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July 09, 2005

London Bombings Buy Signal - Are You Listening?
by Greg Miller

Opening Whisper

The terrorist bombings in London were obviously the work of those without brains, even brains of the most barbaric sort. Their hidden and dark motivations leave me clueless as to what they might hope to accomplish by their desperate attacks on soft civilian targets. They don't seem to understand concepts like western resolve and work ethic and productivity. They will be tracked down and punished. The rule of law will prevail. Will others follow them? Of course, but the markets voted on Thursday and Friday that the economic effects of their terror will be infrequent and limited in scope. In fact, perhaps our friends in Europe will increase their resolve in hunting down the criminals and may also become more proactive in targeting the desperados before they get organized.

We can read something into the market recovery after the opening on Thursday morning. The message, if we are listening, is that these bad boys and the Dennis the menace hurricane in the Gulf of Mexico are not significant enough to alter the immediate economic climate in the U.S. and Euro Zone. In fact, the lack of a sell-off on Thursday, the stabilization of prices and the subsequent rally is likely due to the short covering of those who were set for a more dismal outcome. And when it didn't occur they had to give up the obvious and go long.

The breakout of the equity markets from recent trading ranges appears to be giving us our next buy signal. In fact, the London bombings have had a reverse effect in that they have nudged us out of recent trading ranges and have set the stage for the next trend cycle. The technical indicators have now turned positive, giving us the new buy signal. These positive technicals should provide some follow-on buying next week.

Our Trading System - What The Numbers Are Telling Us

The S&P 500 has been hugging the 1200 level for weeks. The Nasdaq Composite has also been range-bound between 2050 and 2100. The NDX has recently been stalled at 1500. On Thursday the market shrugged off the bad news in London and staged a significant rally. Friday's action seemed to confirm that we are in rally mode and have broken out of recent ranges. Has the PPT (Plunge Protection Team) been at work to support the markets this week? The likely answer is yes. Given this PPT "put contract" supporting the market, I have identified a BUY SIGNAL today on the weekly charts.

Elliott Wave proponents have recently indicated that the March highs of 1229 on the S&P 500 are THE HIGHS, and that the markets will move down significantly from here. We do not agree with their market-limiting analysis and trying to tell the markets what they MUST DO. If the EW gurus are wrong and we do take out the resistance at 1229, then a significant rally could follow as the shorts cover their longer-term short positions based on EW counts.

This is a weak, but identifiable buy signal. It is much more apparent if you use our NDX model chart parameters and look at the $SPX or $COMPQ. The Nasdaq Comp in particular is flashing a buy signal on technology. The SPX may now be set to move dramatically above its resistance at 1200 as evidenced by its daily stochastic indicator. Our system model MACD is still in quadrant 2 and therefore the new buy signal is a weak signal. [Note: Quadrant 2 is when the MACD is at or near the zero crossover line but moving up from recent negative histogram territory.] Our faster weekly indicators have relinquished some of their negative vectors. The ROC and StochRSI are now moving in positive directions. Lacking the majority vote, the sell indicators have now been out-voted by the buy indicators.

This next up trend could continue for at least 2-3 weeks based on the cyclic patterns in our daily MACDs. We have the possibility for a significant profit potential of 8-10 percent in the next 3 weeks by using the beta 2.0 leverage of the Rydex Dynamic Funds.

NDX - 6 month Chart Model - Friday July 8, 2005

What Is The Current Sentiment?

The Nasdaq Composite ($Compq) has been stronger recently relative to the Nasdaq 100 ($NDX). The $Compq/$SPX ratio is has been moving positive while the NDX/SPX ratio has been moving down. This week both the Comp and NDX 100 moved upward relative to the S&P 500. This relative strength in the technology issues supports our buy signal.

3 year Weekly Nasdaq Comp. / SPX Relative Strength Ratio

The following chart is the Bullish Percent Index on the Nasdaq Composite. This chart may be topping out, but until it begins to roll over, we will not get a bearish indication from it. Looking at October of last year we saw an apparent topping pattern which then became a year-end rally. We must react to market technicals, not try to lead them. Leading interpretations are usually wrong and will often get us into losing positions.

1 Year Bullish Percent Index on Nasdaq Composite

Taking another look at the XBD/NDX Broker Dealer relative strength chart below, we see again that the ratio has strengthened. One good thing about ratio-based technical analysis is that we don't have to go into any detail to explain this ratio and why it works to give us potential buy signals. The very fact that we can observe and learn from these ratios without interpretation is quite interesting. This recent spike move upward also supports our new buy signal.

Sentiment appears to be strongly moving toward a bullish orientation. The VIX and CBOE put/call ratio are at low levels indicating that we are in a greed-based market mentality. The fact that we overcame the terror in London was compounded by the supportive new jobs number in the U.S. Taken together with other economic data and the start of a new corporate reporting season, the bulls are probing for the remote possibility of a rally that could take the bears by complete surprise as to its magnitude and duration. Better bury your bear bias buddy! The bulls are on a mini-rampage. Will it be short-lived or might it pick up some momentum?

When will greed turn once again to fear? The markets will tell us. A big move may be upon us now! I am on board the train headed north that left the station on Thursday. But, like Jack, I will stay nimble and quick.

3 Year Weekly $XBD / $NDX Relative Strength

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

Our subscribers were informed to go long before the close on Friday by buying RYVYX Velocity 100. We will remain in buy signal mode until the market tells us that we are wrong. When we know we are wrong, we must go to cash quickly.

The Market is setting a new trend direction. Are you listening?

The Market Listener Indicators
(YTD Gain/Loss with RYVYX & RYVNX = +17.13% as of July 8 Close)

Listen To What He Says

NAB Genesis 18:10-14 He said, "I will surely return to you at this time next year; and behold, Sarah your wife will have a son." And Sarah was listening at the tent door, which was behind him. Now Abraham and Sarah were old, advanced in age; Sarah was past childbearing. Sarah laughed to herself, saying, "After I have become old, shall I have pleasure, my lord being old also?" And the LORD said to Abraham, "Why did Sarah laugh, saying, 'Shall I indeed bear a child, when I am so old?' "Is anything too difficult for the LORD? At the appointed time I will return to you, at this time next year, and Sarah will have a son."

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

Wishing you all the profit you can handle,

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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