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May 22, 2005

Buy Signal Week 2 - Are You Listening?
by Greg Miller

Opening Whisper - We saw a good move to the upside this week. The rally catapulted the NDX to a 3.91% gain for the week. A nice move if you acted on our buy signal sent to subscribers last Friday before the close. Using RYVYX Velocity 100 which has a beta of 2.0, you could have realized an approximate 7.8% gain for the week.

This rally caused the NDX to go parabolic. It is not often that I watch a longer term MACD go parabolic when its histogram is already positive. All I can say is WOW! However, it seems to me to be a classic case of short covering that will eventually come to an end. But might it be true that some new money is entering the market because of the breakout and because the indicators are flashing new "buy" signals? Will buying beget buying? The answer is yes and the magic word is momentum. The momentum might just carry us higher, but the volume tailed off a little on Thursday and Friday from its peak on Wednesday. Monday might be the tell-tale inflection point that takes us higher or kills the momentum.

Friday was an equity option expiration day and someone made some big money selling those out-of-the-money puts! The expiration of all of those worthless puts will cause the put buyers to rethink their bearishness on this market.

Now our work should be focused on protecting and adding to this week's gains. Let our profits run, but keep our eyes on our stops to exit to cash so as not to give up our gains.

The VIX is falling, the 18 week EMA of the CBOE Put/Call ratio is falling, and the Bullish Percent ratios are rising. In addition, all major indices have moved above both their 50 and 200 day moving averages. These are all bullish signs. One negative however, and it could be telling, is that the 50 day moving average of the Dow Industrials has fallen below the 200 DMA. Unless we get a sustained move, this crossover may be warning us that the trend is still down.

Manufacturing activity in the U.S. is dying quickly. The manufacturing indexes are all moving down dramatically, the Philly Fed being the today's disaster du jour, but market momentum has shrugged off that bad news. Eventually, it will have its impact. The economy is not the market. And the economy appears to be slowing if manufacturing is any indication. Also, the trade war with China has begun in earnest. As the rhetoric and trade barriers go up, can we presume them leading indicators that the equity markets will go down? I think so.

Our Trading System - What The Numbers Are Telling Us

Our system model is showing a strengthening buy signal. The StochRSI has quickly moved to the overbought area. The weekly MACD sell signal has continued to weaken. The weekly 12-26-12 MACD histogram (on the bottom of the chart) has moved more positive 4 weeks in a row. It would be hard to project a MACD crossing, but it appears to be at least 3 weeks away.

NDX - 6 month Chart Model - Friday May 20, 2005

The Dow Industrials, SPX and OEX are still lagging behind the NDX & COMP. The following is a chart of the NDX strength relative to the SPX. We are seeing a turn in tech optimism not seen since last August. This ratio will provide momentum to short-term hedge fund buyers until it turns south and then watch out below. For now, it confirms our buy signal.

3 Year NDX / SPX Relative Strength - Weekly

What Is The Current Sentiment?

The bearish sentiment is getting the air popped out of its bubble. The cycle is turning from bearish to bullish. But the bearishness seems to be just covered up for now by the momentum of the rally. Does anyone really believe that we could see a 10-15% move up from here? It is likely that few really believe that could be true. And that latent bearish sentiment is just what a contrarian like me wants to see. This rally could produce a much more significant move than even the bulls surmise. For that reason, we need to stick to our signal and not try to get cute.

Let's take a look and see how the negative sentiment is turning at this time.

3 Year Weekly Bullish Percent NDX Chart - $BPNDX

The Bullish Percent on the NDX has crossed above the 8 week moving average, and the MACD histogram has started an upward move. The short-term negativity may have abated on the NDX and seems to have begun a more bullish move over the last 4 weeks.

VIX Volatility Index - 12 months

The VIX (above chart) has turned south this week indicating that fear in the market is decreasing very quickly. The Slow Stochastic and MACD on this chart are rolling over. A falling VIX tends to confirm our buy signal.

3 Year Weekly Relative Strength $SOX / $SPX

The above chart shows the relative strength of the SOX (Philadelphia Semiconductors Index) versus the S&P 500 index. This ratio has just moved above the 35 week moving average. The Stochastic and MACD are turning up indicating that the semiconductors may be moving out and leading the tech sector higher. Similar moves in the past have NOT been sustained. Will this relative strength move be different?

Where Do We Go From Here and How To Listen For the Next Signal?

Since we have just moved above, and are so close to the 200 day and 50 day moving averages, we should believe that these simple moving averages (daily NDX chart) are going to become support. Therefore if we break support, we could be in for some downside very quickly as the technicians will then agree with us that this rally has only been short covering and not a major change in investment mood or trend.

I will repeat what I said last week; "The whole thing could crash next week and we may be caught with a buy signal at the time, but we have no choice if we are going to blindly follow our 'system' without emotion."

If we see the market lose momentum and begin to roll over, we might want to cut our position size and begin our move to cash to protect gains even before we get the official cash signal. The stop settings will help us gauge when to move to cash.

This rally seems to be more than just a "dead cat bounce" off of an interim bottom. But short covering oversold rallies always appear to have significant power. Has most of the rally cycle already occurred since we are 3 weeks into it? Perhaps. If this is a 6 week rally cycle, then we could be at the apex and will see downside for the next 3 weeks. If the rally continues we would project resistance at 1560 on the NDX and 1200 on the SPX in line with 68% Fibonacci retracements of recent moves.

The Market is changing directions now! Are you listening?

The Market Listener Indicators (Sell++ = sell signal turning toward Buy)

¹ This Market Listener signal is our base signal. Daily Money Management signals may move us partially and/or temporarily to cash. You should not base your trading on this or any other single indicator or set of indicators. With Rydex I can trade 10 minutes prior to the close during the trading day/week when I see that one or more of the fast signal indicators have changed signals. This is particularly important if I am going to a CASH position in order to preserve capital. The above table shows the results of the end-of-week, WEEKLY SIGNALS.

Listen To What He Says

RSV 1 Corinthians 13:8-13 "Love never ends; as for prophecies, they will pass away; as for tongues, they will cease; as for knowledge, it will pass away. For our knowledge is imperfect and our prophecy is imperfect; but when the perfect comes, the imperfect will pass away.

When I was a child, I spoke like a child, I thought like a child, I reasoned like a child; when I became a man, I gave up childish ways. For now we see in a mirror dimly, but then face to face. Now I know in part; then I shall understand fully, even as I have been fully understood.

So faith, hope, love abide, these three; but the greatest of these is love."

I am working on the art of listening and hope that you are too.

Gregory W. Miller, P.E.
The Market Listener
An Educational Newsletter for Stock Market Trend Timers

Paid Subscribers receive mid-week alerts to market changes that impact our system. The alerts advise of changes in stop level or signal changes prior to the Friday close of trading.

The Market Listener Trading System - My adaptive trend following trading system is the result of years of mistakes. I always seemed to be zigging when I should be zagging. My investing was based too much on emotion and inputs from so many varied newsletters and methods. After what has been literally years of personal research into cycles, Elliott Waves, artificial intelligence and many other systems, I have learned that my own trading style is best handled by avoiding the "art" of prediction at all costs!!! When I looked at moving averages for indication of trend direction, it seemed that they too were always 180 degrees out of phase with what I should have done. My conclusion, after many losses and much frustration, is that I needed to keep it very simple and let the market tell me what it wanted to do. In particular, I wanted to follow the trend, which is your friend, until the market whispered, or shouted to me that it wanted to change directions. And then, I found that Stochastics and Rate of Change indicators help me go to cash until the trend reverses or continues. Thats how my trend following system & its cash management component developed. I trade Rydex Venture and Velocity funds by which I can go short (x2) or long (x2) the NDX (NASDAQ 100 Index). I hope my newsletter and its insights can give you an education on alternative investment strategies. You might find your own technique or modify mine.

Links:
Rydex Funds: www.RydexFunds.com
Stock Charts: www.StockCharts.com

About the Author: Gregory Miller is a registered Professional Engineer (PE) in the State of Texas. He has been involved in electrical engineering and projects in the U.S. and some far-flung regions of the world. Greg has studied the markets for decades and enjoys applying his analytical abilities and computer number crunching to the science of investing.

Copyright © 2005-2006 All Rights Reserved by Gregory W. Miller

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