of PMO Crossover Buy Signals shows that the XLE stocks are very oversold in the short-term, and this condition happens to coincide with a medium-term oversold condition reflected by the Percent Buy Index, an alignment that implies that the expected rally should have staying power.



Bottom Line: I am not suggesting that we try to pick a bottom here, but the conditions are favorable for a good rally in energy stocks once prices begin moving upward enough to trigger a buy signal. I should point out that timing model performance on this sector has been marginal because of the sideways chop of the last year or so.






Posted at 05:04 PM in Carl Swenlin | Permalink

hefeiddd

January 05, 2007NEW NYSE COMMON STOCK ONLY INDICATORSBy Chip Anderson
Carl Swenlin
The purpose of this article is to introduce a new set of market indicators that DecisionPoint.com has recently released, indicators constructed from only common stocks listed on the NYSE.
A little background, at its inception The NYSE Composite Index was composed of all the issues listed on the New York Stock Exchange. The approximately 3,500 components were cap-weighted by total shares outstanding, and the NYSE Composite was one of the dullest indexes in existence. In January 2003 this all changed in a major way. The composition of the index was changed to include only common stocks listed on the NYSE (approximately 2,050), and they are cap-weighted based on the float (the shares available for trading). The result has been that the new NYSE Composite is now one of the top performing broad market indexes. For example, during the rally that launched off the July 2005 lows, the NYSE Composite had gains second only to the Nasdaq 100 Index.
When the NYSE Composite was reconstituted in January 2003, the NYSE failed to publish statistical breadth and volume data related to only the 2,050 components on the index. Rather, the NYSE and all media sources continued to publish data based all the 3,500 issues listed on the exchange, and most technicians (me included) continued to use these flawed data to construct indicators for the NYSE Composite. It was, after all, the only data available, but the resulting indicators had to be taken with a grain of salt. Let me explain why.
The NYSE Composite components are only common stocks, whereas the approximately 1,500 issues excluded from the Index are mostly not common stocks and are primarily issues sensitive to interest rates. By using data from all NYSE issues listed, indicator results are being contaminated by 1,500 issues that are totally unrelated to the Composite Index, and that often behave as a group in a manner completely different from the 2,050 index components. As a consequence, market indicators generated from this questionable data must necessarily be considered somewhat unreliable.
In late-2005 we decided to fix this problem. Since we track the list of NYSE Composite component stocks, we began collecting these Common Stock Only (CSO) data, and we developed a standard set of indicators based upon it. We also back-calculated the raw data and indicators back to January 2003. We have just released the new set of 10 indicators to our subscribers. If I may be allowed for a moment to be humility-challenged, the release of these indicators is a very big deal for many technical analysts. The scarcity of the raw data means that few services can offer these indicators, and some of these indicators are only available from DecisionPoint.com.
Is there any real difference between the Common Stock Only (CSO) indicators and those based upon All NYSE Issues? Yes, there are many differences, ranging from subtle to significant. Let's look at New High New Low charts as an example. Obviously, the CSO highs and lows have a smaller range because there are fewer stocks involved, but one difference that really stands out is the huge down spike of All Issues New Lows in May 2004, whereas, the CSO version shows merely a slight down blip.





Bottom Line: Whenever possible, market indicators should be constructed from data derived from the component stocks of the index to which the indicator is applied. In other words, the S&P 500 Advance-Decline Line should be constructed from the action of S&P 500 stocks. For too long NYSE Composite indicators have been corrupted by data from stocks that are not part of the NYSE Composite Index. It is with great pleasure that DecisionPoint.com has released a set of NYSE Composite indicators that are based on real NYSE Composite Index data.



Posted at 05:04 PM in Carl Swenlin | Permalink


December 09, 2006CRASH TALK IS PREMATUREBy Chip Anderson
Carl Swenlin
I have heard that a number of people have been predicting a crash. I don't know what evidence they are citing, but my analysis of the price structure and internal indicators leads me to the conclusion that there is not a crash anywhere in sight. This does not preclude a crash triggered by an external event of which we can have no advance knowledge, but the visible deterioration that typically precedes a crash does not currently exist.
To illustrate, we can look at charts (below) of the two most famous crashes of the last 80 years – the Crash of 1929 and the Crash of 1987. There are two chart configurations that preceded these two major crashes. First, was the price action – a major price top, followed by a lower top, followed by a break below the price low between the two tops. This kind of event doesn't always lead to a major crash, but it is always a sign of danger, and can be part of a market correction.
The second element is internal deterioration visible in a breadth indicator. In the case of the two charts below we can see that, when the second price top formed, the ITBM Oscillator also topped, and it topped below the zero line as a result of an extended period of deterioration. Below zero indicator tops are another danger sign that should not be ignored.





The next chart shows the current market status. The market is clearly overbought, but prices are making new highs, and the ITBM does not reflect any serious deterioration. The market is definitely due for a correction, but, other than the overbought condition, there is scant evidence that a correction, let alone a crash, is definitely about to occur.



Bottom Line: History shows us that structural crashes do not materialize out of thin air. That is to say, if the market is making new highs, it will take several weeks or months after the final top to allow for sufficient deterioration before the bottom falls out.



Posted at 05:04 PM in Carl Swenlin | Permalink


November 18, 20064-YEAR CYCLE RULESBy Chip Anderson
Carl Swenlin
For quite a while I have been saying that the rally that began in July has been driven by persistent bearishness among investors. I still think this was a significant element, and it was encouraged by a strong belief that a major decline would be occurring in October in conjunction with the long-awaited 4-Year Cycle trough. Unfortunately for the bears, it appears that the 4-Year Cycle trough arrived early and without much fanfare (because the price decline into the cycle low was not very impressive).
On our first chart we can see that the Cycle trough occurred after a mere 7.5% decline and appeared in the form of a double bottom in June and July.



While the Cycle low was easy enough to spot on a one-year daily chart, it shows up only as a small blip on the long-term monthly semi-log chart below. While it clearly fits into the nominal 4-year periodicity, the decline was not nearly as dramatic as many others in the past, and it is easy to see why many investors were fooled into waiting for a deeper decline in the traditional October time frame.



Assuming that my cycle assessment is correct (some will say that it isn't), and assuming that the new 4-Year Cycle unfolds in a "textbook" fashion (it very well may not), it is most likely that we have begun another up leg in the bull market that will last for a few years. While that is a distinct possibility, I personally will not count on it too heavily, because we can clearly see on the chart above that some cycles are far from typical.
The cycle model can help explain current market action, and it can help us anticipate future price moves; however, rather than try to predict the future, I still find it best to let our trend-following tools/models point the way and drive our decision-making. The table below shows the status of those models as of Thursday.



This table is updated for subscribers every trading day in the Decision Point Alert Daily Report.
Bottom Line: Many investors are still expecting a major decline later this year, but I think that is unlikely because a new 4-Year Cycle is beginning. Prices should remain in an up trend for several months, if the cycle unfolds in a typical fashion.


Posted at 05:03 PM in Carl Swenlin | Permalink


November 04, 2006GOLD IS COMING BACKBy Chip Anderson
Carl Swenlin
Since gold peaked around $725 in May of this year, it has been going through the process of digesting the huge advance that took place a year prior to that peak. At first it was not clear whether or not the gold bull market was over, but, as you can see on the chart below, the initially violent correction transformed into a sideways consolidation in the shape of a triangle. This week, over five months from the May top, gold decisively broke up through the top of the triangle, giving a pretty clear signal that the correction is over.



On the weekly chart below the breakout appears even more dramatic, and there is the added bonus that the weekly PMO (Price Momentum Oscillator) has bottomed. The picture is turning very positive.



With interest in gold likely to increase dramatically as prices advance, now is probably a good time to introduce a new vehicle for owning gold – Central Gold Trust (AMEX: GTU). GTU is a closed-end fund that owns gold bullion (only gold bullion), which is stored in a Canadian bank vault. The fund is run by the same folks that run Central Fund of Canada (CEF), which differs from GTU in that it owns both gold and silver.
GTU began trading on the Toronto Exchange last year, but the chart below shows that it was thinly traded until it debuted on the AMEX in September where volume increased significantly. I think this will probably become one of the best vehicles available for owning and trading gold. It is my understanding that GTU qualifies for capital gains tax, which, for tax purposes, makes it superior to the gold ETFs and bullion. Do not take my word for it – check with your tax professional.



Bottom Line: Our trend model for gold turned bullish on 11/3/2006, and the chart picture looks very good. In my opinion, the correction in gold is over, and the next leg up is beginning.



Posted at 05:04 PM in Carl Swenlin | Permalink


October 21, 2006WINDSOCK VERSUS CRYSTAL BALLBy Chip Anderson
Carl Swenlin
For several months these articles have included a reminder that "Technical analysis is a windsock, not a crystal ball." To clarify, a windsock is used to ascertain the current wind direction and intensity. A crystal ball is used to predict the future. As a practical matter, if we make decisions in response to known market conditions, we are operating in a mode that will allow us to adjust our stance as conditions change. Conversely, if we position ourselves based upon a prediction about the future, we are stuck with defending that prediction until it comes true or sticking with it until we lose enough that we are forced to capitulate.
Market action during the period from May 2006 to the present serves as a prime example of how the crystal ball can get cracked. During the decline from the May top it was broadly accepted that the bull market top was finally in place and that a major decline was beginning. The rally out of the summer lows was viewed as a short-term technical bounce in the context of a longer-term decline. The bears held fast. As prices approached the level of the May top, hope was born that a bearish double top was forming. The bears held fast . . . until the last three weeks of rally left the bears with little on which to hang their hats.



That is not to say that the bears did not have convincing arguments – I certainly agreed with most of them – but I have become more of a "windsock" kind of guy, and find there is less stress when I rely on our mechanical Thrust/Trend Model to help me align with current market conditions. The Model turned neutral during the decline from the May top, but it turned bullish again as the market rallied off the July lows. The table below shows how it has performed with the 16 indexes to which it is applied:



These are decent results, and we should be able to capture some of the profits if the market turns down at this point, but I don't want to leave the impression that there is any sure thing here. The Model has been marginally profitable for the last few years as market chopped higher in a fairly narrow range. And if the bears had been right more recently, the Model would have been whipsawed for some small losses. But that would not have been as distressing as hoping for a bearish outcome all the way from the July lows to the recent highs.
Checking current market conditions, the next chart shows the percentage of stocks in the S&P 500 Index that are above their 20-, 50-, and 200-EMAs, and it shows that the market is currently overbought in all three time frames. That doesn't mean that there will be a decline – the market was similarly overbought about a year ago, yet prices continued to rise for several months. Nevertheless, the market is vulnerable under these conditions and is it not a good time to add to positions.



Bottom Line: Whether the current up trend continues or ends, we are fortunate that the Model got us in early. When the market finally turns, we can be reasonably confident that the Model will take us out and preserve some of the gains in the process. Keep in mind that Model signals do not predict what is going to happen, they merely point us in the direction the market seems to be going at the time.



Posted at 04:04 PM in Carl Swenlin | Permalink

hefeiddd

October 07, 2006MARKET HITS OVERHEAD RESISTANCEBy Chip Anderson
Carl Swenlin
The structure that has dominated the price pattern for nearly three years is a rising trend channel, which I have drawn on the S&P 500 chart below. As you can see, the price index has once more encountered the top of that channel, and that resistance will probably prevent any significant price advance until overbought conditions have been allowed to correct.
That is not to say that a major price reversal is imminent. It is certainly possible, but it is also possible that prices will dribble along the bottom of the overhead trend line for several months as happened prior to the summer price lows.
There are two things that argue for a major price decline. First, is the seasonal weakness that the market traditionally experiences in October, and the other is the 4-Year Cycle lows, also expected in October.


On the other hand, investor sentiment continues to remain at strongly bearish levels. Note on the Rydex Cash Flow Ratio chart below that the bears have scarcely budged from the bearish side of the three-year range, in spite of the fact that prices have moved steadily higher.


Bottom Line: It seems reasonable to expect some weakness over the next several weeks, but I will remain bullish until our mechanical model says otherwise. Even though cyclical and seasonal pressures present problems, I think that sentiment is the trump card. It is hard for me to imagine a major decline beginning when there are so many bears out there.
Technical analysis is a windsock, not a crystal ball. Be prepared to adjust your tactics if conditions change.



Posted at 04:04 PM in Carl Swenlin | Permalink


September 16, 2006MARKET OVERBOUGHT BUT SENTIMENT STILL FAVORS BULLSBy Chip Anderson
Carl Swenlin
The S&P 500 Index is approaching new 52-week highs, but there is short-term overhead resistance immediately ahead, and our primary medium-term indicators are becoming modestly overbought. Does this spell trouble for the bulls? Probably not. Overbought conditions are not necessarily a problem in a bull market, and there are still way too many bears for an important top.

Our first chart shows the S&P 500 Index with our three primary medium-term indicators (oscillators) – one each for price, breadth, and volume. As you can see they are approaching the overbought side of their range, but they are far short of being at their extreme limits, and they still allow for higher prices before they make a final top. Another thing to remember is that oscillators oscillate within a fixed horizontal range, prices normally do not. This means that, even though the oscillators top and begin to trend down, prices don't necessarily have to follow. In fact, you can see a few instances on the chart where prices continued higher even after the oscillators topped.



Our next chart is of the Rydex Cash Flow Ratio*, which I featured in an article two weeks ago. Note that the Ratio remains oversold (reflecting strong bearish sentiment), in spite of the fact that prices have continued higher. The condition of the Ratio is caused by a combination of aggressive buying of bear funds and timid acquisition of bull funds. This situation is extremely unusual, and I believe it must be relieved before we can expect a significant price decline. Relief will come when the bears give up and the bulls become more aggressive, ultimately causing the Ratio to move back up toward the top its trading range.



Bottom Line: The significant aspect of the market being overbought is that it is probably not a good time to be adding new long positions. Also, more caution is appropriate while the overbought condition is being worked off. Otherwise, I think the Rydex Cash Flow Ratio strongly suggests that prices will move higher, even after internals begin to correct downward. In other words, I think that people need to become more bullish before the rally will end.
Technical analysis is a windsock, not a crystal ball. Be prepared to adjust your tactics if conditions change.



Posted at 04:04 PM in Carl Swenlin | Permalink


September 02, 2006RYDEX RATIO IMPLIES PRICES WILL GO HIGHERBy Chip Anderson
Carl Swenlin
After the decline that lasted from the beginning of May to mid-June, a second bottom was made in July, from which the current rally emerged. Both the bottoming process and the rally have been rough and tedious, causing a lot of anxiety among market participants, and resulting in strong, persistent bearish sentiment. This is clearly visible on our first chart of Rydex Cash Flow analysis.

The first panel below the S&P 500 chart shows cumulative cash flow (CCFL) for bull plus sector funds. Note how the indicator has been running flat for the duration of the July/August rally, a reflection of caution. On the other hand, the next panel down shows that CCFL for bear funds has been increasing for most of that period and shows that the bears are nearly as committed now as they were at the June price low.



Our next chart is of the Rydex Cash Flow Ratio*, which summarizes the elements of the first chart into a single indicator. Again, we see that the Ratio has stayed near the bearish extremes of the three-year range, even as prices approach new highs. This brings to mind the psychological term "cognitive dissonance", which is the pain we experience when our belief is in conflict with reality. Surely the bears must be feeling some pain.



Bottom Line: If the rally had been stronger and smoother, it would probably been sufficient to shake out the bears and attract the bulls, shifting sentiment to the bullish side of the range. As it is, I think we must assume that prices will move higher until sentiment turns more bullish. Such an adjustment could occur within a few weeks.

Technical analysis is a windsock, not a crystal ball. Be prepared to adjust your tactics if conditions change.




Posted at 04:04 PM in Carl Swenlin | Permalink


August 19, 2006NASDAQ 100: TURNING BULLISH, BUT SHORT-TERM OVERBOUGHTBy Chip Anderson
Carl Swenlin
The Nasdaq 100 Index has declined farther than the broader indexes, and it has been slower in turning around; however, this week the index has turned the corner, and appears ready for a continued advance. The only problem is that it has become short-term overbought.

To demonstrate, let's look at the first chart which presents our On-Balance Volume (OBV) Indicator Set. The Climactic Volume Indicator (CVI) measures extreme OBV movement within the context of a short-term OBV envelope for each stock in the index. The Short-Term Volume Oscillator (STVO) is a 5-day moving average of the CVI. The Volume Trend Oscillator (VTO) summarizes rising and falling OBV trends. These charts tell us if the index is overbought or oversold based upon volume in three different time frames.

The first obvious feature is the price breakout above the three-month declining tops line, which signals that the trend is turning upward. Next we can see that the CVI and STVO have both hit their highest level in a year. While this is evidence of the short-term overbought condition, it also implies that an initiation climax has occurred, an event that signals the beginning of a rally.



While the short-term overbought condition tells us to expect some pull back and/or consolidation, the second chart presents a positive intermediate-term picture. It displays our three primary intermediate-term indicators for price, breadth, and volume. As you can see, while the price index was making a series of new lows, the three indicators were either flat or trending upward, forming positive divergences. Also, you will note that all three indicators have been moving up from very oversold levels, and they have a long way to go before they become overbought.



Finally, most sentiment indicators we follow continue to reflect strong pessimism, which is bullish for the market.

Bottom Line: Currently, the indicators show us that the trend is turning up. Short-term conditions call for a "pause to refresh," but, once a short correction/consolidation is complete, intermediate-term conditions allow for the rally to continue for at least a few more weeks. Technical analysis is a windsock, not a crystal ball. Be prepared to adjust your tactics if conditions change.



Posted at 04:04 PM in Carl Swenlin | Permalink


August 05, 2006TECHNICAL PICTURE IS MOSTLY BULLISHBy Chip Anderson
Carl Swenlin
The decline from the May top, and the subsequent sideways chopping have been hard on investors' nerves as they try to decide how things will eventually resolve; however, even though the rising trend line has been challenged twice in the last few months, the technical picture has been steadily improving. Also, sentiment indicators have been persistently and strongly pessimistic – some even worse than at the 2002 bear market lows – and this is bullish for the market.
The first chart shows the components of our Thrust/Trend Model, our primary timing tool. (A full discussion of this model can be found in the Glossary section of the DecisionPoint.com website.) The first thing we can see is the bullish double bottom that was formed as the price index was challenging the bottom of the rising trend channel. What remains to be seen is a decisive break above the middle peak of the "W", but the price pattern is positive nevertheless.
Until recently the model has been in neutral because the Percent Buy Index (PBI) has been below its 32-EMA, but, as you can see, the PBI has also formed a double bottom and has recently broken above its 32-EMA, switching the model to a buy signal. Also, the PBI, like most of our other medium-term indicators, is rising out of oversold conditions. The chart looks very positive.



The model shown is for the S&P 500 Index, which gives us our positioning for the broad market, but we also apply the model to other market and sector indexes. As you can see in the table below, buy signals are being generated across a wide range of indexes and sectors.

This table is updated daily in the Decision Point Alert Daily Report.
No matter how positive things may look, there is always something to worry about. For me it is that we are overdue for a bear market, and we are also due for a price trough associated with the 4-Year Cycle. As you can see by the chart below, the 4-Year Cycle is pretty reliable in attracting price lows, and based on the history shown on the chart, there is about an 80% chance that prices will be lower later this year (and about a 20% chance that they won't).


Also, it is not easy to see on the chart, but the monthly PMO has topped and has been falling for three months.
Bottom Line: Actions taken by the Fed next week could torpedo my conclusions, but the most objective evidence we have shows that the market is configured for another advance, and this is backed up by the more subjective pessimism reflected in most sentiment indicators. On the other hand, if the models have been tricked by the market, they will normally turn neutral with only minor loses; however, stops should be used to guard against negative price action that is too rapid for the models' reaction time.



Posted at 04:03 PM in Carl Swenlin | Permalink


July 15, 2006SPLIT MARKETBy Chip Anderson
Carl Swenlin
While both the S&P 500 and Nasdaq 100 are showing the effects of the current correction, there are significant differences in the technical picture on both charts. With the S&P 500 we might ask, "Where's the bear?" The 50-EMA of price is still above the 200-EMA, and most important, price still remains within the nearly three-year rising trend channel. The most negative thing about price action is that this correction is currently making a second retest of the rising trend line, something that didn't happen on the three previous bull market corrections. Unless things change for the worse, I'd have to say that the S&P 500 remains in a bull market.

Things look a lot worse for the Nasdaq 100 Index. The 50-EMA is below the 200-EMA, and the price index has dropped down through the bottom of the rising trend channel that has defined the last few years of the bull market. I have no hesitation saying that this index has entered a bear market. This is not good because it tends to lead the broader market.





One thing that may be considered positive on both charts is that the Percent Buy Index (circled) is oversold, but, as you can see, oversold conditions do not always result in price rallies. While the Nasdaq 100 has been oversold for over a month, prices have continued to deteriorate. During that same period, the S&P 500 has held its own, but, again, the oversold condition has only brought a failed rally and second retest of support.

Bottom Line: Our market posture is neutral for both indexes based upon the status of our primary timing model. I think that's a good thing because the market could be transitioning to a bear phase. If this is the case, oversold conditions are dangerous. They can result in furious short-covering rallies that are subsequently prone to failure.

- Carl Swenlin

Visit Carl's website – DecisionPoint.com – for the most comprehensive collection of market indicator charts on the Web. Breadth charts, Investor sentiment charts, P/E charts, even historical charts going back to the 1920s - DecisionPoint has it all!

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June 17, 2006BEARS HAVE HARDLY BUDGEDBy Chip Anderson
Carl Swenlin
(Editor's Note: This article was written on June 16th - over a week ago. Given the market's sideways motion since then, the article's basic premise remains valid. It is also instructive to compare commentary from the past with current conditions to see how the commentary "played-out".)
Despite a massive rally on Thursday, the Rydex Cash Flow Ratio reflects that very few bears have given up. The Rydex Cash Flow Ratio, an exclusive DecisionPoint.com indicator, gives an improved view of sentiment extremes by using cumulative cash flow (CCFL) into Rydex mutual funds rather than using the totals of assets in those funds (which we use for the Rydex Asset Ratio). It is calculated by dividing Money Market plus Bear Funds CCFL by Bull Funds plus Sector Funds CCFL. While the Ratio is not necessarily representative of the entire stock market (it only involves money in Rydex mutual funds), it has proven to be a reliable sentiment indicator.

Our first chart shows that the Ratio is at the low end of its range, meaning that bearish sentiment is at an extreme level. Note that Thursday's rally only effected a small up tick on the Ratio, so very few bears have been shaken loose. This is bullish for the stock market because short-covering bears are like rocket fuel for rallies.

Our second chart shows how the recent rally was in fact a bounce off the bottom of a rising trend channel. That means the support, so far, has held, and that is also bullish. Additionally, most of our medium-term indicators are oversold, providing a good foundation for an extended rally.

Bottom Line: Our primary mechanical timing model remains neutral, and it will take continued constructive market action to turn it back to bullish. An excess of bearish sentiment and generally oversold market conditions provide a good setup for a rally; however, I must emphasize that oversold conditions are very dangerous if the bull market is transitioning to a bear market. For planning purposes, I will assume that the rally will continue, but my market posture will remain neutral pending a buy signal on our timing model.


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June 03, 2006BOTTOM LOOK PRETTY SOLIDBy Chip Anderson
Carl Swenlin
On Tuesday we saw the market successfully retest last week's lows, then on Thursday there was a climactic rally that broke above last week's highs. This was a lot more positive than many people (including me) were expecting. The most significant short-term event was that the CVI (Climactic Volume Indicator), which is the very nervous purple line on our first chart, hit its highest reading in over a year-and-a-half. This marked what I believe was an initiation climax (as opposed to an exhaustion climax). As the name implies, an initiation climax signals that a new short-term trend has been initiated in the direction of the climax, in this case up. Since the market is now short-term overbought, some backing and filling can take place before the up trend continues, but it is most likely that higher prices will be forthcoming.

What makes the recent bottom look pretty solid is that the other two indicators on the chart, the VTO (Volume Trend Oscillator) and STVO (ST Volume Oscillator), were very oversold at the recent price lows. I have circled other instances where both indicators were similarly and simultaneously oversold, and you can see that rallies of at least short-term duration resulted.
While this rally could challenge the May highs, I don't think it is the beginning of a major bull move because of our second chart below, which shows the percentage of stocks above their 20-, 50-, and 200-EMAs. As you can see, the shorter-term 20- and 50-EMA indicators reached oversold levels similar to other important bottoms in the last two years; however, the 200-EMA indicator was only modestly oversold at the recent price low. The bottom looks pretty solid but only for short-term purposes.

One thing to remember is that rallies out of oversold conditions are not a guaranteed sure thing. When the market turns bearish, oversold conditions are dangerous and can beget even more selling.
Bottom Line: Our primary medium-term timing model for the S&P 500 switched to neutral on May 19, which means that the decline was severe enough to trigger a caution flag. In order to return the model to a bullish stance, a modest amount of work will be required to the up side. The condition of the indicators says that is well within reach; however, I do not think this is the beginning of a major bull move, because the recent bottom was not deeply oversold on our long-term indicators.



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May 20, 2006OVERSOLD BOUNCE IS DUE, BUT . . .By Chip Anderson
Carl Swenlin
During the last two weeks the market has experienced a much needed (and long anticipated) decline, and now it is due a bounce out of a short-term oversold condition; however, the decline could continue for a few more months.

On our first chart below we can see that the CVI (Climactic Volume Indicator) and the STVO (Short-Term Volume Oscillator) have reached deeply oversold levels and have turned up. This is a pretty good indication that a short rally could be starting.

Also, note the rising trend line I have drawn on the chart. For several months it has acted as support as the market worked its way higher. Unfortunately, that line has been decisively penetrated, and it will now function as overhead resistance. My guess is that any rally will not exceed 1300 on the S&P 500.

The next chart shows three of our primary medium-term indicators -- one each for price, breadth, and volume. The ITBM (IT Breadth Momentum) and ITVM (IT Volume Momentum) Oscillators have become modestly oversold, but the PMO (Price Momentum Oscillator) has only just passed through the zero line and is nowhere near the level where other declines have ended. Also, the violation of the short-term rising trend line suggests that the decline will continue at least to the bottom of the medium-term rising trend channel.

The best-case scenario is that the decline will end once the PMO, ITBM, and ITVM turn up from oversold levels, which might only take a few more weeks; however I want to call your attention to the March-August 2004 correction. Note that indicators (and the market) made three oversold bounces before the correction was finally over.

Bottom Line: An oversold bounce can be expected, but there is plenty of room (and need) for a continued decline longer-term. Our primary timing model for the S&P 500 switched from buy to neutral on Friday, so I am inclined to believe we are in for some rough sailing over the next several months.


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May 06, 2006GOOD AND BAD NEWS ABOUT THE DOLLARBy Chip Anderson
Carl Swenlin
On March 17 our trend model turned from bullish to neutral on the US dollar, and since then the technical picture has continued to deteriorate. Prices have dropped precipitously from near 90 to near 85, and the weekly 17-EMA has crossed down through the 43-EMA, a long-term sell signal. (The weekly moving average crossover is not "official" until the end of the week, so the sell signal could be erased if there is a sharp rally on Friday.) The weekly moving average crossover is a big deal, because, as you can see on the chart below, it doesn't happen very often.

While price action and internals are negative, there is the possibility that a bullish reverse head and shoulders is forming. There is a clear left shoulder and head, and the support line at 85 could facilitate the formation of a right shoulder. If the dollar can rally off the support at 85, we would want it to rally up through the neckline drawn at 93 in order to execute the pattern. There is no guarantee that this will happen, but it is a possibility.
The next chart is a long-term view of the dollar using a monthly chart (each bar equals one month), and it shows another set of positives and negatives. Starting with the negatives, the monthly PMO has topped, and the 6-EMA has crossed down through the 10-EMA. Both are long-term sell signals.
On the positive side, we can see that there is very strong long-term support between 78 and 80. If the reverse head and shoulders pattern fails to execute, it could be that the current decline will lead to a double bottom on the support around 80 in preparation for a strong upside trend reversal.

Bottom Line: We are currently neutral on the dollar, and the technical condition of the index is negative; however, support zones at 85 and 80 could provide a solid basis for a long-term bottom. Sentiment shows the lowest percentage of bulls since late-2004, so a short-term bounce is likely very soon.


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April 16, 2006ENERGY ADVANCE NOT SUPPORTED BY CASH FLOWBy Chip Anderson
Carl Swenlin
One way we can gauge sentiment regarding a particular market or sector index is by watching asset levels and/or cumulative net cash flow in and out of the related Rydex mutual fund. In general, cash flows should rise and fall along with prices. When divergences occur, price movement should be questioned. For example, a large price move accompanied by a small increase in cash flow indicates there is probably not broad support behind the price move and that the rally could fail. Or, a sharp decline that does not result in proportional cash outflows probably indicates too much optimism and the likelihood of an additional decline sufficient to cause capitulation.

In the case of Rydex Energy Fund we can observe that, as we would expect, money flowed out of the fund when prices declined from the January top. After the correction was completed, prices once more advanced toward the January high; however, this price advance was not confirmed by money flowing back into the fund. In fact, assets and cash flow have remained flat during the price advance.

How can the fund's price advance if money is not pushing the move? Remember, the fund's price is actually its NAV, which is the net asset value of the securities owned by the fund. The value of these securities will change as a result of their being traded in the market. The fact that fund asset levels and cash flow do not confirm price changes indicates that volume associated with the move is drying up. In the case of Energy Fund, we can assume that the advance is not likely to be sustained.

At DecisionPoint.com we track assets and cash flow on all 47 Rydex funds. They are invaluable sentiment indicators.



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April 01, 2006MARKET TREND IS STILL UP, BUT...By Chip Anderson
Carl Swenlin
The overall trend of the market is still up, but there are very few new opportunities surfacing. Taking a look at our primary mechanical timing models below, we can see that nearly all of the broad market and sector indexes are on profitable buy signals, but most of the signals are relatively old and do not offer ideal conditions to put new money to work.

Another problem is that, while the signals are showing a profit, in many cases (like the S&P 500) the profit is rather narrow for the age of the signal, and much of it would be lost if the trend were to change. (It takes about 3% to 4% to generate a signal change.) Nevertheless, I am pleased with how the models have been performing under the circumstances.
The problems reflected by the timing models is also evident in the following chart of the S&P 500. We can see that the trend has been up since the price low in late October; however, the index has been stalled by the resistance at the top of the shallow rising trend channel, which could continue to impede progress for some time to come. And, even in the context of the rising trend channel, prices are due to correct back to at least the bottom of the channel, and that is not a situation that invites renewed risk taking.

While prime opportunities may be few, there are two worth considering. First, the S&P Energy Sector has generated a new buy signal after a short correction. Note that it is bouncing up off the bottom of a rising trend channel.

Also Interesting is the Nasdaq 100 Index. It still failed to pass all the screens necessary to generate a new buy signal, but it is very close to doing so. It too is bouncing off the bottom of a rising trend channel.

While both charts are promising, they represent the modest opportunities found after a correction in an established rising trend. They are not likely to result in the kind of gains we see from deeply oversold bear market lows.
It is especially interesting that the Nasdaq 100 is looking positive at this time. It could provide the required push to keep the broader market rising for a while longer.
I must emphasize, these are not recommendations, and the timing signals are not infallible.


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March 18, 2006MARKET IS ST OVERBOUGHT AND AT RESISTANCEBy Chip Anderson
Carl Swenlin
Last week I wrote an article entitled Investors Intelligence Sentiment Helps Bulls in which I pointed out that sentiment had become very bearish, and that the market was more likely to rally than decline. Since then the market has enjoyed a short rally, but sentiment continues to be steadfastly bearish, a persistent positive for the market; however, the market has become short-term overbought and it has run into long-term resistance.

The bottom two panels on the first chart show the breadth and volume versions of the Swenlin Trading Oscillator (STO) -- short-term indicators. As you can see, both indicators have reached the overbought side of their range. This condition needs to be relieved, but this could happen without a price decline -- as you can see in May and July of last year the indicators dropped toward zero while prices continued higher. Could this happen again this time? Let's look at a longer time frame.

The chart below shows our intermediate-term indicators -- the PMO (Price Momentum Oscillator), as well as the ITBM (IT Breadth Momentum) and ITVM (IT Volume Momentum) Oscillators. They are all in the neutral zone, and have a long way to go before they reach overbought levels, so there is plenty of room internally for prices to move higher. By the same token, there is also plenty of room for them to move lower, but they are not currently acting as if they want to go in that direction.

Finally, let's look at the price index. We can see that it has been hugging the top of the rising trend channel for nearly four months, and it has just squeaked above the line of resistance. This is not a decisive breakout, but it is another manifestation of the persistent bullishness that prices have been displaying for quite a while.

Bottom Line: Our mechanical timing model has been bullish since November 4, 2005. Short-term indicators are overbought and problematic, but medium-term indicators, as well as sentiment, allow for a continued advance in prices for at least a few more weeks.


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March 04, 2006RYDEX CASH FLOW IS BEARISHBy Chip Anderson
Carl Swenlin
The Rydex Cash Flow Ratio*, which is shown on the first chart below, reflected a fair amount of bullish sentiment and peaked around the end of November. Since then it has been sliding down toward the bearish side of the range in spite of the fact that prices have been moving higher. This is not normal -- prices normally drive the Ratio as money flow adjusts to price movement.

My first conclusion was that over-anxious bears were placing their bets too early and driving prices higher with their short covering; however, a closer examination of the Ratio's components reveals that something quite different, and dangerous, is taking place.

The chart below shows the components of the Cash Flow Ratio. Note that, since November, bear plus money market funds cash flow has been flat to slightly rising, demonstrating clearly that the bears have been relatively patient.

On the other hand, cash flow for bull plus sector funds has decreased dramatically. This means that money has been moving out of bullish funds even though prices have moved higher. This is almost always a bad sign.

To summarize, the Rydex Cash Flow Ratio divergence does not reflect premature bearishness, rather it shows that many people (smart money?) are quietly moving toward the exits. This is just one of a long list of divergences that can be observed on our indicator charts, and, even though the trend of the market is still up, increased caution is appropriate.

RYDEX CASH FLOW RATIO: The Rydex Cash Flow Ratio gives an improved view of sentiment extremes by using cumulative cash flow (CCFL) into Rydex mutual funds rather than using the totals of assets in those funds (which we use for the Rydex Asset Ratio). It is calculated by dividing Money Market plus Bear Funds CCFL by Bull Funds plus Sector Funds CCFL. To read more click here.



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February 18, 2006SHORT-TERM OVERBOUGHTBy Chip Anderson
Carl Swenlin
In my February 2 article I stated my belief that a medium-term correction is in progress because the PMM Percent Buy Index (PBI) has turned down and crossed down through its 32-EMA. The chart below shows this condition still exists, and I have not changed my mind at this point.

Some readers pointed out that a similar occurrence in 2003 did not have serious negative effect on prices. I agree, and I should have mentioned this in the article. There is, however, a big difference in the 2003 PBI top and those that occurred afterwards. That 2003 top occurred after a huge upward thrust of the PBI from deeply oversold levels that signaled the beginning of the bull market. The PBI has not been that deeply oversold since.

This week the market has rallied, once again challenging recent highs and straining the credibility of any bearish outlook, but in doing so it has become quite overbought in the short-term, while also approaching overhead resistance.

The overbought condition can be seen on the chart of our OBV Indicator Set* below. The Climactic Volume Indicator (CVI) has reached the top of its normal range, and the ST Volume Oscillator (STVO) is not far behind. These are short-term indicators.

The internal problem with the rally can be seen on the Volume Trend Oscillator (VTO), which is a medium-term indicator. Note how the rallies in April and October were launched from deeply oversold levels on the VTO, whereas the current rally launched after the VTO had only dropped to neutral levels. The same problem exists on the charts of many other medium-term indicators. While the rally may continue, its pedigree is pretty weak, and indications are that it has run out of steam short-term.



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February 05, 2006CORRECTION PHASE BEGINNINGBy Chip Anderson
Carl Swenlin
With the market having formed numerous tantalizing tops since the end of November, perhaps the title of this article should say that a correction phase is finally beginning. And, considering all those previous false starts, why am I so sure that this time is the real thing? Well, I'm pretty sure that a medium-term correction is in progress because the PMM Percent Buy Index (PBI) has turned down and crossed down through its 32-EMA. The PMM (Price Momentum Model) PBI is an important indicator that reveals the degree of bullish participation and whether that participation is getting stronger or weaker.

On the chart I have marked the current PBI top as well as three prior significant tops, which were also followed by 32-EMA downside crossovers. All three tops initiated a correction lasting from three to six months. There is no guarantee that the same thing will happen this time, but the similarity between the tops gives me a high degree of confidence in my conclusion.

The next chart shows our IT Breadth and Volume Momentum Oscillators (ITBM and ITVM), and you can see how the market's internal strength peaked about two months ago, and these indicators gave a similar early warning for the other three corrections.

The ITBM and ITVM show that the current market condition is neutral (the indicators are near the zero line), but it is likely that they will be spending a few months working below the zero line as the market begins to correct in earnest.

There is no way to tell if the correction will be sideways or sharply down, but we are due for a cyclical bear market, and the 4-Year Cycle is pointing toward a major price low in October, so odds are in favor of a significant price decline.



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January 21, 2006UNDERMINING GOLDBy Chip Anderson
Carl Swenlin
While mining gold has become very profitable, there are many signs that future prices are being undermined. For example, our first chart shows total assets and cash flow for Rydex Precious Metals Fund. While assets have risen along with price, cash flow (the bottom panel on the chart) reflects that money has actually been flowing out of precious metal stocks. This means that the rally has very thin support.

SIDEBAR: We are seeing similar divergences across a wide range of Rydex index and sector funds.

Our next chart of the gold ETF shows that a similar technical divergence is affecting the price of gold as well. Note how the December and January OBV (on-balance volume) peaks were about equal and failed to confirm recent highs. Also, OBV during the last two weeks' rally has been virtually flat -- again failing to confirm the price advance, and implying that distribution is taking place.

Finally, sentiment for gold is becoming very bullish, as demonstrated by our last chart which shows the premium/discount being paid for Central Fund of Canada (CEF), a closed-end fund that owns gold and silver. Closed-end funds trade like stocks and can trade at a premium or discount to the actual net asset value (NAV) of the fund's assets. Currently, in their rush to own gold, investors are willing to pay nearly 10% more than the fund's assets are actually worth.

Conclusion: Both gold and gold stocks are overbought and showing signs of internal weakness. Bullish sentiment is becoming excessive. All this evidence implies that a correction us due. It could be a short-term event lasting a few weeks, or it may stretch out over several months, and the amount of the correction could be quite jarring; however, I have no reason to conclude that the bull market in gold is over. It is time to guard stops and be patient until the technical problems have cleared, and another buying opportunity presents itself.



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January 07, 20062006 ASSESSMENTBy Chip Anderson
Carl Swenlin
I am often asked to make an annual forecast, and I frequently oblige, but this year I'd like to take a different approach. Rather than making a "forecast," let's make an assessment of some significant factors that will be affecting market progress in 2006.
First is the 4-Year Cycle. On the S&P 500 chart below I have drawn vertical lines through the actual 4-Year Cycle troughs, as well as a few places where price troughs should have occurred but didn't. For the most part we can say that significant price lows occur every four years about 85% of the time.
Take note that the log scale causes recent price movement to be greatly under emphasized, and significant declines/lows in 1987, 1990, 1994, and 1998 appear as mere blips.

The next 4-Year Cycle price low is due in October of this year. Subordinate cycles suggest that the low may arrive a few months on either side of that projection, and there is no guarantee that the decline will play out in a straight line. For now we should be looking for some above average difficulty between now and the end of the year.
Fundamentals also present problems for the market. The next chart shows the index of S&P 500 earnings and a presentation of the P/E ratio based upon prior peak earnings, a methodology developed by John Hussman (hussman.com). As you can see, over the long term earnings have trended higher in relation to a trend line that rises at an average of about 6% a year, and the current earnings peak is very close to that trend line. This has been the situation for the last two years, and could account for the market's slow progress during that time.

Currently, the P/E has remains at a level where, except for the bubble years of 1998-2002, the market at best had trouble making forward progress, and at worst experienced major declines. This will be a significant drag on the market until the P/E can correct back toward the area of 15, which represents fair value. A correction to undervalue (10) could also happen, but that is a rare occurrence and not necessary to set up favorable conditions.
CONCLUSION: Normal cyclical expectations and high valuations present significant obstacles for the market this year, and the bull/bear cycle suggests that a significant decline will occur between now and the end of the year. That said, I should point out that Decision Point's timing models for the broad market remain on buy signals, and the trend is up. The odds favor a decline this year, but the top isn't in place yet.



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December 10, 2005GOLD HITS $500 AND RESISTANCEBy Chip Anderson
Carl Swenlin
On December 1 New York spot gold closed at $502.30, slightly exceeding a target long awaited by gold bugs, but $500 is also a level we technicians have for a long time identified as a long-term resistance level. Could it be that the cyclical bull market in gold has come to an end?
Strictly speaking, we can't say for sure that the secular bear market in gold is actually over yet. As you can see by the chart, gold has more or less maintained a trading range since 1983, whereby it worked off the excesses of the prior bull market that took prices to $850. So far it has not decisively broken out of that trading range, therefore, we cannot conclude that the long-term consolidation is over.
Nevertheless, I believe that the bear market low was made in 1999, and that the rally from the 2001 retest low is the beginning of a secular bull market; however, it is still likely to take some time before gold can move significantly higher and put the trading range behind.
The rising trend channel I have drawn on the chart reinforces the overhead resistance and offers some perspective regarding the ebb and flow of prices. While the bull market is likely to continue, it is also likely that prices will soon pull back and consolidate. This process could take up to a year or more with correction lows around $450. I also think we could see prices as high as $530 before the correction starts.

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November 20, 2005MARKET BECOMING OVERBOUGHT IN ALL TIME FRAMESBy Chip Anderson
Carl Swenlin
When a stock is above a moving average it is considered bullish, and the stock can be considered to be in a rising trend for that time frame. A good way to determine the market's overall condition (overbought/oversold) across a range of time frames is to analyze the percentage of stocks above their 20-, 50-, and 200-day moving averages. The following chart shows the condition of the stocks in the S&P 500 Index.

As you can see the market is becoming overbought in all time frames. Each of the three indicators is not only approaching the top of its trading range, but they are very close to the declining tops lines I have drawn, which demonstrates how participation is fading even as the S&P 500 moves to progressively higher tops. If the indicators can press higher to about the 90% level, it would be a longer-term positive; however, if the declining tops lines prevail, it is likely that overhead resistance on the price index will force another correction.
I am seeing this kind of picture through a wide range of internal indicators, and investor sentiment is becoming extremely bullish, so I expect that there will soon be another correction of sufficient depth and duration to clear the overbought condition and dampen confidence. As you can see from other corrections in the last few years, this can be accomplished fairly quickly and painlessly.


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October 16, 2005MARKET IS OVERSOLD AND DANGEROUSBy Chip Anderson
Carl Swenlin
The Price Momentum Oscillator (PMO) is an expression of internal strength for a given price index. In the chart above we summarize three important PMO characteristics for the individual stocks in the S&P 500 -- the percentage of PMOs rising (very short-term), the percentage of PMOs on crossover buy signals (short-term), and the percentage of PMOs above the zero line (medium-term). The chart tells us that the S&P 500 is technically oversold in all three time frames. (To read more about the PMO click here).
We normally think of oversold conditions as signalling the next buying opportunity, and as you can see, oversold conditions such as this normally lead to some kind of rally once a price low is in place. Normally, but not always. During a bear market, oversold conditions can result in even more selling.
I don't know if that will happen this time -- I can't say with certainty that a bear market has begun -- however, there are good reasons for extra caution. Most obvious on the chart is the breakdown from the ascending wedge pattern, which is bearish. And spanning a much longer time frame is the declining tops pattern on the PMO, which diverges from the rising tops of the bull market.
Looking beyond the chart, we know that bull markets do not go on forever, and this one is three years old. Based upon my cycle work, the 4-Year cycle is due to crest, leading to a bear market decline that should last until about this time next year. Also, we have sell signals on all but two the 17 major market and sector indexes tracked by our primary timing model. The exceptions are Energy and Utilities, but they are under pressure as well.
Bottom Line: A bounce is likely, but I do not believe it will lead to new price highs. Rather, it will work off the oversold condition and set things up for a continuation of the decline. Worst case is that there will be no bounce, just more selling, and the market will become even more oversold. In either case, it is a dangerous time to be making bullish assumptions.

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October 02, 2005GOLD APPROACHING RESISTANCEBy Chip Anderson
Carl Swenlin
This chart of gold has some interesting technical features. First, there is the parabolic rise to $850 in 1980, which culminated in the inevitable blowoff and collapse.
After a parabolic collapse, prices most often return to the original base, which in the case of gold is somewhere below $100 and not visible on the chart; however, another outcome is that prices can enter a high-level consolidation, which is a trading range at a level far above the previous base, and this is what has happened with gold. In this case, the trading range is between roughly $300 ($250 at the extreme) and $500, and it serves the purpose of digesting the excesses of the parabolic, and preparing for the next long-term move, which I assume will be up.
The reason I assume that the next long-term trend will be up is because the double bottom in 1999 and 2001 marks the end of a 22-year bear market in gold, and a new bull market is in force. The problem is that the bull market is now nearly five years old, and we can clearly see overhead resistance in the area of $500, created by the intersection of the top of the rising trend channel and the top of the long-term trading range.
The normal technical outcome from a high-level consolidation is an upside breakout. We don't know if the current rising trend will be able to effect such a breakout, but sufficient time has passed that it would not be overly optimistic to have this expectation; however, remember, we are looking at a monthly chart (each bar is one month), and it could be another year or more before a breakout is made and confirmed.
For example, there were corrections within the rising trend channel in 2004 and 2005 that took several months to complete, so it is reasonable to expect that another lengthy correction will take place once the resistance around $500 is encountered.
Finally, let's look at the Price Momentum Oscillator (PMO). The PMO peak in 1980 is abnormally high and cannot be used as a benchmark for anything except another parabolic rise. The PMO's current level is typical for the trading range, but it is pretty high. This level could be exceeded if the rising trend continues and accelerates, but, if gold's current rate of climb is maintained, the PMO can remain flat, and, therefore, not much help in warning of a trend change.
Bottom Line: My long-term view for gold is positive, but I expect that, when it encounters the resistance at the $500 level, there will be a correction of sufficient length and depth ($450?) to consolidate the gains of the last five years and to move the PMO back toward the zero line.

- Carl Swenlin

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September 24, 2005NEW HIGHS AND NEW LOWS SIGNAL CAUTIONBy Chip Anderson
Carl Swenlin
Since the beginning of July, 52-week new highs have been contracting with each new NYSE Composite price high, demonstrating that fewer and fewer stocks are participating in the rally. Contracting new highs by themselves are not always problematic, and can merely be a sign of an approaching correction in an ongoing bull market; however, when they are accompanied by expanding 52-week new lows, a darker picture begins to emerge.
You will note that spikes in the number of new lows usually occur at the end of corrections, giving notice that the correction is near an end. Unfortunately, the recent spike in new lows has occurred just as the NYSE Composite Index has pulled back from an all-time high, and this is an indication that, not only is upside participation fading, but the tide may be shifting to the downside as well.

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September 10, 2005GOLD STOCKS APPROACHING RESISTANCE, POSSIBLE BREAKOUTBy Chip Anderson
Carl Swenlin
The May low for the Philadelphia Gold and Silver Index (XAU) provided us with the second data point necessary to establish the bottom of a trading range that is about two years old. The XAU is now approaching the top of the range, and we can expect that the current advance will stall when that overhead resistance is reached.
Trading ranges are also called continuation patterns. This is because they are formed when the trend of a price index pauses to consolidate before the trend continues. Since the XAU trend was rising before the consolidation began, we should expect the trend of the XAU to continue upward once the current trading range runs its course. Our expectations regarding the trading range are also supported by the internals. The PMO (Price Momentum Oscillator) is rising and above its 10-EMA, and it has plenty of room to run before an overbought condition is reached, so the next test of resistance could ultimately result in an upside breakout. A final note, the bottom panel of the chart shows the relative strength of the XAU to the price of gold. If gold and gold stocks always had the same percentage of change, the price relative line would be flat; but this is clearly not the case. When the line rises, it means that the XAU is stronger than gold (and vice versa). As you can see, the XAU normally moves in the same direction as gold, but at a faster rate of speed.

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August 20, 2005RYDEX CASH FLOW RATIO FAVORS BULLSBy Chip Anderson
Carl Swenlin

There is growing evidence that a bull market top is finally in place, but not all the evidence supports that scenario. For example, the Rydex Cash Flow Ratio shows that bearish sentiment is again approaching record levels, indicating that another run at new price highs could be in the cards.
Decision Point's Rydex Cash Flow Ratio differs from the Asset Ratio in that it is based upon a cumulative total of daily net cash flow for each of the Rydex mutual funds, not raw asset levels. The Cash Flow Ratio is calculated by dividing the total bear fund cash flow plus money market cash by the total bull and sector fund cash flow. As you can see on the chart, the Ratio (first panel below the S&P 500 graph) has been in a trading range for nearly three years, and the bottom of that range has been a reliable measure of bearish excess sufficient to signal important price bottoms. Once again the Ratio is approaching the bottom of the range, and bearish cash flow (bottom panel on the chart) is near record high levels. Moreover, this sharp increase in bearish sentiment has occurred with only a minor price decline -- people have gotten too bearish too fast. All this should send up warning flags to the short sellers. Having said that, let me point out that it is entirely possible for prices to head lower and for bearish cash flow to punch through the resistance to new highs, causing the Ratio to break through the bottom of its range. Also, the failure of bullish cash flow to follow prices to new highs presents a serious negative divergence, indicating that participation has faded significantly. Nevertheless, the most obvious thing I see on the chart is that sentiment has gotten bearish too quickly, and that is not good news for the bears.






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August 06, 2005GOLDOLLAR INDEX SHOWS GOLD'S STRENGTHBy Chip Anderson
Carl Swenlin
Generally speaking, gold and the dollar have an inverse relationship -- a rising dollar causes the price of gold to decline and vice versa; however, supply and demand pressures also influence the price of gold, but it is often difficult to see them. For this we use the GolDollar Index.
The GolDollar Index was invented buy Tom McClellan (www.mcoscillator.com), and is calculated by multiplying the price of gold by the U.S. Dollar Index. (We divide the result by 10 to keep the numbers from getting too big.) Its purpose is to cancel the effects of currency fluctuations on the price of gold. By comparing it with the spot gold index we can determine if there is inherent strength/weakness in the price of gold.
The first panel on our chart shows that the GolDollar Index has been rallying since the beginning of the year and has exceeded its 2004 high. This means that the demand for gold has been strong enough to overcome the negative effects of the dollar's strength. This is also evident from the fact that, rather than declining, gold has been consolidating in a triangle formation, even though the dollar has been rallying.
Now the dollar has begun a correction (see bottom panel of chart), so it is likely that gold will be breaking out of the triangle and challenging the 2004 high around 450. Assuming that (1) gold's intrinsic strength persists, and (2) the dollar continues to correct to its support around 85, gold could rally above the 450 level by 10 or 20 dollars.
Unfortunately, such a move will likely prove to be a gold bull trap. The weight of the technical evidence indicates that the dollar has begin a long-term rising trend, which is long-term bearish for gold. But for now, the dollar is showing short-term weakness, and gold has intrinsic strength -- a combination that should make gold bugs very happy . . . for a while.

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July 17, 2005OEX PUT/CALL RATIO SAYS BOTTOM NEARBy Chip Anderson
Carl Swenlin
The Equity and OEX Put/Call Ratios generally signal overbought and oversold conditions that help identify price tops and bottoms; however, sometimes the OEX Put/Call Ratio will invert relative to the Equity Put/Call Ratio. At these times the inversion signals the opposite of what we would normally expect.
Here's how I think this works. The Equity P/C Ratio represents the activity of speculators (the little guys) who become more and more committed to price direction until it reverses on them, therefore the Equity P/C Ratio becomes oversold at price bottoms and overbought at price tops. The OEX P/C Ratio reflects hedging activity by big money. These guys tend to lighten up as the price trend becomes more extreme, preparing for the inevitable reversal, so the OEX P/C Ratio can become overbought at bottoms and oversold at tops -- the opposite of what happens to the Equity P/C Ratio.

This is not always the case, but I have put red dotted lines on the chart to point out where these inversions have signaled price bottoms. Note that there is one very prominent inversion occurring now. Because the Equity P/C Ratio is oversold and prices have been declining, I think there is an excellent chance that the OEX P/C inversion is telling us that a price low is imminent.
My observation is that these signals can have short-term or intermediate-term implications, but there is no way to tell in advance.



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July 03, 2005SMALL-CAP PARTICIPATION NARROWINGBy Chip Anderson
Carl Swenlin
A good measure of market participation -- the number of stocks participating in upside price moves -- is the percentage of stocks above their 200-day moving average. DecisionPoint.com tracks this number on the major market indexes, and in this instance we are looking at this indicator for the S&P 600 Small-Cap Index.
Note how the indicator has been making lower highs for the last 18 months, even as the price index has made new all-time highs. This negative divergence is not necessarily fatal, but it does reflect how the price index is being supported by fewer and fewer stocks. The price index can move higher because it is capitalization-weighted. This allows the larger-cap stocks in the index to carry it higher, while increasing numbers of smaller-cap stocks begin to fade. This is not healthy, and it is another piece of evidence that indicates that the cyclical bull market is probably near an end.

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June 18, 2005EVIDENCE OF DISTRIBUTIONBy Chip Anderson
Carl Swenlin
While persistently rising prices are frustrating the bears and encouraging the bulls, there is evidence that distribution is taking place.
On the first chart I have circled areas where daily volume has scooped below its 250-EMA line, indicating that there was inadequate sponsorship of the rising trend. In each of the first three cases shallow volume preceded price corrections. The current volume dip, which has lasted about six weeks, has yet to be resolved, but it seems reasonable to expect a correction fairly soon, probably starting soon after we see final expansion of volume.
The second chart shows a five-week period of NYSE Member Net Selling, which is a fairly unusual because these insiders are normally accumulating shares into declines (shares that will be sold during the next advance). The NYSE delays reporting of these numbers by two weeks, so there is a big question mark as to what Members have been doing during the last three weeks; however, the large amount of net selling raises a red flag, especially when viewed in the context of the shallow volume problems discussed above.

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June 04, 2005ENERGY SECTOR CASH FLOW IS TEPIDBy Chip Anderson
Carl Swenlin

Decision Point tracks actual cash flowing into and out of Rydex mutual funds, and, while cash flow normally runs parallel to price, divergences can often appear ahead of price reversals. For example, let's look at Rydex Energy and Rydex Energy Service Funds.
During the last four weeks of the price correction that began at the March top you will notice how cash flow went relatively flat, indicating that the bulls were holding their ground and that accumulation was taking place. However, since the two-week rally that began at the May price low, cash flow has been rather tepid, and was even flat during the first week of the rally. It is probable that energy stocks have completed a medium-term correction and are poised to move higher, but the lack of sponsorship and overhead resistance warn that we could see a partial retracement of recent gains, particularly in the Energy Service sector. Cash flow divergences provide valuable clues that can help us prepare for price action others are not expecting, but they don't always result in the kind of price move they imply. Always wait for prices to make the expected break before acting. My observation is that these cash flow divergences only have short-term implications. Also, it is important to remember that the Rydex sector funds only account for a small slice of the total market in a given sector, and this small picture may not be representative of the big picture.





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May 21, 2005INITIATION CLIMAX?By Chip Anderson
Carl Swenlin

One of Decision Point's proprietary indicators is the Participation Index (PI). It measures extreme (climactic) activity within a short-term price envelope. When a large number of stocks are participating in a particular price move (up or down), we recognize that such high levels of participation are unsustainable and refer to it as a "climax".
There are two kinds of climaxes -- an initiation climax, which marks the beginning of a longer-term price move and an exhaustion climax, which marks the end of a price move. Both kinds of climax can be followed by some consolidation activity before the trend changes or continues.
On the chart I have marked three upside climaxes. With 20-20 hindsight we can easily conclude that the first two are exhaustion climaxes, but I have designated the last one, the highest PI reading in a year, as an initiation climax, although the jury is not in on that one yet. My reasons are that price has broken out above the declining tops line that has been in effect since January, and during May UP Participation has expanded significantly while DOWN Participation has contracted sharply.
While my annotations point out upside climaxes, there is a classic downside initiation climax on the second trading day of January. It is followed by two weeks of consolidation, then the down leg is completed with an exhaustion climax on January 24. The final selling climax for the four-month down trend doesn't occur until April 17.
Climactic indicator readings identify points at which the market is overbought or oversold, but they don't always mean that the trend is about to change directions. Currently, the market needs to correct its overbought condition, but it does not appear to be vulnerable to a reversal of trend.


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May 07, 2005VOLATILITY STILL HISTORICALLY LOWBy Chip Anderson
Carl Swenlin

The CBOE Volatility Index (VIX) is a measure of the implied volatility of SPX index options. (According to the CBOE web site, "volatility is a measure of the fluctuation in the market price of the underlying security.") As a practical matter, the VIX measures the amount of fear that options writers have about the future volatility of the market, and, as with any sentiment gage, it is based upon current market action.
While the VIX is most commonly used for short-term analysis, it is also useful to interpret it in a longer-term historical context. I have done this before, but an interview with Larry McMillan in the May 2005 issue of Active Trader magazine prompted me to revisit the topic. One of he arguments being used to support a bearish case for the market is that the VIX readings have been very low, but as you can see, this is not always the case. While low VIX readings may reflect complacency, they do not necessarily mean that the market is going to decline. For example, an extended period of low volatility preceded the 1995-2000 bull market up leg. John Bollinger has made the point that low volatility usually precedes a period of high volatility, much like the calm before a storm, but it does not predict if the coming period of high volatility will be associated with price advance or price decline. Conversely, while we can clearly see that there are high spikes on the VIX at the bottom of market corrections, higher VIX readings are also possible during market advances. The bottom line is that you should look at historical charts to verify bullish or bearish assertions based upon a particular indicator. There may be an extended market decline in our immediate future, but the currently low VIX reading does not provide any proof to the argument.






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April 16, 2005S&P 600 SMALL-CAP NEW HIGHS and NEW LOWSBy Chip Anderson
Carl Swenlin
At DecisionPoint.com we have recently added a chart of S&P 600 Small-Cap 52-week new highs and new lows (NHNL). (We also have NHNL charts of the S&P 500, S&P 400 Mid-Cap, NYSE, and Nasdaq). This allows us to examine and determine the condition of each sector.
As with other indicators, we look for divergences between the indicator and prices. New lows are particularly good for identifying long-term bottoms. Note the sharp contraction of new lows in March 2003 compared to October 2002 associated with price lows that were about the same. This positive divergence was a good sign that the bear market decline was ending.
From March 2003 new highs began to expand until they peaked in September 2003. From there they began to contract and continued to do so for almost a year. So why didn't this negative divergence signal a major price top? Primarily because in a bull market negative divergences are very unreliable.
One way we can determine if a contraction of new highs is probably meaningless is by observing what is going on with new lows. Note how between September 2003 and August 2004 there was virtually no expansion of new lows until the end of the period when the bull market correction climaxed.
Next we can see how new highs peaked in December 2004, and they have been contracting ever since. This time we can see that the angle of contraction is much steeper than the previous one, and, more important, there is a visible and persistent expansion of new lows. The negative divergence of new highs along with the expansion of new lows is one sign that the bull market may be over.

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April 02, 2005CASH FLOW SENTIMENT GAGEBy Chip Anderson
Carl Swenlin
The Rydex Asset Ratio measures the amount of bullish and bearish sentiment by tracking and comparing the total assets in Rydex bull and bear funds. Decision Point also calculates the Rydex Cash Flow Ratio, an indicator we developed that accounts for the actual cash flowing into and out of the funds by canceling the effect of changing share prices on total assets.
On the chart below we can see that bulls were not nearly committed at the March price top as they were at the December 2004 top. I have drawn a line across the corresponding Ratio tops to illustrate the negative divergence. The two Ratio lows in January and March represent short-term oversold points, but the real benchmark is set by the Ratio lows in August 2003 and August 2004. When this level is reached again, it will probably mark an intermediate-term price low. The Ratio has maintained a pretty steady range for the last two years, but it could shift higher or lower based upon the longer-term trend of prices.

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March 19, 2005LOOKING FOR A CRB TOPBy Chip Anderson
Carl Swenlin
The title of this article, Looking for a CRB Top , has been my broken record for the last year or so, but it just hasn't happened so far.
I use the monthly price chart and PMO ( Price Momentum Oscillator ) to determine when long-term price reversals may be approaching. Last year it looked like a top was forming as the PMO topped twice and prices stalled in the congestion area between about 260 and 285, but this activity proved to be a consolidation that built compression for the most recent rally. This rally has been virtually straight up. It has broken through the top of the rising trend channel and is close to challenging the 1980 high of 337.60, which is a long-term resistance level. However, evidence of an approaching top is mounting. Sentiment on commodities is very bullish. The PMO is very overbought and approaching the record level of 1980. The recent vertical price advance creates vulnerability for a vertical decline, prior evidence of which you can see on the chart. Finally, the long-term overhead resistance looks like a good place for prices to stall. While my CRB market posture is bullish based upon a shorter-term trend following model, I think the three-year CRB rally has nearly run its course.

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March 05, 2005DVY: DIVIDEND-PAYING ETFBy Chip Anderson
Carl Swenlin
Many ETFs (Exchange Traded Funds) pay dividends, but only one is devoted to dividend-paying stocks -- the Dow Jones Select Dividend Index Fund (DVY). As the name implies, this ETF is derived from the Dow Jones Select Dividend Index ($DJDVY), an index constructed and maintained by Dow Jones.
The Index is composed of about 100 stocks and is capitalization-weighted, which means the top one-third of the stocks in the index represent 60% of the weighting. A complete list is available on ishares.com. It is subject to change on a daily basis. DVY has only been trading for about 14 months. Fortunately, Dow Jones has calculated historical data for the derivative index going back to 1992, so we have adjusted the index data so as to provide a theoretical price history for DVY. Now there is enough historical data to estimate how this fund will perform over the long-term. The most impressive thing about the chart below is the relative strength line, which shows that DVY has out-performed the S&P 500 Index every year except 1998 and 1999. These were the years when investors abandoned dividends for the tech stock gold rush. At the 2000 top the S&P 500 was up nearly 300% versus only about 200% for DVY. Since inception to the present DVY has advanced 500% versus 200% for the S&P 500, and the bear market didn't catch up to it until 2002 when DVY had a decline of 27% (versus a 50% bear market decline for the S&P 500). Since the 2002 low DVY has advanced about 75% versus 50% for the S&P 500. When DVY first began trading, I thought it was just another ETF gimmick, but clearly this fund was a good idea. The chart demonstrates that value and growth can be synonymous. The current dividend is about 3%, which makes the stock overvalued if we compare it to the historical yield range of the Dow Industrials (3% to 6%). There is not enough dividend history to accurately estimate what undervalued is, but I'd guess it would be a yield of about 6%.

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February 19, 2005APPLE: CAN YOU SAY "PARABOLIC?" TWICE?By Chip Anderson
Carl Swenlin
Investors love the Apple (AAPL) "story" and they are driving he stock's price into a vertical ascent. When a stock arcs into an ever-increasing angle of ascent it is called a parabolic rise. "Investors" get into a feeding frenzy, causing the price rise to become so steep that it is unsustainable. The inevitable outcome of a parabolic is a crash, because investor sentiment will at some point reverse, and people are suddenly trying to get out of the stock as fast as they were previously trying get in.
What is at once amusing and tragic is that, as you can see on the chart, this isn't the first time this has happened to AAPL. Nevertheless, here we go again. One piece of recent news that has propelled the stock is the announcement of a 2:1 split, and coincidentally there was also a 2:1 split in 2000 as well. Those who fail to learn from history . . .
Another driving force behind parabolics is short sellers. Their suicidal attempts to pick a top followed by frenzied short covering creates even more demand to drive the price higher. It is foolhardy to play parabolics in either direction.
I don't know when this parabolic will finally collapse, but it is virtually guaranteed that it will. (Note that the PMO is very overbought, a sign that the end is probably near.) Once that happens, prices can return to their starting point (or close to it). Another less disastrous outcome is that about 50% of the parabolic gains can be lost, then the stock enters a high-level consolidation for several years.
Personally, I think Apple is a good company, I love their products, and in my opinion the company's prospects today are better than they have been in years; however, the current price behavior reflects unrealistic investor expectations.

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February 05, 2005THE DECENNIAL PATTERN (YEARS ENDING IN 5)By Chip Anderson
Carl Swenlin
The Decennial Pattern refers to the fact that years ending in the number five (5) are up years for the stock market. This is not just a statistical tendency. In fact, this has been the case for every year ending in 5 since 1885. Furthermore, the price low for these years has been made in the first quarter of every year except 1965. Many find this evidence quite compelling, however, John Hussman (hussman.com) demonstrates in his 1/24/2005 weekly commentary why the decennial pattern is "statistically unimpressive." Nevertheless, there could be more to this pattern than luck and serendipity. Years ending in 5 are also either the first or third years of a presidential term, and these tend to be up years.
While the Decennial Pattern is a bullish sign for 2005, I wouldn't bet the ranch on it. Every year has it's own character, and it is better to follow the trend and remember that getting heads 100 consecutive times flipping a coin, the odds of getting heads on the next toss are still 50-50.
Below are charts of the last eight years ending in 5 (that's as far back as we have data). Our thanks also to Peter Eliades (stockmarketcycles.com) and Tom McClellan (mcosillator.com) for the research used in this article.

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January 22, 2005OEX PUT/CALL RATIO SAYS BOTTOM NEARBy Chip Anderson
Carl Swenlin
The Equity and OEX Put/Call Ratios generally signal overbought and oversold conditions that help identify price tops and bottoms; however, sometimes the OEX Put/Call Ratio will invert relative to the Equity Put/Call Ratio. At these times the inversion signals the opposite of what we would normally expect.
Here's how I think this works. The Equity P/C Ratio represents the activity of speculators (the little guys) who become more and more committed to price direction until it reverses on them, therefore the Equity P/C Ratio becomes oversold at price bottoms and overbought at price tops.
The OEX P/C Ratio reflects hedging activity by big money. These guys tend to lighten up as the price trend becomes more extreme, preparing for the inevitable reversal, so the OEX P/C Ratio can become overbought at bottoms and oversold at tops -- the opposite of what happens to the Equity P/C Ratio.

This is not always the case, but I have put red dotted lines on the chart to point out where these inversions have signaled price bottoms. Note that there is one very prominent inversion occurring now. Because the Equity P/C Ratio is oversold and prices have been declining, I think there is an excellent chance that the OEX P/C inversion is telling us that a price low is imminent.
My observation is that these signals can have short-term or intermediate-term implications, but there is no way to tell in advance.


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January 08, 2005SENTIMENT: A SUDDEN ATTITUDE ADJUSTMENTBy Chip Anderson
Carl Swenlin
There has been a lot of concern among analysts that sentiment has been too bullish; however, the recent correction has done a lot to alleviate that condition.
The American Association of Individual Investors (AAII) performs an electronic sentiment poll every week. The cutoff is Wednesday and the results are published the next day. This quick turn around gives us an immediate view of investor sentiment before the results are stale and we can compare the results directly to the price action that generated them.
As you can see on the chart below, the recent price decline has effected a rapid attitude adjustment in investors, moving sentiment readings from very bullish to about neutral. Sentiment generally becomes more bullish as prices rise, and more bearish as prices decline, so it is a good thing that sentiment adjusted so quickly -- persistent bullishness in the face of price weakness would be unusual and a reflection of extreme complacency.

The Investors Intelligence advisor poll (not shown) has not yet reflected any response to the price correction, but this is because there is about a two-week delay from the time the advisory newsletters are written and the time the poll results are published, so it is too early to tell if newsletter writer sentiment has been affected.
It is important to remember that sentiment is a short-term indicator. For example, participants in the AAII poll are responding to this statement: "I feel that the direction of the stock market over the next 6 months will be: Up, No Change, or Down." We can see that investors' outlook for the 6-month time frame was significantly altered by a relatively small and short price decline.


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December 18, 2004DOLLAR TRYING TO BOTTOMBy Chip Anderson
Carl Swenlin
The daily chart of the US Dollar Index shows that the dollar is trying to put in a bottom. The encouraging signs are that the 9-year low earlier this month survived a sharp retest this week, the index has broken above the short-term declining tops line, and there is a PMO crossover buy signal. The problem is that sentiment has moved from extreme bearishness to neutral, which means that quite a few bulls have arrived on the scene. This happened too quickly, in my opinion, and there may be more work to do (and lower lows seen) before the bottoming process is complete.

There is encouragement on the long-term (monthly) chart as well, because there is a strong zone of support between 78 and 80, and the PMO is very overbought. Nevertheless, the PMO is still falling, and it needs to turn up before we can begin to believe the long-term down trend has ended.

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December 04, 2004WEAK CASH FLOW PRECEEDS PRICE DECLINES IN PRECIOUS METALS STOCKSBy Chip Anderson
Carl Swenlin
When there is weak cash flow into Rydex Precious Metals Fund it is a fairly reliable warning to expect price weakness in the short-term, and sometimes the corrections can be quite severe.
As a general rule we expect cash flow to more or less follow prices -- when prices are going up, cash flow should also be moving up proportionately -- however, when prices rise and cash flow suddenly dries up, it tells us that the sector is losing support. Higher prices are failing to attract more money.

On the chart we can see four negative divergences between cash flow and price. In the first three instances they resulted in price declines. The current divergence seems to be playing out as expected and a correction in precious metals stocks has begun.


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November 20, 2004MEASURING PARTICIPATIONBy Chip Anderson
Carl Swenlin
The market has finally broken out of the 2004 trading range, but many people are worried that the move could be a bull trap. One way to judge the authenticity of a move is to see how many stocks and/or sectors are participating in it. To do this we can look at the Percentage of PMM Buy Signals.
Decision Point's Price Momentum Model (PMM) generates longer-term buy and sell signals based strictly on price movement. (To learn more about the PMM click here ). We apply this model to all the stocks in a market index, then summarize the percentage of buy signals into an indicator.

We can see on this chart that the Percentage of PMM Buy Signals for stocks in the S&P 500 Index is currently above 80%, which means that participation in this rally is quite broad, and that smaller-cap stocks in the index are participating as well as the large-cap stocks. While a reading above 80% is good in terms of participation, it is also a level that we would consider to be overbought. This may or may not be a problem. In a bull market, conditions can remain overbought for extended periods of time, and prices can continue to move higher in spite of it. The last half of 2003 is a good example of this. There is no practical way to guess how long this rally may last, but you will notice that the indicator was not seriously oversold when the rally began. The first leg of the bull market began when the indicator showed less than 20% PMM Buy Signals, whereas there were slightly less than 50% of PMM Buy Signals at the start of this rally. I interpret this to mean that, because the market was not seriously oversold at the start, this rally is not likely to last as long as the one in 2003.




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November 06, 2004RELATIVE TO 52-WEEK HIGH/LOW (Rel to 52)By Chip Anderson
Carl Swenlin
While it is widely reported when a stock is hitting a new 52-week high or low, I've always been curious as to where stocks are in relation to their 52-week range the rest of the time. To determine this I developed the "Rel to 52" scale. We simply assign a value between zero (at the 52-week low) to 100 (at the 52-week high). A stock in the middle of its 52-week range would get a Rel to 52 value of 50. This value is reported in one of the columns in our downloadable spreadsheets.
Decision Point also tracks the "Rel to 52" for each stock in certain market indexes, then we average them. The results make for an interesting indicator that give us a sense of how all the stocks are faring, not just the small percentage that are hitting the extremes of the one-year range. We have this indicator for the SPX, OEX, NDX, and Dow.

One of the things that stands out on this chart is the fact that, even in the depths of the bear market, the average Rel to 52 value was between 35 and 40, indicating that most stocks were not making new lows along with the S&P 500 Index. Conversely, notice how the Rel to 52 near the March 2004 market top was about 87, indicating that most stocks were participating in the rally.
The thing to remember is that the Rel to 52 is affected not only by up or down price movement, but also by the changing width of the 52-week range. For example, you can see how the range expanded in 2003 up to the March 2004 high, at which point the range was 375 points. Since then the bottom of the range has been rising along the higher lows of the 2003 portion of the bull market, and now the range is only 120 points wide. In the event of a longer-term price reversal, new lows would begin expanding rather quickly because the bottom of the range is relatively close. While I have had my spreadsheets set to calculate and collect these data for several years, I had forgotten about it until just recently. There is probably more to learn from this chart as we study it and think about what we see, but it already offers a unique perspective on new highs and new lows.



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October 16, 2004THE SPX/VIX RATIOBy Chip Anderson
Carl Swenlin
An indicator that has recently become quite popular is the SPX/VIX Ratio. I have tried to convince two of its proponents that it is a calculation that makes no sense, but to no avail. Nevertheless, I will present my argument here for your assessment.
Ratio calculations are most commonly used to demonstrate relative strength between two price indexes, or to determine the price acceleration/deceleration of a single index. For the relative strength calculation you divide one price index by another. For example the chart tools on both DecisionPoint.com and StockCharts.com web sites have an indicator named "Price Relative", which on the default setting will divide the selected stock price by the SPX. The resulting indicator is an index that rises and falls based upon the relative strength of the stock versus the SPX. For the Rate of Change (ROC) calculation for a single price index we simply divide today's price by the price from a previous date. This results in an indicator that expresses speed and direction of the price index. The SPX/VIX Ratio (which divides the S&P 500 by the CBOE Volatility Index) makes no sense because it divides a price index, with a theoretically infinite range, by a range-bound indicator index . The result of this calculation is an indicator that behaves quite differently when the S&P 500 is below 400, as it was in 1990, compared to when the S&P 500 was over 1500 points, as it was in 2000. You can see what I mean on the chart below.

It is hard for me to construct a rationale for this indicator, but I think the current assertions are that the recent ratio spike near 90 is warning that we are near another important top like the 2000 top, which also had a ratio spike near 90. I will not argue about whether or not we are near a major top -- it's possible -- but a single previous data point in a 15-year period doesn't prove the hypothesis. I think the VIX chart taken by itself is more constructive and informative. Note how the upward spikes mark periods of extreme fear brought on by severe market declines. Currently the VIX is near the lower end of its range, indicating that investors are very complacent; however, this behavior is much like it was in the 1990s, a time when the market was advancing. We can see by the historical range of the VIX that, while people are indeed complacent, they are not as complacent as they can get. As for the SPX/VIX Ratio, with all due respect to its proponents, it expresses a relationship that has no meaning. I think this is evident when we view the longer-term chart.

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October 02, 2004THE 9-MONTH CYCLEBy Chip Anderson
Carl Swenlin
We are currently expecting a price low associated with the 9-Month (40-Week) Cycle, but let's first review some cycle basics.

The vertical lines show the location of all Nominal 9-Month Cycle troughs since 1996. The normal expectation is that the price index will arc from trough to trough, but sometimes other forces override normal cycle pressures, as happened in 1999 and 2000 when the market was transitioning from secular bull to secular bear. Because we are depicting "nominal" cycle projections, all the lines are of equal distance from one another, and they show where the cycle trough is assumed to be located. In other words, we believe that cycle periodicity is consistent, but price movement doesn't always conform to the cycle ideal.
The price crest associated with the current 9-Month Cycle occurred in the first quarter. Early tops are often followed by severe declines; however, the market entered a consolidation pattern instead. It appears that the price low for the cycle occurred in August, and that the current retracement toward that low could be a successful retest which coincides with the cycle trough, which is due now.
Bottom line is that we're looking for an important price low associated with the cycle trough, but that low can arrive a month or more on either side of the projected date. Assuming a successful retest, the cycle structure suggests that a rally out of the cycle trough could result in prices finally making a breakout from the trading range. However, at this writing, we have negative readings on other indicators, and there is considerable downside risk until the retest is complete. While we wait, let us be reminded that the cycle could run long by several weeks, in which case the August lows would be vulnerable.


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September 18, 2004A LONGER-TERM MARKET VIEWBy Chip Anderson
Carl Swenlin
Daily charts can be used to fine tune entry and exit points, but they should be interpreted within the context of what weekly charts and indicators tell us. For example, some shorter-term indicators show the market to be overbought, but the weekly chart implies that another leg of the bull market is just beginning.
At the beginning of this year the market began a corrective phase that lasted about eight months, climaxing with the shakeout selling into the August lows. As you can see on the chart, bull market correction often conclude when the price index dips below the moving averages. The fact that prices are now back above the moving averages (which are also rising), is a good sign that the correction is over.

Another good sign is that the Price Momentum Oscillator (PMO), which topped in overbought territory in the first quarter, has now bottomed near the zero line. You can see how the PMO remains above the zero line during bull market corrections -- in bull markets the zero line is an oversold level for the weekly PMO.
There is nothing not to like on this chart. A lengthy correction has been successfully concluded and the market environment is very positive. I have no opinion on how long or high the rally will go, but I assume it will last for at least a couple of months. We want to see the PMO continue to rise and cross above its 10-EMA. If the PMO turns down below its 10-EMA, it would be a strong sell signal.


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September 05, 2004A "NEW AND IMPROVED" RYDEX RATIOBy Chip Anderson
Carl Swenlin
The Rydex Asset Ratio has been around for eight or ten years, and it is a favorite among sentiment indicators because it is based, not upon opinion polls, but upon where people are actually putting their money. It is calculated by dividing total assets in bear index and money market funds by the total assets in bull index and sector funds.
Recently Decision Point introduced the Rydex Cash Flow Ratio. It uses the same basic formula, but, instead of total assets, it uses Cumulative Cash Flow (CCFL) totals for the same funds. To determine CCFL we calculate daily net cash flow, which is the actual cash entering and leaving each fund in the Rydex group of funds. This is done by calculating the amount that total assets in a fund should have changed based upon the percentage change of the net asset value (NAV) per share, assuming that no cash was added to or taken out of the fund. We then subtract this amount from the actual amount of total assets in the fund, and the result is the daily net cash flow. We keep a cumulative total of the daily net cash flow. Total asset value tells us how much money is in the fund. Cumulative Cash Flow tells us how much cash was actually moved in or out of the fund.
We think that the Rydex Cash Flow Ratio is a dramatic improvement over the Rydex Asset Ratio, because it uses an estimate of the amount of money that has been committed to bull and bear funds, making it a more accurate reflection of the actual underlying psychological forces that are affecting market participants.
On the chart below we can see that the Cash Flow Ratio shows more rational and consistent levels of support and resistance. And we can see that the Cash Flow Ratio is able to maintain a fairly well-defined trading range for extended periods.

It is really striking how the Cash Flow Ratio has clearly detected the true state of sentiment during 2002 through 2004. For example, we can see a sharp rise in bullish sentiment coming off the March 2003 price lows. Then by May 2003 we can see sentiment peak and begin to turn bearish. I remember because I was there. People didn't believe that a bull market had begun. They became progressively more bearish in June and July, and, when the market had a small shakeout in August 2003, the Cash Flow Ratio was as bearish as it had been in March 2003. While that may not seem reasonable based upon price movement, I think it is an accurate expression of how sentiment "felt" at the time.
Also, note how the Ratio trading range shifts downward at the beginning of 2003. This was caused by a large chunk of money moving into bear funds as the market headed down into it's final low before the bull market launched. Bearishness reached a feverish pitch at that time and it permanently altered the trading range. This could happen again in either direction if sentiment is strong enough.
Finally, we can see that the recent levels of bearishness at the August 2004 price lows are the same as they were in March and August 2003. In my opinion, this is strong evidence that a medium-term price low was reached at that point.


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August 21, 2004A MARKET BOTTOM FOR THE S&P?By Chip Anderson
Carl Swenlin

We can't know the full potential of this rally, but there is abundant evidence that we have a solid bottom, and that we are seeing a rally that has at least the potential to move back to the top of the trading range.
First, there are positive divergences on indicators in every time frame. A positive divergence is where price makes a lower low but indicators make a higher low. The dark red lines on the bottom three panels of the chart highlight the positive divergences. These indicators, by the way, summarize the status of the PMO (Price Momentum Oscillator) for each of the stocks in the S&P 500 Index.
Next, we can see prices breaking above a short-term declining tops line, and there is an important PMO buy signal, generated when the PMO crossed above its 10-EMA.
Finally, Percentage PMOs Rising shows a strong initial impulse with a surge to almost 90%.
It is not impossible for the rally to move prices higher than the March top, but, as with the two previous lows this year, the PMO bottom associated with the recent low was too shallow. It would have been better if it had dropped to around -2.0, creating a fairly solid oversold condition.
Overall, this is a pretty good looking chart, but the top of the trading range could easily be the limit of the rally.






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August 07, 2004THE PRICE OF OIL VERSUS STOCKSBy Chip Anderson
Carl Swenlin

Recently, the price of crude oil has taken the spotlight as having a major influence on the price of stocks. On the one-year chart above we can see that there was no consistent relationship between oil and stocks as long as oil was priced below $35; however, when oil moved above $35 in March, we begin to see a consistent negative correlation between oil and stocks.
Long-term resistance for crude oil is around $41-42. When crude oil reached that level at the end of July, stocks attempted another rally, in anticipation that crude oil would turn down again at resistance. Once crude broke to new all-time highs, the short rally in stocks failed. If crude prices continue to move higher, I think we should be alert for the possibility that there will be another disconnect in prices. Specifically, if the price of crude moves well above $42, short price declines may not translate directly to a rally in stocks because prices will still be too high. This is not to say that stocks can't rally, just that gyrations in the price of oil may not transmit directly to stocks. For the record, I have no opinion regarding the price of oil. As you can see on the long-term chart, it has moved into uncharted territory and is above historical resistance levels. It could be headed for a major blowoff, or it may have moved permanently into the bottom of a new long-term trading range.




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July 24, 2004ADVANCE-DECLINE LINE FOLLIESBy Chip Anderson
Carl Swenlin

I have written on this subject before, but I was inspired by a recent article by Larry McMillan (optionstrategist.com) to visit if again.
Recently the NYSE A-D Line hit new all-time highs, and this is being cited as strong evidence that the market is headed higher. Unfortunately, this is a case of bullish analysts shopping for indicators that support their case, and ignoring indicators that don't. Here's why.
The NYSE Advance-Decline Line is a cumulative total of each day's advancing issues minus declining issues. It is one of the oldest, simplest, most widely watched, and, until recently, most useful technical indicators in existence. The problem is that the NYSE Composite Index is composed of about 2,040 common stocks, but the advance-decline data published by the exchange (and used to calculate the Advance-Decline Line) is derived from all issues traded on the NYSE, about 3,500 issues, many of which are interest rate sensitive and are more of a reflection of what is happening in the bond market than the stock market. Because of this, NYSE breadth (advance-decline) data and many of the indicators that use it should, in my opinion, be considered unreliable.
This doesn't mean that usable breadth data aren't available. There is, of course, the Nasdaq Composite Index, and at DecisionPoint.com we calculate advance-decline data for the S&P 500, S&P 100, Nasdaq 100, S&P 400 Mid-Cap, and S&P 600 Small-Cap Indexes. All of these are composed only of common stocks, and they give a completely accurate picture of breadth for each of those market indexes.
In the chart above we compare several A-D Lines. As you can clearly see, the NYSE A-D Line is completely disconnected from the price index and bears no similarity whatsoever to the other A-D Lines. NYSE breadth numbers may be telling us something, but, as yet, I don't think anyone has figured out exactly what it is.
We are planning to develop a common stock only version of the NYSE Composite A-D Line, but I think it will add little to the coverage we already have. The A-D Lines for the S&P 500 and Nasdaq 100 Indexes provide individual indicators that are directly related to those specific indexes, and this quite important considering how many people trade those indexes.



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July 10, 2004EQUAL-WEIGHTING CONTINUES TO BEAT CAP-WEIGHTINGBy Chip Anderson
Carl Swenlin

The S&P Equal-Weight Index (SPEWI) was developed by Rydex Fund Group in collaboration with Standard & Poor's. It is composed of the 500 stocks in the S&P 500 Index (SPX), but each stock In the SPEWI carries an equal weighting (rebalanced quarterly) versus the cap-weighting of the SPX. (The cap-weighting of the SPX results in the 50 stocks with the highest market capitalization carrying about 70% of the entire SPX weighting.)
The SPEWI trades as an ETF (Exchange Traded Fund) named Rydex S&P Equal Weight ETF with the symbol RSP. Note, it is not a mutual fund in the Rydex Group -- it trades like a stock. I continue to cover this stock because it continues to illustrate how much better equal-weighted portfolios can perform.
Since the 2000 market top, RSP has out-performed the SPX, with the exception of the final leg of the bear market in 2002. It lost only 40% during the entire bear market versus 50% for the SPX. Since the 2002 low, RSP has gained about 75% versus only 50% for the SPX. And, more important, RSP moved to new, all-time highs at the end of 2003, while the SPX is still well off its 2000 peak.
While recent RSP performance has been superior, the relative strength line at the bottom of the chart tells us that it lagged the SPX from 1994 to 2000. I think this was probably caused by the increasing popularity of indexing during that period, which would have caused an unusually high demand for the high-cap stocks in the SPX.
Watching the relative strength line, which is RSP divided by the SPX, will tell us when a shift back to large-cap stocks is taking place, but, as long as the relative strength line is rising, RSP will be a better bet than the SPY (the ETF that tracks the S&P 500).
Decision Point has a series of indicators derived from the S&P 500 stocks, and virtually without exception, these indicators are themselves unweighted, which makes them much more useful with RSP than with the SPX. Subscribers should check the Straight Shots section of the DecisionPoint.com Main Menu.



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June 19, 2004S&P 600 MID-CAP STOCKS ABOVE 200/50/20-EMABy Chip Anderson
Carl Swenlin

I'm very pleased to announce that we now have a chart showing the S&P 600 Small-Cap stocks above their 200-EMA, 50-EMA, and 20-EMA. But wait! There's more! We also have this chart for the S&P 400 Mid-Cap, S&P 500, Nasdaq, Nasdaq 100, S&P 100, and NYSE Composite.
In my opinion, this is a much better picture of breadth than advance-decline numbers, particularly since decimalization has introduced so much volatility into them. (A change of only a penny can classify a stock as an advance or decline.) The relationship of a stock's price to these three moving averages gives us concrete evidence regarding market strength in the short-, intermediate-, and long-term. By "concrete" I mean that when price is above a moving average, it is bullish. When it is below, it is bearish. When we can see a summary of all the stocks in a given index, we have a pretty good idea of how broadly based the strength or weakness is in that index.
These charts also tell us whether the index is overbought or oversold in the three time frames.
Another interesting feature of this chart is that we can see the negative divergences in the 200-EMA and 50-EMA. You'll notice that intermediate-term internals began to weaken well before the April 2004 top in the S&P 600 Index, but the long-term 200-EMA top came in January of this year. Internal tops can lead the actual price tops by quite a bit because the larger-cap stocks will carry the cap-weighted index, while the smaller-cap stocks are falling into a ditch.
Now the price index has broken a rising trend line, and the internals are quite a bit weaker and show less support for the snapback rally. This is definitely cause for concern.
The charts for the large-cap indexes are showing similar weakness internally, but prices reflect that participation in the bull market is narrowing, with the large-cap stocks carrying those cap-weighted indexes.



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June 06, 2004A NEW RECORD FOR NYSE MEMBER BUYINGBy Chip Anderson
Carl Swenlin

In the week ended May 15, 2004 NYSE Member Net Buy/Sell numbers hit a new, all-time high of net buying of +741,439,000 shares. There are only two other occasions of net buying that even come close to this -- +540,105,000 shares in the week ended November 14, 2003, and +588,248,000 shares for the week ending March 28, 2003. As you can see by the chart, there is no other week that even comes close to these three huge buying spikes.
You will also note that each of the two prior buying spikes occurred immediately prior to a significant market advance, and, in my opinion, the current buying spike is an extraordinarily bullish event.
NYSE Members are the middlemen who make their money by accumulating stock during declines and selling back it to us at a profit during the next advance. If they have acquired this much inventory, I think we can assume they expect to distribute it at higher prices over the next several weeks.
Can they be wrong? I suppose so, particularly if there is a catastrophic event affecting stocks prices (and highly likely that they have this position fully hedged), but it makes no sense to me that they would load up on stocks to this extent unless they are pretty sure they will be able to turn this inventory at a profit.
As you can see on the chart, most of the time it is hard to make much sense of the net buy sell numbers, but significant amounts of NYSE Member buying or selling should serve as red flags, because it is their business to insure that their positions unwind in their favor.
NOTE: NYSE Member Net Buy/Sell numbers are available from Barron's (print and online), and they are released by the NYSE two weeks in arrears so that we can't know what they are doing in real-time.


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May 14, 2004LOOKING FOR A BOTTOM IN GOLD STOCKSBy Chip Anderson
Carl Swenlin

At the end of April the XAU monthly Price Momentum Oscillator (PMO) -- not shown here -- topped at very overbought levels, rendering a long-term sell signal. This action confirmed the sell signal top on the weekly PMO a month earlier, shown on the chart above. Both the monthly and weekly PMO can issue long-term signals, but the monthly PMO is much more serious.
Nevertheless, the weekly PMO shows that the longer-term overbought condition has been relieved, and the daily PMO (not shown) is becoming overbought, so we should be looking for a bounce from around the rising trend line support at 75 or 70. I think it will probably be a strong rally, and may even turn the monthly and weekly PMOs back up, but, in my opinion, sentiment is not yet as bad as it ought to be in order for gold stocks to put in a bottom. I base this opinion upon Rydex Precious Metals Fund net cash flow, which still doesn't reflect the degree of capitulation that we ought to see, considering how badly prices have been hit.
Rather than trying to catch a falling knife, I think that waiting for the weekly PMO to bottom (on a weekly closing basis) will provide a margin of safety for those wanting to trade the next rally.
To learn more about Decision Point's PMO click here.


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May 01, 2004S&P 500 NEW HIGHS AND NEW LOWSBy Chip Anderson
Carl Swenlin
Here's a new chart we've just deployed on DecisionPoint.com, showing the 52-week new highs and new lows for just the stocks in the S&P 500 Index. I think this is useful because it shows what is happening with the stocks in the world's most "indexed" index. I have been collecting this data since 2001, but I have never seen it on a chart before. The most surprising aspect to me was that there were not more new lows in 2002 as the market was putting in a bottom, but I assume this is due to the high sponsorship of these stocks.
Currently, the most obvious feature is the sharp contraction of new highs over the last few months, even as the price index has been bumping along near bull market highs. This is a negative divergence and doesn't bode well for the market this late in the bull run. There has been some expansion of new lows, but nothing to compare to the recent 200 new lows on the NYSE (a reflection of what is happening to interest rate sensitive issues on the NYSE that are not common stocks).

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April 17, 2004RYDEX PRECIOUS METALS FUND NET CASH FLOW SPELLS TROUBLE AGAINBy Chip Anderson
Carl Swenlin

DecisionPoint.com tracks net cumulative cash flow of Rydex mutual funds as a way of estimating sentiment in various sectors. The theory is that money 'ought' to follow prices, more or less. In the last several months this indicator has been rather helpful in identifying problematic price moves by the appearance of price/cash divergences.
On the above chart of Rydex Precious Metals Fund, I have highlighted the first divergence with red circles. Note how there was virtually no cash flow supporting the advance into the January price top. An indication that the advance would fail. Next the blue circles show a blowoff move in February. Lots of money moved into the fund, but prices failed to respond positively enough. Again, an indication that the advance would fail.
Now we see a precipitous drop in prices, highlighted by the green circles; however, note that a proportionate amount of cash has not yet fled the sector. To me this indicates an unrealistic optimism, and my conclusion is that prices will have to drop farther in order to increase bearish sentiment to appropriate levels.


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April 03, 2004NEW DECISION POINT INDICATOR: PMMBy Chip Anderson
Carl Swenlin

Does the world really need another indicator? Well, this is one we have been collecting data on for years, but we just recently started charting it because we discovered it presents a good picture of internal market strength or weakness.
Our Price Momentum Model (PMM) is a simple but effective mechanical model that we apply to all the stocks, indexes, and mutual funds we track. The PMM is always on a buy or sell, and it generates new signals when: (1) price moves 10% in the opposite direction of the signal extreme and (2) crosses the 200-EMA. For example, if the model is on a buy signal, a sell signal will be generated when the price index drops 10% from the highest price recorded during the buy signal and crosses down through the 200-EMA. (See http://www.decisionpoint.com/Glossary/PriceMomentumModel.html to learn more about the model.)
Since we track every stock in the Dow, Nasdaq 100, and S&P 500, we can calculate the percentage of the stocks on PMM buy signals. The resulting indicator is similar to the Bullish Percentage Index, which uses point and figure buy signals, but our PMM indicator tends to be a bit less volatile because a PMM signal change is harder to generate.
Currently, the indicator for the Nasdaq 100 (NDX) shows that considerable damage was done to the stocks in the index during the correction, as our indicator dropped below 50%; however, it is bouncing back nicely.
When the Percent PMM Buy index is above its 32-EMA, we generally consider the market environment to be positive because it shows a persistence in stocks being able to generate PMM buy signals. When it is below the 32-EMA, more caution is warranted, although it is possible for a market index to advance with only half its components participating (on PMM buy signals) because most indexes are capitalization weighted.
I think this indicator is most useful in evaluating the validity of major bottoms. If it can't move above its 32-EMA, it says the rally is not broad and is being led by a few large-cap stocks. Note how participation rose to over 90% within the first months of the 2003 bull market advance. This was also the case with the S&P 500, Dow, and the 112 Dow Jones US Sectors (which moved to 99%!).


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March 20, 2004DETERMINING THE TREND AND CONDITION OF THE MARKETBy Chip Anderson
Carl Swenlin

The trend and condition of the market should dictate the kind of actions we will take, so these are the first things we should evaluate during the process of making investment/trading decisions. This process is necessary for all time frames, but for this article I will focus on the longer-term.
TREND: On a weekly-based chart we can evaluate the longer-term trend of the market using trend lines and moving averages. We can see that the long-term trend line drawn from the 2000 price top has been violated to the up side, and a new up trend is in the making. For a more objective definition of the trend I use the 17-week (fast) and 43-week (slow) exponential moving averages (EMAs). When the fast EMA crosses the slow EMA, it generates a buy or sell signal depending on the direction of the crossover. Currently, the 17-EMA is above the 43-EMA, so a buy signal is in effect and the trend is officially up. The 10-year period on the chart shows how effective the 17/43-EMA relationship is for catching long-term trends.
CONDITION: Next we want to determine the condition of the market within the trend. Specifically, is it overbought or oversold? Again we can use the relationship of the 17/43-EMAs, only this time we look to see how far they are apart. Comparing other periods where corrective action has taken place, we can see that the 17-EMA is well above the 43-EMA and showing the market to be very overbought. Also, the weekly PMO (Price Momentum Oscillator) has had a very long run from its October 2002 low, and it too is very overbought.
Finally, we can see that the market is already reacting to the overbought condition. The rising trend line from the March 2003 price low has been violated, and the PMO has topped and generated a crossover sell signal. These events imply that the current correction will continue for several more weeks; however, in the context of a long-term rising trend it is not likely that we have seen the final top for the bull market, but, of course, that remains to be seen.
ACTIONS: In a rising trend we look for opportunities to buy, but during a correction it is not likely that we will find very many. In fact, with the correction in progress, the more immediate priority will be to appropriately adjust stops on long positions and raise some cash for the time when the correction is finally over and new buying opportunities begin to pop up all over the place.


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March 06, 2004LONG-TERM SELL SIGNAL FOR GOLD?By Chip Anderson
Carl Swenlin
When the monthly PMO (Price Momentum Oscillator) reaches a range extreme and changes direction, it is a pretty good indication that the long-term trend is changing. PMO direction changes in the middle of the range can often just be "noise", but, when the PMO has a long, sustained move in one direction and changes direction at an extreme overbought or oversold level, it demands our attention.
Such is the case now. The monthly PMO has been moving up for nearly three years, and it turned down this week. The PMO direction change is not official until the end of March , and, if gold rebounds from this correction, the PMO could still be rising as of the close on March 31. However, the situation is critical. Price has failed to hold above the long-term resistance around 415, but it remains above the the most accelerated rising trend line. If that support fails, chances are that gold will enter a correction lasting at least several months.

Posted at 05:04 PM in Carl Swenlin | Permalink

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March 07, 2009DOW THEORY STILL IN DOWNTRENDBy John Murphy
John Murphy
At the start of the 20th century, Charles Dow invented the Dow Theory. It was a simple idea. He created two stock indexes -- one for industrial stocks and one for the transports (which were exclusively rails). His reasoning was that both indexes should rise together in a healthy economy. While industrial companies made the goods, the rails transported those goods to market. One couldn't function without the other. Although he was applying that idea to the economy, his Dow Theory became a basic part of traditional technical analysis. When both indexes are rising together, a bull market exists. When they fall together, a bear market is present. Charts 1 and 2 compare the Dow Industrials and Dow Transports over the last three years. Both are in major downtrends which is bad for stocks and the economy. Although the transports turned down first in the second half of 2007, they retested their old highs in the spring of 2008 before finally peaking. The transports fell sharply during the second half of 2008 and are now trading at the lowest level since 2003 (the industrials have already broken that low). Since most attention is given to industrial stocks, I'd like to examine some driving forces behind the transportation plunge.

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February 20, 2009A LOT OF MARKETS ARE AT CRITICAL CHART JUNCTURES...By John Murphy
John Murphy
GOLD TOUCHES $1000 FOR FIRST TIME IN A YEAR... A number of financial markets are testing important chart points. Let's start with gold. Bullion touched $1,000 today for the first time since last March. Chart 1 shows the streetTracks Gold Trust (GLD) very close to touching its March 2008 high at 100. On a short-term basis, however, the price of gold looks overbought. Some profit-taking from this level wouldn't be surprising. If that's true, some counter-trend moves may be seen in some other markets. The dollar may have also started one.

DOLLARS DIPS AS EURO BOUNCES ... The U.S. Dollar has been rising along with gold since December. Chart 2, however, shows the Power Shares DB US Dollar Index Fund (UUP) dropping today from chart resistance near its November high. Chart 3 shows the Euro bouncing off chart support along its November low. That suggests that some "short-term" market dynamics might be changing. A weaker dollar might contribute to some profit-taking in gold and buying in some oversold commodities. A bouncing Euro might suggest that the recent selloff in stocks is overdone as well. I've shown before that stocks have been trading in tandem with the Euro since midyear and opposite the dollar.

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February 07, 2009MACD LINES SHOW SOME PROMISEBy John Murphy
John Murphy
A reader complained this week that we failed to point out the "negative divergence" in the daily MACD lines during January prior to the latest downturn. The reason I didn't point it out was because none existed. In fact, it may be the other way around. At the moment, the daily MACD lines look more positive than negative. Chart 1 overlays the MACD lines (and MACD histogram) over daily bars for the S&P 500. The chart shows that the MACD lines bottomed during October and gave a positive divergence during November (rising trendline) before rallying into the start of January. No negative divergence was given at the early January top. Although the S&P fell to the lowest level in two months during January, the MACD lines remained well above their earlier lows. The lines have now turned positive again (see circle). To me, that looks like positive divergence and hints at more market strength. The market is rallying today with the biggest gains coming from financial stocks (and banks in particular). The S&P is up more than 2% and is nearing a test of last week's intra-day high at 877. A close through that initial chart barrier would strengthen the market's "short-term" trend and keep the three-month trading range intact. There's even more good news.

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January 18, 2009OTHER BOND CATEGORIES ARE BOUNCINGBy Chip Anderson
John Murphy
I recently wrote about how investment grade corporate bonds were starting to gain some ground on Treasury bonds. Today, I'm adding two other bond categories to that list. The flat line in Chart 1 is the 20+Year Treasury Bond iShares (TLT) which has been the strongest part of the yield curve over the past few months. That's been partly due to a flight to safety and deflationary concerns. The three other lines in Chart 1 are relative strength ratios versus the TLT. All three bond ETFs have been gaining ground on Treasury Bonds since mid-December. The strongest has been the LQD (blue line) which I wrote about in the earlier article. The next strongest is National Muni Bond Fund (PZA) which is the green line. The next in line is the High Yield Corporate Bond Fund (HYG). Charts 2 through 4 show what those bond ETFs look like. The LQD in Chart 2 is trading well above its 200-day line. The Muni Bond ETF (Chart 3) is testing that resistance line and its early November peak. Chart 4 shows the High Yield Corporate Bond ETF trading at a three-month high and nearing its 200-day line. For those who think that the recent surge in Treasury bond prices is overdone (I certainly do), these other bond ETFs offer some alternatives.




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January 04, 2009INTERMARKET TRENDS TURN MORE POSITIVEBy Chip Anderson
John Murphy
Chart 1 shows how the interaction between the four main asset classes unfolded during 2008 and how they're entering 2009. The two weakest assets were commodities and stocks. The two strongest were Treasury bonds and the dollar. During the first half of the year, commodities were the strongest asset class while the others lost ground. At midyear, however, a sharp rally in the dollar (green line) caused a massive collapse in commodities (black line) which continued until November. Treasury bonds (red line) rallied sharply on plunging commodities. During most of the second half, bonds and the dollar rallied while stocks (blue line) and commodities fell together. [During a recession, bond prices usually rise while stocks and commodities fall]. Starting in November, however, those trends started to reverse. The stock market started to recover as the dollar weakened. As we enter the new year, stocks and commodities are bouncing while the dollar and bonds are pulling back. While those trend reversals are still relatively small, they do suggest that investors are entering the new year in a more optimistic mood.



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December 14, 2008% NYSE STOCKS ABOVE 200 AVERAGEBy Chip Anderson
John Murphy
A reliable measure of the market's strength or weakness can be found in the % of NYSE stocks trading above their 200-day averages. That's because 200-day averages are used to measure a market's long-term trend. [A 50-day line measures short- and intermediate- market trends]. Chart 1 shows the indicator since the start of 2006. The sharp drop during the second half of 2007 was one of the bearish signs that warned of a coming bear market. During bull market corrections, the indicator will often pullback into the 40-50% region. The April 2006 bull market correction bounced from 40%. Drops below 40% signal the start of a bear market which occurred during the second half of 2007. Bear market bounces can rise into the 50-60% region. The April/May bounce rose to 53% before turning back down again. The August bounce failed at 40%. A reading above 60% is normally needed to signal a new bull market. Chart 2 shows the trend during 2008 which is still very low 4%. That means that 96% of NYSE stocks are trading below their 200-day lines. While that historically low reading reflects a deeply oversold market, it doesn't show any sign of turning higher. Remember that the stock market is a market of stocks. The market can't be expected to rise much when the overwhelming majority of its stocks are still in major downtrends.




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November 16, 2008S&P JUMPS 6% AFTER TOUCHING NEW LOWBy Chip Anderson
John Murphy
After dropping briefly to the lowest level since March 2003, the S&P 500 achieved an upside reversal day (as did all of the other major indexes) that resulted in a 6% gain. It also did that on the highest volume in weeks. The fact that the S&P touched a new low before rallying is especially impressive (Chart 1). The Nasdaq did the same (Chart 2). The Dow Industrials bounced off psychological support near 8000. The rally was aided by short-term positive divergences in both the daily RSI and MACD lines. Although all market groups participated, the biggest gains were seen in consumer discretionary, financials,REITS, and small caps. Commodity stocks also rallied strongly. Gold and energy stocks gained 12%. The commodity bounce was aided by stronger stocks and a weaker dollar. Many commodity markets were closed during the late stock rally and will probably see more buying tomorrow. Bond prices sold off as stocks rallied.




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November 02, 2008LIBOR DROP ENCOURAGES MARKETSBy Chip Anderson
John Murphy
One of the recent positive trends is the continuing drop in the three-month London Interbank Overnight Lending Rate (LIBOR). That rate determines what banks charge each other for loans. During the credit freeze that started in mid-September, the LIBOR jumped from 2.8% to 4.8% as stocks fell sharply. Since mid-October, however, the LIBOR has been dropping. It fell another 16 basis points today to 3.03 (see arrow) which is the lowest level in six weeks. That's helping to stabilize global stock markets.



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October 19, 2008COMMODITES ARE LAST ASSET TO PEAKBy Chip Anderson
John Murphy
A number of readers have asked if I thought the U.S. was in a recession or heading into one. Others have asked if I thought this recession would be worse than most. Although I'm not an economist, it is possible to make some judgements about the direction of the economy by looking at various financial markets. Two of them are stocks and commodities. On July 18, I wrote an article suggesting that commodities were peaking based on a number of technical indicators. That article also contained a headline that read: "Commodities Peak During Bear Markets". Here is an excerpt from that earlier message: "At the end of an economic expansion, stocks usually peak before commodities. If stocks enter a bear market (and a recession starts), commodities usually enter a downside correction as well. During the stagflation years of the 1970's, serious downturns in stocks caused profit-taking in commodities. The commodity rally resumed after the stock market and the economy turned back up again." Stocks lost half of their value during 1973 and 1974 which led to a recession the second year. Commodities also dropped during that recessionary year. Historical studies show that stocks peak anywhere from six to nine months before the economy. From October 2007, that would put the outer target for an economic peak in July 2008 which is when commodities peaked.



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October 05, 2008SELLING SHOULD HAVE BEEN DONE MONTHS AGOBy Chip Anderson
John Murphy
Over the past couple of weeks, I've suggested taking no new action in the stock market. Part of my reasoning is that we've been recommending a bearish strategy for the past year and see no reason to change that. Selling should have been done earlier in the year when major sell signals were first reported here. My January 3 Market Message reported on the major sell signal given by the monthly MACD lines last December (Chart 1). A number of other technical indicators also give major sell signals at the start of the year that we reported on. None of those sell signals have been reversed and we've made several bearish recommendations since then. I realize that there are opportunities for short-term traders. My main focus, however, remains on intermediate and major trends. Since there's little justication for buying, the main question is whether we should be doing more selling at the moment. Here's why I don't think October is a good time to sell.



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September 21, 2008FINANCIALS SURGEBy Chip Anderson
John Murphy
A massive government rescue plan and a temporary ban on short selling has boosted the Financials Sector SPDR by nearly 12% (Chart 1). It's the day's strongest sector on a day when all sectors are in the black. Brokers (not shown) are up 12% and banks nearly a similar amount. Chart 2 shows the PHLX Bank Index trading over its 200-day moving average for the first time in more than a year. If the financials can hold most of those gains through the end of the day, it will be a big positive for them and the rest of the market.




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August 17, 2008TWO SECTOR LEADERS ARE STAPLES AND HEALTHCAREBy Chip Anderson
John Murphy
Until proven otherwise, the two strongest market sectors are still consumer staples and healthcare. And both are defensive categories. Chart 1 shows the Consumer Staples Select (SPDR) trading at a new eight month high after breaking through its spring high. It's nearing a test of its record high formed last December. Its relative strength ratio (below chart) has been rising since last summer when the market started to peak. Chart 2 shows the Health Care SPDR (XLV) bottoming at the end of June. The XLV has exceeded its spring high and its 200-day moving average. Its relative strength line turned up during May when the last market rally ended. The simplest way to play the two sectors is through these ETFs. If you're a stock picker, there are lots to choose from.




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August 02, 2008ECONOMISTS ARE LATE AS USUALBy Chip Anderson
John Murphy
In a recent Market Message, I discussed how the stock market is a leading indicator of the economy and why it isn't a good idea to use economic forecasting to trade the stock market. Historically, the market turns down at least six months before the economy. Chart 1 shows the NYSE Advance-Decline Line peaking last June. That suggested a possible recession by December of last year. Chart 2 shows the S&P 500 peaking last October. That puts the odds for a recession somewhere around April of this year. This week's economic reports showed that second quarter growth was below economic forecasts. It probably would have been even worse without a temporary boost from rebate checks. More importantly, GDP growth for the fourth quarter of last year was actually negative. It was reported this morning that the unemployment rate for July rose from 5.5% to 5.7% to the highest level in more than four years. A number of economists were quoted over the last two days saying that the economy was now in recession. Thanks for that late newsflash nearly a year after the stock market started dropping. These are the same folks who accused investors of panicing at the end of last year by using the "fear versus fundamentals" slogan that was flashed on TV screens. With the stock market now in an offical bear market, what are investors supposed to do with the newfound pessimism in the economic community? How many times do we have to repeat this cycle before people realize that the only way to trade the stock market is to study the market itself -- not the economy. The study of the market is what the charting approach is all about. And what Stockcharts.com is all about.




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July 19, 2008SHORT-TERM SELL SIGNALS GIVENBy Chip Anderson
John Murphy
This week's downturn in crude oil prices has had a depressing effect on the entire commodity group. Chart 1 shows the CRB Index (plotted through Thursday) breaking a three-month up trendline (and its 50-day moving average). The 12-day Rate of Change (ROC) line (top of chart) has fallen to the lowest level in more than three months. And the daily MACD lines (bottom of chart) have turned negative after forming a "double top" between March and July. The minimum downside target is most likely a test of the 400 level which would test a yearlong support line and the early May low. I wouldn't, however, rule out a further drop to the March low at 380. The weekly CRB chart also suggests a very over-extended market in need of a correction.

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July 06, 2008SECTOR ROTATION SAYS BEARISHBy Chip Anderson
John Murphy
SECTOR ROTATION MODEL... One of our readers asked where we are in the Sector Rotation Model. That model shows the normal sector rotation that takes place at various stages in the business cycle. The chart shows that basic materials and energy are market leaders at a market peak. As the economy starts to slow, money starts to rotate out of those two inflation-sensitive groups. Basic materials peak first and energy last. This week's downturn in basic material stocks suggests that the topping process is moving even further along. Energy may be the next to roll over. As the economy slows, money flows into consumer staples, healthcare services, and utilities. That's where we appear to be right now. One way we can tell that a bottom is near is when money starts to flow into financial and consumer discretionary stocks. So far, there's no sign of that happening. That leaves us in the midst of a bear market with money flowing toward staples, healthcare, and utilities.

STOCKS LEAD THE ECONOMY... Everytime I show the Sector Rotation Model, I feel the need to point out that the stock market (red line) peaks well before the economy (green line). Although most of us are aware that the stock market is a leading indicator of the economy, that point keeps getting lost on Wall Street and the media. Ever since the market peaked last fall, the media has presented a parade of economists arguing that the economy was still on sound footing. I remember seeing a headline "fear versus fundamentals" back in January (that was repeated again this week on CNBC). The implication being that the market was falling on "fear" instead of "fundamentals". With the stock market having had one of the worst first halfs in decades, we're now starting to get confirmation that the economy is in bad shape. It's a little late for that to do anybody any good. That's why we study the market and pretty much ignore the media, economists, and Wall Street suits.
NOTE: John will be on vacation next week.


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June 22, 2008FED'S IN A BOX, AND BEAR FUNDS ARE RISINGBy Chip Anderson
John Murphy
THE FED'S IN A BOX ... I've written recently about the Fed turning its attention away from the economy and back to inflation. Unfortunately, this week's market downturn is going to make its job a lot harder. The Fed apparently concluded that its easing program since last September would be enough to stabilize the stock market and the economy. This week's stock drubbing calls that analysis into question. How can the Fed raise rates to fight inflation with stocks tumbling? It can't. That should keep the dollar from rallying much further and could give a boost to gold. Money moving out of stocks and into bonds is also keeping long-term rates from moving up any further. Here's the problem. The market can't expect anymore help from the Fed. To lower rates again would give inflation another leg up which is a big part of the problem. Rising inflation and a weak economy make for stagflation which we haven't seen since the 1970s. One of our readers asked if "cash was trash" in an inflationary environment. Right now, cash looks better than stocks.
BEAR FUNDS ARE RISING ... Outside of bonds, the only other markets that gained ground today were bear funds. We've shown these two bear funds before, but here they are again. Chart 1 shows the Short S&P 500 ProShares Fund (SH) reaching a three-month high. Chart 2 shows the ProShares Ultra Short Dow 30 (DXD) acting even stronger.


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June 08, 2008BEARISH FORCES RETAKE THE MARKETBy Chip Anderson
John Murphy
There have been two consistent themes that myself and Arthur Hill have been stressing in recent Market Messages. One has been that the rally from mid-March is a bear market rally. The other has been that the rally has probably ended. That dual reality was brought into sharper focus on Friday when a combination of intermarket forces sealed the fate of bullish hopes. A huge jump in the unemployment number, a big drop in the U.S. Dollar, and a record surge in oil prices sunk the stock market in a big way. Charts 1 and 2 show the Dow Industrials and the S&P 500 hitting two-month lows on heavy volume. That's after failing at their 200-day moving averages in mid-May. Rather than repeating ourselves, I refer you to last Monday's Message headlined: "It still looks like the bear market rally is ending -- Short-Term ROC lines have turned negative -- Long-Term ROC shows market still in bear market -- VIX jumps 10% -- Nasdaq fails at 200-day average for second time". All of those bearish factors are still in play. Chart 3 shows the Nasdaq ending the week back below its 200-day line after a brief pop over that major resistance line on Thursday.




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May 17, 2008COMMODITY COUNTRIES HIT NEW HIGHSBy Chip Anderson
John Murphy
On Monday, I wrote about three foreign stock markets that were at or close to new record highs. Those three markets are Brazil, Canada, and Russia. What all three have in common was that they are producers and exporters of commodities. By the end of the week, all three markets had hit new records. Chart 1 and 2 show Brazil iShares (EWZ) and the Market Vectors Russia ETF (RSX) hitting new highs. Both cash indexes have done the same. Chart 3 shows the Toronto Composite Index (TSE) hitting a new record high as well. Canada iShares (bottom of Chart 3) have not reached new highs yet. As I explained on Monday, a flat Canadian Dollar is causing the iShares to lag behind Canadian stocks. Not surprisingly, the top sector in the Canadian market is basic materials. That's also true in the U.S. as commodity markets have a strong day.





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May 04, 2008CRUDE AND NATURAL GAS LOOK OVERBOUGHTBy Chip Anderson
John Murphy
When only one commodity group is hitting new highs, that's usually a sign that it's out of step with the others. That seems to be the case with energy. I still believe that the energy complex is due for some profit-taking. Chart 1 shows the United States Oil Fund still in an uptrend. The 14-day RSI line, however, (top of chart) is backing off from overbought territory over 70. The daily MACD lines (bottom of chart) may be stalling at their March high. That's not a lot to go on. Add in the fact that energy shares are among the day's biggest losers, however, and we see a market group ripe for profit-taking. Chart 2 shows a negative divergence between the 14-day RSI (solid line) and the United States Natural Gas Fund. That's another sign that the recent energy runup is on weak technical footing.




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April 19, 2008PENDULUM SWINGS BACK TO STOCKSBy Chip Anderson
John Murphy
This week's market action has been characterized by stock buying and bond selling. The change in the relationship between those two markets is shown in the chart below which plots a ratio of the 7-10 Year Treasury Bond Fund (IEF) by the S&P 500 SPDRS (SPY). The falling ratio since October shows that investors have favored bond prices over the last six months. Since mid-March, however, the ratio has turned up. That means that investors are rotating out of bonds and back to stocks. The rise in the ratio isn't enough to signal a major trend change between the two asset classes. But it does show that investors are feeling a bit more optimistic. Rising bond yields gave a boost to the dollar today and caused heavy profit-taking in gold.

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April 06, 2008METAL AND OIL SERVICE STOCKS ARE BREAKING OUT TO THE UPSIDEBy Chip Anderson
John Murphy
Throughout the market problems of the first quarter, stocks tied to basic materials have been the top performing sector. That's also been true over the last week. The chart below shows the Materials SPDR (XLB) trading over 43 today for the first time this year. That puts in in striking distance of its fourth quarter highs. The rising relative strength line below the chart shows the group's superior performance since last autumn. Three of the top performing stocks in the XLB are Alcoa, Freeport McMoran Copper & Gold, and U.S Steel.

One of the top performers in the Oil Services Holders is Rowan Companies (RDC). The chart below shows the stock breaking out to the highest level since last July. Its relative strength ratio is doing the same. Beneath it, is a chart of ESV. It shows Ensco Intl already nearing a test of last summer's highs. Its relative strength ratio is in a strong uptrend. The strongest chart of all may belong to Halliburton (HAL). It shows that oil service leader nearing a challenge of its 2006 and 2007 highs in what appears to be a two-year "ascending triangle". (An ascending triangle is defined by two converging trend lines with a flat upper line and rising lower line. It's a bullish pattern.) A number of readers have asked where to start putting new money to work in the stock market. At the moment, two good choices seem to be basic material and energy stocks.



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March 15, 2008YEN HITS THIRTEEN YEAR HIGHBy Chip Anderson
John Murphy
Last week I showed the Japanese Yen testing major chart resistance its 2000/2004 peaks. Today's 2% gain against the dollar put the yen over 100 for the first time in thirteen years (1995). While that's good for the yen, it's not necessarily good for global stocks which have been falling as the yen has been rising since last summer. Another low-yielding currency had a strong day today. The Swiss Franc gain of 1.5% made it the world's second strongest currency and pushed it to a new record high against the dollar. With the dollar and U.S. rates falling sharply today (along with stocks), gold and bonds had another strong day.





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March 01, 2008WHY A RISING YEN ISN'T GOOD FOR STOCKSBy Chip Anderson
John Murphy
I first started writing about the danger posed to global stocks last summer when the yen first started rising. I also wrote that was because a rising yen was part of the unwinding of the so-called "yen carry trade". Over the last few years, global traders had been borrowing yen at almost no interest charge (shorting the yen) and using those funds to buy higher-yielding assets elsewhere including currencies and stocks. For awhile, it almost seemed like the global rally in stocks was predicated on the yen staying down and providing a continuing supply of cheap global liquidity. That all started to change last summer. Chart 1 shows a generally inverse relationship over the last two years between the Dow Jones World Stock Index (blue line) and the yen (black line). Note that every blip in the yen since the start of 2006 coincided with a market pullback. Last summer, however, the yen turned up in a more serious way. The upturn in the yen during July coincided exactly with the start of the topping process in global stock markets. Each subsequent yen upturn (November and December) coincided with another stock peak. That certainly suggests that yen strength is contributing to global stock weakness. That's because traders are now being forced to buy back yen shorts and sell assets elsewhere. Chart 2 shows the impact of the rising yen even more dramatically. That chart compares global stocks (blue line) to the yen (plotted as the black zero line). The blue line is in effect a global stock/yen ratio. It shows that a rising yen has been a bad thing for stocks. And there's no sign of that negative trend ending. At the risk of a bad pun, Chart 2 shows that a stronger yen has stopped "carrying" the bull market in stocks.







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February 16, 2008COMPARING BOND ETFsBy Chip Anderson
John Murphy
The below chart compares the performance of four T-bond ETFs since last July, when money started to flow out of stocks and into bonds. The four ETFs represent different durations in the yield curve. Through the middle of January, the top performer was the 20 + Year Bond Fund (TLT). Next in line was the 7–10 Year Bond Fund (IEF). That was followed by 3–7 Year Bond Fund (IEI), which was followed by the 1–3 Year Fund (SHY). The chart shows that the longer duration bonds did better than the shorter-term ones. That situation, however, may be changing. Over the last month, longer duration bond ETFs have fallen faster than shorter-duration funds. That could be a reaction to new fears of inflation arising from the aggressive Fed easing and a further steepening of the yield curve. That's because the long bond is the most vulnerable to fears of rising inflation. That also suggests that the long bond may no longer be the best place to be on the yield curve.

The following three charts compare three bond ETFs with different time durations. The first shows that the 20+ Year T Bond Fund (TLT) has broken its 50-day moving average (blue line). Its the weakest of the three ETFs. The next shows the 7–10 Year T-Bond Fund (IEF) still trading above that initial support line. The last of the three shows that the 3–7 Year T Bond Fund (IEF) is holding up even better. That suggests to me that it makes sense to start moving away from the long bond to shorter maturities on the yield curve.



Which brings us to TIPS (Treasury Inflation Protected Securities). TIPS are bonds that have some protection against inflation built into their pricing. That would seem to make them a good alternative in the current environment of falling yields and rising inflation pressures (record high commodities). Chart 8 shows the iShares Lehman TIPS Bond Fund (TIP) over the last year. [TIP was the top performing bond ETF over the past year]. It has slipped a bit during February, but is holding over its 50-day moving average. The ratio below the chart divides the TIP by the 20+Year Bond ETF (TLT). The rising ratio since the start of 2008 shows that the TIP is starting to do better than the TLT. That may mean that bond investors are starting to favor TIPS for more insurance against inflation. That's not a bad idea.





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February 03, 2008JANUARY BAROMETER PREDICTS BAD YEARBy Chip Anderson
John Murphy
I haven't heard anyone in the media talking about the January Barometer, which is based on the view that "as January goes, so goes the year". That's probably because they only talk about it when the market has a strong January, which predicts a good year. Unfortunately, this January was a very bad one. The 6% loss in the S&P 500 makes it the sixth worst January on record. According to the Stock Trader's Almanac, "the January Barometer predicts the year's course with a .754 batting average. It goes on to state that "every down January on the S&P since 1950, without exception, preceded a new or extended bear market, or a flat market". In addition to a bearish January Barometer, the market had a bad chart month as well. The monthly bars in Chart 1 show the S&P 500 falling -6.12% since the start of 2008 on the heaviest volume in a decade. The monthly stochastic lines (above chart) have fallen to the lowest level since mid-2003. The monthly MACD histogram has been negative for two consecutive months.





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January 20, 2008SO MUCH FOR GLOBAL DECOUPLINGBy Chip Anderson
John Murphy
I've expressed reservations before about the recent theory of global decoupling. The reasoning was that foreign markets would remain relatively immune to a major selloff (and possible recession) in the U.S. That view struck me as strange, especially with the close correlation that's existed between global markets over the past decade. Which is why Chart 1 shouldn't come as a surprise to anyone. It shows a sampling of the world's major developed stock markets over the last year. And, not surprisingly, each and every one of them started to fall in November along with the U.S. market. Most haven fallen as far as far as the U.S., but they are falling. The only ones still in the black for the last year are Hong Kong (+26%), Germany (+12%), and Australia (+2%). The biggest yearly losers are France (-7%), Britain (-5%), and Canada (-2%). By comparison, the S&P 500 lost -6.5%.





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January 06, 2008S&P 500 THREATENS 400-DAY MOVING AVERAGEBy Chip Anderson
John Murphy
During the August market drop, I wrote about the importance of the 400-day moving average as a major support line. [That line is gotten by converting the 20-month moving average to a daily line. I'll show why we use that line shortly]. The daily bars in Chart 1 show the August and November price declines bouncing off that long term support line. The chart also shows, however, the S&P 500 closing below that support line today. [That's the first Friday close below that line in five years]. The 400-day line also resembles a "neckline" drawn below the August/November lows. That's another reason why today's breakdown could have bearish implications for the S&P 500 and the market as a whole. A close below the November intra-day low at 1406 would be further confirmation of today's moving average violation. Chart 2 shows why the 400-day line is important.





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December 15, 2007RETAIL WEAKNESS IS A BIG PROBLEMBy Chip Anderson
John Murphy
The two charts below demonstrate part of the reason why recent Fed moves haven't had much of a positive impact on the stock market. It has to do with negative fallout on retail spending resulting from the housing meltdown. The bars in Chart 1 plot the S&P 500 Retail Index, which has been one of the year's weakest groups. The RLX is on the verge of falling to a new three-year low. Its relative strength ratio (solid line) has already reached a five-year low. If the weak performance of retail stocks is a leading indicator of retail spending (which I believe it is), and if retail spending is 70% of the U.S. economy, then Chart 2 carries bad news for the U.S. economy and stock market. What's causing the retail breakdown? Chart 2 overlays the same Retail/S&P 500 ratio over a bar chart of the PHLX Housing Index. Notice the close correlation between the two lines. They both peaked in the middle of 2005 and have been falling together since then. In other words, the housing depression is closely tied to the retail breakdown. That suggests that there's a lot more to worry about than just subprime mortgages and liquidity problems. Which may also explain why recent Fed moves aren't helping much.







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November 03, 2007BEAR MARKET IN BANKSBy Chip Anderson
John Murphy
Earlier today I showed the Bank Index on the verge of hitting a new low for the year. By day's end, it had fallen to the lowest level in two years (Chart 1). This puts the BKX on track to challenge its 2005 low. In case you're wondering what that means, the BKX has fallen more than 20% from its early 2007 peak. That qualifies as an official bear market in bank stocks. That 5% daily drop helped make financials the day's weakest group. Consumer discretionary stocks came in second worst. Other large losers were small caps and transports. Those are the same market groups that have been lagging behind the rest of the market since mid-year. Although all sectors lost ground, groups that held up a bit better than the rest of market were healthcare, energy, industrials, utilities, and consumer staples. Bonds also had a strong day.





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October 20, 2007TWO DOW CYCLICALS TUMBLEBy Chip Anderson
John Murphy
The Dow Industrials were hit especially hard on Friday. A lot of that was due to big tumbles in two of its cyclical stocks – Caterpillar and 3M. Chart 3 shows Caterpillar falling 6% (on higher volume) to undercut its 50-day average. CAT appears headed for a retest of its 200-day line. Chart 4 shows 3M tumbling 7% on huge volume. Both relative strength lines are in downtrends. The fact that both stocks are considered be cyclical in nature (or economically-sensitive) suggests that the market is getting more worried about the U.S. economy. That view is supported by the fact that Dow stocks holding up the best were in the defensive consumer staple and healthcare categories.






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October 06, 2007WEEKLY MACD LINES TURN POSITIVEBy Chip Anderson
John Murphy
Last Friday, I wrote that the weekly MACD lines hadn't turned positive yet for the S&P 500, but were close to doing so. They turned positive this week. I wrote last Friday that "we need to see a positive crossing by the weekly (MACD) lines (or a histogram move over zero) to confirm that the current rally has enough strength to move to new highs". Both events took place this week. The chart below plots the weekly MACD histogram bars on top of the S&P 500. Intermediate buy and sell signals are given when the histogram bars move above and below the zero line. Since this is weekly indicator, its signal are given much later than signals on daily charts (which turned positive during August). But it's an important confirmation that the current rally has some staying power. It's taken seven weeks from the histogram bottom in mid-August to a bullish crossing. That's not unusual. It took eight weeks for that to happen in the summer of 2006. What is unusual this time is that the bullish crossover took place as the market was hitting a new high. Most often, the weekly MACD lines turn up well before a new high. The reason for this late crossing is the unusually deep correction this summer. The histogram bars fell to the lowest level in four years. That's why it took it so long to turn positive. It's a late signal, but an encouraging one.





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September 22, 2007YOU CAN BUY A FALLING DOLLAR FUNDBy Chip Anderson
John Murphy
I first wrote about this inverse dollar fund in April 2006 and again on July 13 of this year. The ProFund Falling US Dollar Fund (FDPIX) is a mutual fund designed to trade in the opposite direction of the US Dollar Index. In other words, the fund rises when the dollar falls (hence its name). As I've suggested in the past, investors can use this fund to profit from a falling dollar. Chart 1 (plotted through 9/9) shows the Falling Dollar Fund trading at a new 12-year high. An alternative to buying a dollar inverse fund is to buy a foreign currency ETF. Chart 2 shows the Currency Shares Euro Trust (FXE) hitting a new high on 9/20 along with the Euro.







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September 07, 2007VIX STILL IN AN UPTRENDBy Chip Anderson
John Murphy
Earlier in the week I heard a TV commentator (masquerading as an analyst) give his interpretation of the CBOE Volatility (VIX) Index. His conclusion of course was bullish. He correctly pointed out that peaks in the VIX usually coincide with market bottoms. He then bullishly concluded that since the VIX peaked in mid-August, the market had bottomed. The problem with that bullish interpretation is that the major trend of the VIX is still up. Recently, I wrote that the VIX would probably find major support near the 20 level before turning back up again. I got the 20 support number from two sources. One was the 50-day moving average. The other was the March peak. Pullbacks in an uptrend should always find support near a previous peak. If the VIX is turning back up (as it seems to be doing), that would signal the end of the market rally and not the start of a new uptrend. Here again, when you hear TV people doing their version of technical analysis, turn off the sound and look at your chart.




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August 25, 2007WHERE'S THE VOLUME?By Chip Anderson
John Murphy
Friday's higher prices continued the market rally that started the previous Thursday. The three charts below show major market ETFs all back above their 200-day moving averages, which removes any immediate threat of a bear market. All have recovered more than half of their July/August decline, The Dow Diamonds and the S&P 500 SPDR are now in position to test their falling 50-day lines. Since a market bounce that could last two to four weeks was expected, this week's bounce doesn't tell us if the worst is over or if there's another downswing to come (that could at least retest the recent lows). One important thing missing from the rally is volume. All three charts show remarkably light trading this past week. In fact, today's trading was the lowest since the days surrounding the July 4 holiday. Chart 3 shows the PowerShares QQQ Trust (QQQQ) closing slightly above its 50-day line today. Unfortuntely, that also came on unusually low volume. Low volume tends to exaggerate price moves and shows little buying enthusiasm. That's especially true on a Friday afternoon in August.









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August 04, 2007JULY PERFORMANCE FIGURES CARRY A MESSAGEBy Chip Anderson
John Murphy


The chart above shows "John's Latest Performance Chart" that reflects the market's stronger and weaker groups during the hightly volatile month of July. All are plotted around the S&P 500 which lost 3.2% during July. [The S&P can also be plotted as a zero line]. The bars to the left of the S&P did better than the general market. The two top gainers were gold and oil service stocks. The AMEX Gold Bugs Index ($HUI) gained 4.5% in the face of a severe market downturn. Oil Service stocks held up well on the back of rising oil prices (although the've started to slip during the first week of August). Semiconductors lost a small -.42%, but held up better than the S&P. The bars to the right show where most of the weakness has been. Brokers, banks, and retailers were among July's weakest groups. [Homebuilders and REITs were even weaker]. I did a story on Thursday about how relative weakness in retailers was tied to housing problems. The beauty of the performance bars is that they can tell us in one picture where investors might be looking to invest (like gold) and what to avoid (financials, retailers, and anything tied to housing). That juxtaposition of the performance bars also carries a negative warning for the stock market.



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July 21, 2007SMALL CAPS FAIL TO SET NEW HIGHSBy Chip Anderson
John Murphy
I suggested Friday that part of the recent weakness in market breadth figures was most likely due to the fact that most of the recent buying has been in large cap stocks, and that small cap indexes had yet to hit new highs. That discrepancy is shown in the chart below. The Russell 2000 Small Cap Index has been unable to clear its early June peak. [The same is true of the S&P 600 Small Cap and the S&P 400 MidCap Indexes]. The relative weakness in small caps is even evident in today's market selling. Small caps fell much harder than large caps. Below, the RUT is in danger of breaking its 50-day average. The RUT/S&P ratio at the bottom of the chart shows small caps lagging behind large caps throughout the latest market upleg. That's where a lot of the breadth deterioration is coming from. A lot of the breadth weakness is also coming from a continuing breakdown in financial shares. That's because the financial sector has the heaviest weighting in the S&P 500. Financials stocks have been lagging behind the rising market for months and are today's weakest sector. So is anything tied to housing.




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June 23, 2007SUBPRIME CONCERNS HURT BANKS AND BROKERSBy Chip Anderson
John Murphy
Growing concerns about the fallout in the subprime mortgage market caused heavy selling in banks and brokers today. Today's selling more than wiped out yesterday's rebound in the financial group. Chart 1 shows the Financials Sector SPDR (XLF) undercutting yesterday's intra-day low. It's now threatening its 200-day moving average. Most of the selling came in brokers and money center banks most directly affected by subprime problems.





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May 05, 2007XAU INDEX IS TESTING ALL-TIME HIGHBy Chip Anderson
John Murphy
One of the most consistent of all intermarket relationship is the inverse relationship between gold assets and the U.S. Dollar. Nowhere is that more evident than in the chart below. The green line plots the U.S. Dollar Index (which measures the dollar against six foreign currencies. The Euro has the biggest impact in the USD). The orange line is the Gold & Silver (XAU) Index of precious metal stocks. It's clear that they trend in opposite directions. For example, the 1996-2000 dollar rally coincided with a major downturn in the XAU (see arrows). The fall in the dollar at the start of 2001 helped launch a major upturn in gold shares. The most important feature of the chart is that both markets are at key junctures. The green line shows the Dollar Index testing its all-time low along the 80 level. The orange line shows the XAU testing its all-time highs around 150 reached in 1987 and 1996. The fact that the XAU is stalled at long-term resistance may also explain why precious metal stocks have lagged behind the commodity over the last year. That may also explain why the bull market in bullion has been stalled since last spring.





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April 21, 2007ASIA RECOVERSBy Chip Anderson
John Murphy
Thursday's 4.5% drop in Chinese stocks caused nervous selling in other Asian markets. By the time the U.S. market opened, however, Europe had already started to recover and initial U.S. losses were modest. By day's end, the Dow had closed at a new record high. A strong Friday open in Asian markets set the stage for a strong day in global stock markets. Chart 1 is an hourly bar chart of the last ten days. It shows the Pacific Ex-Japan iShares (EPP) gapping down on Thursday (red arrow). The good news is that the EPP then gapped back up on Friday (green arrow). Thursday's isolated price bars (see circle) created an "island" bottom which is a short-term bullish pattern. [An ""island"" bottom occurs when a "down gap" is immediately followed by an "up gap"]. The U.S. market also got a big boost from large industrials like Caterpillar and Honeywell which led the Dow Industrials to a new record high. A big jump in Google pushed the Nasdaq up against its 2007 highs. Commodity markets like gold and oil that pulled back on Thursday (owing to concerns about higher Chinese interest rates) recovered strongly on Friday. Commodity-related stocks – like basic materials, energy, and precious metals – were among Friday's strongest groups. A weaker dollar is continuing to feed the commodity rally.





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April 08, 2007EURO HITS TWO-YEAR HIGH AGAINST DOLLARBy Chip Anderson
John Murphy
The U.S. Dollar Index fell during the week and is drawing dangerously close to last December's low (green circle). The foreign currency with the biggest influence on the USD is the Euro. Expectation for continuing economic strength in Europe – and the likelihood for further ECB rate hikes – pushed the Euro (blue line) to a new two-year high against the dollar. The weekly bars in Chart 2 show the Euro (blue line) moving up to challenge its late 2004 peak near 136. A close above that chart barrier would increase the odds for the USD to threaten its corresponding low near 80. That would be a very important test for the U.S. currency.







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March 17, 2007FINANCIALS HOLD THE KEY TO THE MARKETBy Chip Anderson
John Murphy
It's no secret that one of the main problems pulling the market down over the last month has been the fallout from subprime mortages. It's also no surprise to read that financial stocks (mainly banks and brokers) have been the weakest part of the market over the last couple of weeks. That's a concern because financial stocks are historically viewed as market leaders. They had been leading the market higher over the last two years. Not anymore. The line on top of Chart 1 is a ratio of the Financials Select SPDR (XLF) divided by the S&P 500. That ratio peaked in October of last year, and failed to confirm this year's move to new high ground (red arrow). Even worse, the ratio has fallen to the lowest level since last May. The group itself is now in the process of testing some long-term support lines. One is the 200-day moving average. That support line line hasn't been decisively broken for eighteen months (red circles). Chart 2 shows the XLF also testing a four-year uptrend line (drawn on a log scale). Chart 10 holds some other warnings. One is the unusually heavy downside volume over the last month. Another is the fact that the 14-month RSI is turning down from major overbought territory over 70 (down arrow). The financial sector is undergoing a major test of its long-term uptrend. That's a big test for the rest of the market as well.








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March 04, 2007YEN/EURO IS IN MAJOR SUPPORT AREA AND OVERSOLDBy Chip Anderson
John Murphy
Our main concern here is the relationship between the world's strongest currencies and the Japanese yen. Since 2000, the world's strongest currency has been the Euro (followed by the Swiss Franc, Canadian and Aussie Dollars, and the British Pound. The yen has been the weakest global currency). Chart 1 measures the yen against the Euro (XJY:XEU ratio). The yen has been falling against the Euro (and all other currencies) since 2000. The Yen:Euro ratio, however, has reached a major support level at its 1998 lows and is in oversold territory as measured by the monthly stochastic lines. Purely on technical grounds, this would be a logical time to start reversing the "yen carry trade" that's existed for seven years. In other words, it may be time for the yen to start rising against the world's major currencies (including the Dollar). Chart 2 shows that the yen is bouncing off a nine-year support line (versus the U.S. Dollar). The monthly stochastic lines are turning up from oversold territory. The yen may be done with "carrying" the rest of the world's markets. That's why everyone is very nervous about the bouncing yen.







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February 14, 2007COMMODITY PRICES ARE RISING AGAINBy Chip Anderson
John Murphy
Just when it seemed like inflation was on the wane, another rally in commodity markets suggests just the opposite. [This week's unexpected jump in the core CPI also caught the market's attention]. Chart 1 shows the DB Commodities Tracking Fund (DBC) challenging its late November peak at 25.33. A close above that chart barrier would signal even higher commodity prices. Most commodity indexes benefitted from crude oil closing back over $60 and strong gains in precious metals, copper, and agricultural markets. [Corn hit a new 10-year high]. Since most commodity indexes have a heavy energy weight, they've been held down by energy prices since the start of the year. Chart 2 gives a better idea of how commodity markets are doing outside of energy. The CRB Continuous Index (CCI) has a smaller energy weighting than most other commodity indexes (including the CRB Reuters/Jefferies Index) and a heavier agricultural weighting. Chart 2 shows the CCI breaking out to a new record high on Thursday. The commodity bull market is alive and well. The Fed recently cited the drop in commodity prices as evidence that inflation was slowing. This week's upturn may cause some rethinking of that view.







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February 03, 2007REVUE OF A SUCCESSFUL MOVING AVERAGE TECHNIQUEBy Chip Anderson
John Murphy
Last July, I reviewed a moving average technique that used weekly exponential moving averages. [I first described this system in October 2005]. I'm revisiting it today because it continues to do remarkably well. And I'd like to suggest expanding its usefulness. The technique is a moving average crossover system. In other words, trading signals are given when the shorter m.a. line crosses the longer. The two moving averages are the 13 and 34 week exponential moving avarages (EMAs). [EMAs are more sensitive than simple moving averages because they give greater weight to more recent price data]. Chart 1 shows the two lines over the last six years for the S&P 500 (absent the price action). Only one crossing (signal) has taken place in those six years. That was a bullish crossing in the spring of 2003 just as the new bull market in stocks was beginning (green circle). Although the two lines converged four times during the four year bull market, the 13 week EMA has never crossed below the 34 EMA. Chart 2 overlays the weekly S&P 500 bars on the two EMA lines for the last two years. The S&P dipped below both lines during the last three market corrections. That doesn't matter. What does matter is that the two moving average lines didn't cross.









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January 20, 2007NASDAQ HOLDS 50-DAY LINE...NYSE NEARS HIGHBy Chip Anderson
John Murphy
The market closed the week on an upnote. The most important action took place in the Nasdaq market which bounced off its 50-day moving average (Chart 1). Broader market measures have held up much better. Chart 2 shows the NYSE Composite Index ending the week just shy of its old high. It's well above moving average support. It remains to be seen if today's oversold rally in the oil market continues next week and if that causes any short-term profit-taking in the market. Even so, the NYA would have to break its January low to warrant any real concern. Chart 3 ends with a point & figure chart of the NYA. [Each box is worth 50 points]. It shows the continuing uptrend that started at 8050 during June. The NYA needs a close at 9250 or higher to resume its uptrend. It requires a close at 8950 or lower to trigger a sell signal.










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January 05, 2007EMERGING MARKETS SUFFER WEEKLY REVERSALBy Chip Anderson
John Murphy
The MSCI Emerging Markets iShares (EEM) suffered a downside weekly reversal on heavy volume as shown in the chart below. In fact, the EEM had its biggest weekly fall in more than three months. At the very least, that suggests that a pullback of some type is probably in store. That cautious view is supported by the 14-week RSI line (blue line) which had been trading in overbought territory over 70 for the first time since last May. The RSI line has fallen below 70 for the first time since the last EEM peak eight months ago. Since emerging markets had been leading the global rally during the second half of 2006, any serious pullback in that group would most likely weaken most other global stock markets – including the US.





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December 09, 2006SENTIMENT INDICATORS SHOW A MARKET ENTERING OVERBOUGHT TERRITORYBy Chip Anderson
John Murphy
% NYSE STOCKS ABOVE 200-DAY AVERAGES ... I've received requests to look at some long-term market sentiment indicators. I've chosen a couple that you can plot by yourself on Stockcharts. One of those is the % of NYSE stocks above their 200-day moving average ($NYA200R). That's the reddish line in Chart 1 (the blue line is the NYSE Composite Index). As with all sentiment indicators, there are two main considerations. One is the level. At the end of a major bear market (like at the start of 2003), readings below 30 often mark major bottoms. During bull market corrections, however, readings around 50 usually market intermediate bottoms. That was the case in mid-2004, late 2005, and mid-2006. Readings over 80 usually mean an overbought market. That often leads to downside corrections (and, in some cases, major tops). At the moment, the % of NYSE stocks above their 200-day average has reached 79. That's the highest level in two years and puts it very close to overbought territory. But that's not enough to signal the start of a market downturn.



THE TREND IS STILL UP ... As with most things in market analysis, the trend is the most important factor. Chart 2 is a point & figure chart of the same indicator shown in Chart 1. There are two points that jump out at me. One is that the value of this indicator has exceeded its early 2006 which is a sign of market strength. The second is that the trend is still up. The first buy signal was given at 56 during July, and there have been six buy signals since then. [A buy signal exists when an x column exceeds a previous x column. Obviously, the first two or three signals are always the best]. Although the indicator is moving into overbought territory over 80, the trend is still up. The indicator would have to drop to 72 to give an actual sell signal. It would have to fall to 76 to suffer a downside three-box reversal. Although the sentiment indicator is entering overbought territory, it doesn't show any sign of weakening





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November 18, 2006FALLING COMMODITIES HURT CANADA, EMERGING MARKETS LAGBy Chip Anderson
John Murphy
FALLING COMMODITIES HURT CANADA ... When commodity prices started to slide several months ago, I suggested that certain global stocks markets might suffer from falling raw material prices. One of them was Canada. Chart 1 shows the Toronto 300 Index (TSE) in the process of challenging its spring high. That's not too bad unless we consider that most other global markets have moved well beyond that chart barrier. The more important line on the chart is ratio of the TSE to the Dow Jones World Stock Index (solid line). Notice that the line has been falling since May. The means that the Canadian stock market has gone from a global leader to a global laggard during 2006. The line below the chart is the CRB Index which peaked in May. You can see a close correlation between the falling CRB Index and the falling relative strength line for Canada. Canada benefited from the bull market in commodities for several years. It's now being restrained by falling commodity prices.



EMERGING MARKETS ARE ALSO LAGGING ... I also suggested over the summer that emerging markets might suffer from falling commodity markets. I suspect there are other forces at work including a move away from riskier assets to more established large-cap stocks in developed stock markets. Even so, emerging markets as a group have become global laggards over the last six months. Chart 2 shows the Emerging Markets Ishares (EEM) still trading below their spring peak. The solid line is a ratio of the EEM to the Dow Jones World Stock Index, and it shows global underperformance by emerging markets since May. I suspect falling commodity prices have something to do with that since many emerging markets are producers of raw materials. Global leadership appears to have shifted to Europe and Asia (ex-Japan).





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November 04, 2006ENERGY STOCKS ARE BOUNCING AGAINBy Chip Anderson
John Murphy
The last time I showed the Energy Sector SPDR (XLE) it was starting to bounce off chart support along its 2006 lows (see circles). Chart 1 shows that the XLE has climbed back over its moving average lines and may be heading toward the top of its 2006 trading range. Its relative strength ratio is starting to bounce as well. Oil Service stocks have been the weakest part of the energy patch. Chart 2 shows the Oil Service Holders (OIH) having broken their June/October downtrend line. I've suggested before that buying in energy stocks usually leads to buying in the commodities themselves. Rising bond yields on Friday gave a boost to the dollar. In an impressive show of strength, gold continued its recent climb.







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October 21, 2006A WEAKENED HOUSING MARKETBy Chip Anderson
John Murphy
CATERPILLAR HURT BY WEAK HOUSING ... A plunge in Caterpillar on Friday, Oct 20th, unsettled the market. And for good reason. The bad news from the stock was blamed on a weak housing sector. Why that's worth noting is because Wall Street seems to be dismissing the housing meltdown as not very important. I beg to differ. There are subtle signs beneath the surface that weak housing is having a negative impact on parts of the market tied to the economy. Chart 1 attempts to show a positive correlation between Caterpillar (green line) and the PHLX Housing Index (brown line) since the bull market started four years ago. Both turned up together at the start of 2003 (green circle) and rallied together until the end of 2005. Notice that the plunge in housing stocks at the start of this year was followed shortly by a downturn in Caterpillar (red circle). That weak action isn't limited to CAT. It's generally true of most stocks tied to the economy.



WEAK HOUSING IS HURTING CYCLICAL STOCKS... The brown line in Chart 2 is the Housing Index (HGX). The blue line is a ratio of the Morgan Stanley Cyclical Index (CYC) divided by the S&P 500. The chart shows that economically-sensitive stocks have done much worse than the S&P 500 since May and shortly after the peak in housing. Cyclical stocks are very closely tied to the economy. The fact that they're doing so badly suggests that the market is already preparing itself for an economic slowdown resulting from the weak housing sector. It's no concidence either that some of the market's strongest groups have been in the defensive sector. I wrote yesterday about strength in healthcare and utilities. Another group that usually benefits when cyclicals (and the economy) weaken is consumer staples.

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October 07, 2006DOLLAR SURGES ON STRONG JOB REPORTBy Chip Anderson
John Murphy
The dollar is having one of its strongest days in months. Part of the reason is the drop in the U.S. September unemployment rate and some upward revisions in recent job creation. The report diminished hopes for rate reductions by the Fed in the near future. In addition, Japanese reports of a possible North Korean nuclear test over the weekend also weakened the yen and caused some flight to dollar safety. The bottom line is that the Euro is falling to the lowest level in three months (Chart 1), while the yen touched a new six-month low (Chart 2). Having said that, I'd like to revisit a couple of other bullish factors for the dollar that I wrote about a couple of weeks ago. One has to do with the recent drop in commodity prices and the other which is recent underperformance by foreign stocks. Both trends are consistent with a firmer U.S. dollar.







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September 16, 2006WHAT ABOUT THE FOUR-YEAR CYCLEBy Chip Anderson
John Murphy
I've received a number of questions on the status of the four-year cycle. The stock market has shown a very consistent pattern of forming important bottoms every four years – usually during the fourth quarter. The last bottom took place in October 2002, which makes another one due this year. The only problem is that most of those four-year bottoms occurred after a weak year (like 1990 or 1998) or a year in which prices moved sideways (like 1994). That makes this year's action somewhat unusual. My original market outlook had been for a weaker market into October followed by a probable upturn. So far, the market has held up much better than I had anticipated over the summer months. Although the market still needs to weather the seasonally dangerous September/October months, the four-year cycle should act as a bullish prop under the market on any selloffs. The green arrows in Chart 7 show the last four cycle bottoms in 1990, 1994, 1998, and 2002. If the cycle repeats itself, another four-year bottom is due this year.





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September 02, 2006NASDAQ NEARS MOMENT OF TRUTHBy Chip Anderson
John Murphy
It's very hard for the stock market to stage a major advance without help from the Nasdaq market. Fortunately, it's been getting some Nasdaq help since mid-July. The chart below shows the Nasdaq Composite gaining nearly 200 points (10%) since mid-July. The actual signal of the upturn came with an upside break of its 50-day moving average (blue circle) in early August. Its rising relative strength ratio (bottom line) turned up at the same time and has been rising. That means that the Nasdaq has been leading the rest of the market higher over the last month. [The Nasdaq gained 6% during August versus 2.5% for the S&P 500 and 2.3% for the Dow]. The question is whether its recent rise can be continued. Chart 6 shows the Nasdaq moving into an overhead resistance zone ranging from its early July peak at 2190 to its 200-day moving average at 2225. Interestingly, the Nasdaq could be testing its 200-day line at the same time that the Dow and S&P 500 are testing their May highs. That will be a very important test for the market, especially as it enters the seasonally dangerous September/October time period.





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August 19, 2006CRB BREAKS 200-DAY AVERAGEBy Chip Anderson
John Murphy
I wrote yesterday about recent selling in commmodity pits pushing the Reuters/Jefferies CRB Index into a test of its 200-day average. Today's five point drop has pushed it below that long-term support line in pretty decisive fashion (see red arrow). Chart 1 shows the CRB peaking in early May at 366 and bottoming in mid June at 329.61. The July rally attempt fell short of its May peak thereby leaving a pattern of "lower tops". Today's price drop puts the CRB in danger of breaking its June low. If it does, it will initiate a pattern of "lower peaks" and "lower troughs" which is symptomatic of a peaking market. That would be the first significant sign of a commodity top in five years. Although most commodities are falling today, the biggest weight on the CRB is coming from the energy sector.





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August 05, 2006BOND YIELDS HIT FOUR-MONTH LOWBy Chip Anderson
John Murphy
The U.S. economy added fewer jobs than expected during July and the unemployment report rose for the first time in five months to 4.8% from 4.6%. The weak job report is the latest in a string of signs that the economy is weakening. That's usually good news for bond prices which do better in a slowing economy. Technically, this is a logical spot for bond prices to start doing better and bond yields (which move in the opposite direction) to start dropping. Chart 1 is a monthly bar chart of the 10-year Treasury Note yield. The chart shows the 10-year yield testing a a major down trendline connecting the highs of 1994, 2000, and 2006. The last time I showed this chart I pointed out that this would be a logical spot for bond yields to start to weaken. And that's what they've been doing. The daily bars in Chart 2 show the reaction to today's weak news. The 10-year yield has fallen below its June low to the lowest level in four months. Besides pushing bond prices higher, falling bond yields have also given a boost to market sectors sensitive to interest rates – like banks, utilities, and REITs and to defensive stocks in general – and to safer large cap stocks (especially dividend-paying ones) at the expense of riskier smaller stocks. Falling rates are hurting the dollar which is giving a boost to gold.







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July 15, 2006S&P 500 TESTS MAJOR UP TRENDLINEBy Chip Anderson
John Murphy
Earlier in the week I showed a number of moving averages that appeared to be on the verge of giving major sell signals. Here's another long-term support line to watch. The S&P 500 is bearing down on a two-year support line that starts in the summer of 2004. A break of that important support line would signal a drop to last October's low at 1168. That would be the first double digit percentage loss since the bull market started more than three years ago. I think the odds are pretty good that it's going to happen. The weekly MACD lines have been bearish for the last two months. This week's downturn has widened the spread between the two MACD lines which means that downside momentum is intensifying. The monthly chart is also in a very dangerous position.

- John Murphy

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June 17, 2006READING MY LIPS AT THE NYBOTBy Chip Anderson
John Murphy
READING MY LIPS ... On Tuesday June 13, I gave a speech to traders on the New York Board of Trade. I used that opportunity to review the major intermarket principles relating to the dollar, commodities, bonds, and stocks. I talked about the impact of the dollar on foreign ETFs, and the close connection between commodity prices and emerging markets. I reviewed why I believe the new emergence of Japan is contributing to global inflation pressures and rising global bond yields -- and the potentially negative impact that could have on global stocks. I also review recent sector rotations out of basic materials and energy stocks and into consumer staples and utilities -- and why that could also carry a negative message for the stock market and the economy. All of the points have been covered at one time or another in my Market Messages. But it's one of the few chances I've had to try to put all of these intermarket factors together in one presentation. And I thought you'd like to see it through the courtesy of the NYBOT. You can see and hear it by clicking on the following link:

Click Here to View Presentation

(Note: Requires Microsoft Windows Media Player to view)



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June 03, 2006US DOLLAR AT CRUCIAL JUNCTUREBy Chip Anderson
John Murphy
The chart below compares the Dollar Index (green line) to the CRB Index (purple line) since last September. The main message to be drawn from the chart is that the two markets have been trending in opposite directions which is their natural tendency. Dollar peaks last November and again in March coincided with CRB upturns. A dollar bounce during the first quarter coincided with a CRB selloff. The recent minor bounce in the dollar may have contributed to the recent slide in commodities. That's why commodity traders need to watch the dollar especially closely at this point. That's because the dollar is at a crucial chart juncture.

Back in March I wrote a column about a possible "head and shoulders" bottom being formed by the Dollar Index. The next chart is an updated look at that possible chart pattern. The horizontal line drawn over the 2005 peaks near 92 is a possible "neckline". The middle trough formed at the start of 2005 is a possible "head", while the early 2004 trough is a possible "left shoulder". If the current selloff is a "right shoulder", it shouldn't fall below the left shoulder. The two green circles show that level to be just above 84. The Dollar Index is testing that support level at the moment. To turn the chart pattern bullish, the USD would have to rally from this level and exceed its neckline at 92. It's a long way from doing that. If it doesn't hold near 84, it could drop all the way back to its early 2005 low near 80. Technical indicators are mixed. The 9-week RSI is in oversold territory under 30. But the weekly MACD lines are still negative. Since I'm a believer in the maxim that it's easier to continue a trend than to reverse one, I think odds favor a dollar move to the downside. That would be even more likely if today's weak jobs data encouraged to Fed to take a pause in June. That would be bullish for gold and other commodity markets. That's why a lot rides on the trend of the dollar. That's also why the final chart is so worrisome. Going back to the mid-1980's, it shows the dollar in a long-term secular decline. It also shows how important the support line is along the 80 level. It held at the start of 2005 and prevented a major breakdown. If the current level of 84 doesn't hold, that long-term support line at 80 will be threatened again.

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May 20, 2006S&P 500 IS ENTITLED TO A BOUNCEBy Chip Anderson
John Murphy
Although the longer-range chart picture has weakened (with most weekly indicators on sell signals), the S&P 500 has lost about 5% this week and looks to be in a short-term oversold condition. Its daily chart shows the 9-day RSI line below 30 for the first time this year. In addition, the S&P has reached its 200-day moving average and potential chart support along its first quarter lows. That may be enough to cause a market rebound next week. If one does materialize, the first level of resistance would be at 1280 which would also be a one-third retracement of the recent selloff. That's also the mid-April low that was broken this week. Broken support levels often become new resistance levels. While short-term indicators are oversold, weekly indicators aren't. Since weekly indicators take precedence over daily ones, I would continue to view any short-term rally as another selling opportunity.

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May 06, 2006WHY JAPAN IS STILL A GLOBAL VALUEBy Chip Anderson
John Murphy
The first chart below shows why I believe Japan to be one of the best global values. While most other global markets are at or near record highs, the Nikkei 225 has recovered barely a third of its losses from 1990 to 2003. The Nikkei is still down 55% from its 1990 peak at 39,000. During that same time span, the S&P 500 has risen over 300%. What I also like about Japan is that it's been poorly correlated with other global markets over the last fifteen years. That makes it an excellent global diversification vehicle. This isn't a new view. Those of you who have followed by writing know that I was saying the same thing last summer when the Nikkei was just breaking out of a base at 12K. There is a short-term warning, however, that you should know about. The chart of the Nikkei shows the next upside resistance barrier at its early 2000 peak just over 20K. That's still 18% away from current prices. Chart 2, however, shows that resistance level to be 16.03 in the the Japan iShares (EWJ). Today's trade at 15.39 puts the EWJ within 4% of that resistance barrier. While I remain bullish on Japan, you should know that the EWJ may run into some interim resistance around that 16.00 level.

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April 16, 2006TEN-YEAR YIELDS EXCEEDS 5%By Chip Anderson
John Murphy
Last week the yield on the 10-Year T-note broke through its 2004 peak at 4.90% to reach the highest level in four years. Today the TNX has moved through the psychological level of 5%. That doesn't come as much of a surprise considering that the trend for bond yields is now higher. I suggested last week that the next upside target for the TNX was the early 2002 peak at 5.45%. While I remain convinced that bond yields have embarked on a new uptrend, there's still another technical hurdle that they have to overcome to prove that the long-term downtrend in long-term rates has finally ended. The monthly bars in Chart 2 show the downtrend in yields from the 1994 peak. I've drawn a down trendline over the 1994 and early 2000 peaks. Needless to say, a move above that resistance line would be the final sign that the era of long long-term rates has finally ended. The most immediate result of rising bond yields is falling bond prices.

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April 01, 2006SMALL CAPS AND AD LINE ARE STILL RISINGBy Chip Anderson
John Murphy
Rising interest rates can help the stock market over the short- to intermediate-term because it implies economic strength. It also causes some money to rotate out of falling bond prices and into stocks. Although rising bond yields usually cause problems for the market eventually, we have to watch the market indexes and certain technical indicators to spot when that's happening. One of those is the NYSE Advance-Decline line as shown in Chart 1. As of right now, the AD line is still rising. Historically, the AD line has peaked either before the market or coincident with it. The fact that it's still rising tells us the market's uptrend is still intact. And it will remain intact as long as the NYSE AD line stays over its 50- and 200-day moving averages. Another sign of strength is coming from small cap stocks. Chart 2 shows a ratio of the Russell 2000 Small Cap Index divided by the Russell 1000 Large Cap Index. The ratio has just broken out to a new high. That shows continued leadership in small caps. One of the usual early signs of a market top is underperformance by riskier small caps as money rotates to the relative safety of larger issues. That may happen during the second half of the year -- and I suspect it will -- but it hasn't happened yet. In reality, Charts 1 and 2 are linked. There's a correlation between the direction of small cap stocks and the AD line. That's because there are more small stocks than larger ones. Weakness in small stocks is usually one of the main reasons that the advance-decline line starts to weaken. Right now, small cap strength is helping keep the AD line in an uptrend.

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