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September 11, 2005

Freight Train Trend - Are You Listening?
by Greg Miller

Opening Whisper

Once again, we've got to admit that we are not the type to tug on Superman's cape. And we don't stand on the tracks even when the train is climbing uphill in a determined way. The London bombings of July 7 and the hurricane Katrina disaster have initiated rallies in the face of multi-week down trends. Certainly no one can revel in the perverse way that Wall Street interprets disaster. We all understand the concept of a relief rally, but while the effects of the London bombings might be construed as improving British security, I fail to see any constructive after-effects from Katrina. Sure, there will be a lot of money pumped into the disaster area. And the street seems to believe that it might be a good thing to have a dent in economic growth which might slow the mighty US economy train. But, there appears to be a switchman dead ahead. On September 20, the FOMC will advise us whether the Fed has "blinked" with a pause in their raising routine or whether they are going to continue the 25 basis point increases. A pause in raising rates might stimulate the markets temporarily, but another increase in rates could derail the market rally and start another downhill portion of this year's ride.

TECHNICALS: General Motors (GM) and Citigroup (C) have both bounced off of last week's lows. SPX is close to its recent 4-year high. A move of SPX through 1250 could now provide a green light for all remaining shorts to cover and we could move into uncharted territory leading up to the FOMC announcement. The NDX 100 and Nasdaq Composite are meekly trying to keep up with the S&P 500 and the Dow Industrials. The underperformance of the Nasdaq techs could hinder the rally until we see the NDX/SPX ratio turn upward again.

Once again we will remember the 9/11 anniversary. In a similar way, the hurricane victims are many and hurting and confused. Let's never forget the lost and their struggling families.

Have You Forgotten - Darrel Worley
http://www.minibite.com/america/forgotten.htm
Have you forgotten how it felt that day? Have you forgotten?
To see your homeland under fire Have you forgotten?
And her people blown away Have you forgotten?
Have you forgotten when those towers fell?
We had neighbors still inside going thru a living hell
And you say we shouldn't worry 'bout bin Laden

TREND FOLLOWING COMPLIANCE: Our ZigZag model is now at the upper limit for a down leg. If the market rallies next week, the August leg will turn out to be an extension of the up move since July 7. Recent trend legs have been only about 1 month in length. This is a bit short for our trend following system to catch. As a result, our August 8 Sell signal was closed out on September 6 for a fractional percentage loss. The current daily MACD optimized parameters have been changed to 12-17-8 to keep pace with recent trend turns. We hope to downshift back to the weekly model soon.

12 Month Chart, Daily Prices - NDX ZigZag

Our Fault Tolerant Cash Safety Stop is calculated based on the recent historical average true range of the price. The calculated safety stop is 30 points below the NDX close at 1607 or 1577. The Early Exit Line shown on the following chart implies that there will be some resistance at 1590. Because the up trend is still immature, we will begin to move partially to cash if the rally stalls and we see a daily close below 1590. Our Safety Stop at 1577 will move us completely to cash if we fall below that level this week on a daily close. Limit your losses at all costs!

Subscribers will receive an email with revised trailing stop levels if the market rallies again next week. Subscriptions are free. Send an email to; subscribe@MarketListener.com with "subscribe" in the subject line.

30 Day Chart NDX - Trend Following Channel

RISK ASSESSMENT: The downside market risk (probability of a sell-off) is dominated by geo-politics, oil transport/refining and the very vulnerable consumer. The downside risk has moderated somewhat this week as oil prices pulled back. Further oil price erosion could minimize the risks associated with our buy signal. The market is showing great resilience in the face of Katrina's aftermath. This is very bullish, but proceed with caution with the Sell signal and keep listening.

Our Trading System - What The Numbers Are Telling Us

On Tuesday, subscribers were notified to go to cash. On Wednesday the Buy signal was put into effect before the close. The buy signal was based on accelerating trend parameters. Due to the speed of the change in the length of recent trends, we've had to drop our weekly model in favor of a MACD with parameters 12-17-8 (daily chart) to get us back on track with the trend. Our optimized MACD parameters will lengthen if this rally extends into late September.

There is a natural bias in the markets to require longer parameters on buy signals than on sell signals. This is due to the fact that tops tend to be rounded (allowing slower MACD parameters to catch up) and bottoms tend to be v-shaped (requiring faster parameters for quick turns).

Though the stochastic is in overbought territory, the Ultimate Oscillator has not yet reached the overbought 70 level. Perhaps this rally will be short-lived, but that might be the conventional wisdom and we prefer to hold out until we see a real trend change.

NDX - Revised 1 Year Daily Chart Model - Friday Sep 9, 2005

What About Bonds? The ten-year note yield rose this week gaining 9 basis points staying above the magic 4% level at 4.12%. The M3 money supply numbers for August 29 were unremarkable. But next Thursday we will get numbers for M3 which are likely to reveal a lot of money pumping which may, in part, be a cause for the continuing rally in stocks.

What About Gold? - Gold mining stocks ($HUI, $XAU, NEM) were up nicely on the week even in the face of a steady-to-rising dollar index. Have the miners broken out to the upside? In a word, yes. But gold is now at the $450 level where it has stalled several times over the past year (chart below). I would not be a buyer here until we have broken out above $450 in a significant way. At some point 450 becomes support instead of resistance.

1 Year Daily Gold Chart

What Is The Current Market Sentiment?

The VIX was down significantly on the week to 12. The CBOE Total P/C ratio fell as well (see chart below). The 8 day EMA has crossed below the 18 day EMA on $CPC indicating that fear is subsiding and we are entering a period which will be bullish for stocks. This rising greed level will support our current Buy signal.

In the NDX/SPX ratio on the next page, it appears that this ratio is turning higher after a recent 1-month dip. This would be bullish for the NDX and the broader market as the Nasdaq tech stocks lead the market higher. But don't get too far ahead of this market. This ratio could turn negative quickly so it "bears" watching on a daily basis. At the first sign of the ratio turning negative, I will be looking for the exits and the next trend leg south.

6 Month Daily CBOE Total Put/Call Ratio

2 Year NDX/SPX Ratio

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

With a bit of luck and maybe some decline in oil prices, we may continue this rally for another couple of percentage points. On the next page we have introduced a new "Trend Indicator" table. Our trend trading does best when we have trend legs that last at least 6 weeks and preferably 2 months. These swings permit our system to find them, ride them and get off before they turn too far in the opposite direction.

Our previous Sell signal is a good example of a trend leg that did not mature enough for our system to profit. We closed that signal out with a fractional percentage loss after one month in the trade. Were there any lessons learned from that trade? No. Everything worked as it was supposed to do. There was nothing new. Our stop exit got us out near the entry point and limited our losses. It is this kind of trading that makes our system look like a long option trade (put-sell signal or call-buy signal) in which we have the potential for unlimited gains while our stop limits our losses. If you understand this option trading analogy, you will understand why it is so important that we limit our losses while letting our winners run to their complete duration without setting "profit targets". Profit targets would greatly diminish our potential returns.

The other concept that I like about trading the Dynamic Rydex funds is that we get leverage without having an expiration date! The Rydex folks use futures and options to give us the required leverage (2.0/-2.0) of the NDX and we don't have to worry about an options or futures contract expiration. It is the best of both worlds. For all novice Market Listeners, read the above paragraphs again and make sure that you understand it all. If you still don't understand, do some reading on options and futures contracts so that you understand the leverage, margin and expiration concepts of those financial instruments.

We have set our stop loss level at 1577. As stated above, I would begin taking some money off of the table should we see a dramatic sell-down below 1590. And go totally to cash if NDX falls below 1577 on a daily basis. This Fault Tolerant Cash Safety Stop will be revised if we get significant upside this next week to get our exit level closer to our entry point.

Market Listener Trend Timing Signal Summary

Current Signal: 100% BUY (Bought RYVYX Rydex Velocity 100 Fund)
Subscribers were advised by email of the BUY signal before the close on Wednesday Sep. 7.

Fault Tolerant Cash Safety Stop - For the Week of September 12, admit failure and exit to cash (RYMXX) on a daily close of NDX below 1577.

We will issue an email to subscribers next week if we get an exit signal or have a mid-week update necessary to adjust the FTCSS level.

The Market Listener Trend Indicators

Trends
NDX 100 ZigZag Trend ZigZag Pref % ¹ Approx One-Way
Snap-Shot Trends ML Trend ²
Index

1 Month
Aug 1 Down (weak 1.7%) 5% 1 Month 5

2 Month
Jul 1 Up (8.1%) 5% 1 Month 5

3 Month
Jun 1 Up (2%) 5% 1 Month 5

6 Month
Mar 1 Up (5%) 5% 2 Months 10

12 Month
Sep ‘04 Up (16%) 5% 4 Months 20

¹ The Preferred ZigZag % is that percentage that gives us up and down trends that are typically 2-3 months in length which work well in our system. Shorter trends are more difficult to identify. Longer trends require dynamic slowing of parameters. ² The ML Trend Index is a gross approximation of trend conditions which permit us to profit from trends. Our model profits best on index numbers above 10.

Signals & Results

(YTD Gain/Loss with RYVYX & RYVNX approx. + 28.7 % as of Sep. 9 Close)

Week Ending Slo. Stoch.
(fast) StochRSI
(fast) ROC
(fast) MACD
(Variable) ML Signal ³

Sep 07, 2005 Buy Buy Sell Buy (mod.) Buy

Sep 06, 2005 Buy Buy Sell Neutral Cash

Aug 08, 2005 Buy- Buy Buy Buy Sell

Aug 04, 2005 Buy Buy Buy Buy Cash

July 08, 2005 Sell Buy Buy Buy Buy

June 24, 2005 Sell Sell Sell Buy- Cash

May 13, 2005 Buy Buy Buy Sell++ Buy

May 06, 2005 Buy Buy Buy Sell+ CASH

Feb 11, 2005 Sell Sell Sell Sell Sell

Feb 04, 2005 Sell Cash Sell Sell Cash
Jan 14, 2005 Sell Sell Sell Buy Sell

Dec 31, 2004 Buy Buy Buy Sell Cash

Aug 27, 2004 Buy Buy Sell Sell Buy

Aug 20, 2004 Sell Buy Sell+ Sell Cash

Aug 06, 2004 Sell Sell Sell Sell Sell

Jul 30, 2004 Sell Buy Sell+ Sell Cash

Jul 16, 2004 Sell Sell Sell Sell Sell

³ This Market Listener signal is our base signal. The MACD is our primary weekly input, but can be "out-voted" by the other faster indicators on a daily basis when we need to go to cash to implement our Fault Tolerant Cash Safety Stop (FTCSS). You should not base your trading on this or any other single indicator. Our trend following system dynamically adjusts parameters based on current market conditions including volume and sentiment factors.
With Rydex Dynamic funds, we can trade in the morning and 5 minutes prior to the close during the trading day/week when we see that one or more of the fast signal indicators have changed signals. This is particularly important if we need to go to a CASH position in order to preserve capital. The above table shows the results of the Adaptive System Model Signals.

Listen To What He Says

NAB Psalm 27:4-5 One thing I have asked from the LORD, that I shall seek: That I may dwell in the house of the LORD all the days of my life, To behold the beauty of the LORD And to meditate in His temple. For in the day of trouble He will conceal me in His tabernacle; In the secret place of His tent He will hide me; He will lift me up on a rock.

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

Best Profits,

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.