Flammable Vapors & Vioxx Fuse - Are You Listening?

By: Greg Miller | Sat, Aug 20, 2005
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Opening Whisper

Crude oil futures closed up more than $2 to $65.80 on Friday, but the rally in oil was overshadowed in the afternoon by the Merck/Vioxx verdict in Texas. Oil recovered more than half of the week's losses showing some considerable support at $63 per barrel. That support for higher oil prices is beginning to appear to be a real encounter with supply and demand issues. Media interviews frequently appear to build a case that $65 oil is due to speculative buying. This week however, Goldman Sachs raised its oil price forecast for 2006 to $68 per barrel saying that crude prices can hold at about $60 a barrel for several years to come because oil companies aren't investing enough in new supply. At some point energy users will get squeezed to the point that fuel charges must be passed along to ungrateful consumers.

The Vioxx verdict of $250 million for the plaintiff caused a late day sell-off in Merck of nearly 8%. The predictable follow-on selling of Merck on Monday could provide the source of ignition while steady-to-rising oil prices could provide some flammable vapors to deflate the Dow Industrials to the downside. The lackluster volume this week could "light up" next week. Look for some fireworks as some Wall Street vacationers might return prematurely to get their houses in order.

RISK ASSESSMENT: The downside market risk (probability of a sell-off) is dominated by geo-politics, oil and the vulnerable consumer. There is very little risk to our sell signal on the upside (probability of a huge rally - like capturing Bin Laden maybe?). We are pretty safe here with a Sell signal and a close cash stop.

TECHNICALS: The Nasdaq New Highs - New Lows chart below has rolled a little further south giving us some more evidence for a tech sell-off to lead the markets lower in weeks to come.

We have also included another chart of the Nasdaq Comp which gives another possible view of where signals might be taken. This daily chart includes a 200 and 10 day EMA to show where crossovers occur. The EMA crossovers are too late. However, take a look at the MACD histogram roll-downs and roll-ups and the "relative price to SPX" crossing indicators which have provided much timelier buy and sell signals in the last year. This chart has confirmed our sell signal in recent days. I have circled the appropriate buy and sell points.

3 Year Weekly - Nasdaq New Highs - New Lows

1 Year Daily Nasdaq Composite

Our Trading System - What The Numbers Are Telling Us

The equity markets have been in slow motion this week. The good news for our SELL signal is that even though oil prices ($WTIC) were off on the week, there appears to be no spark for a rally in stocks. We made some money this week (approx. 3%), but, more importantly, our model and decision support tools are strengthening the SELL signal. The daily NDX chart shows that we are now in a somewhat oversold condition. Normally this oversold condition would provide some support for a temporary rally. However, the media will be filled with Merck/Vioxx news next week which could blunt any rally as it did today. Next week is otherwise a slow economic news week.

Our chart model indicators on the NDX are gradually reinforcing the evidence for our Sell signal issued on August 8. The SlowSto, StochRSI, CCI and MACD histogram are now all on "sell".

We appear to be in late Quadrant 3 of this cycle where our weekly MACD histogram peaked and will now start to accelerate downward in Quadrant 4. Our proprietary adaptive MACD's have generated solid sells signals.

NDX - Expanded 6 Month Chart Model - Friday August 19, 2005

What About Bonds? The ten-year note yield barely budged on the week. The yield range is getting compressed. Which way will the spring recoil? An equity sell-off could lower yields somewhat. Sooner or later, the yields will move more dramatically.

What About Gold? - Gold mining stocks ($HUI) got roughed up a little this week by being off by about 4%. HUI didn't crater and having a higher low is some consolation for not having a higher high. The upward momentum has not been seriously violated, but we need a rally in the miners early next week or this recent uptrend my falter badly. This could be a good opportunity to gradually add to your trading position in NEM if a base is forming for the next wave up. Set close stops as a sell-off in the broader equities market could pull down gold mining stocks even if gold rallies. For short-term traders, the stop on NEM should be set at just below the low for this past week or about $39.40 (closing prices). This week NEM held above last week's stop of $38.50. Cross your fingers and hope that the current rally can take the miners higher. Admit failure quickly though if NEM breaks down below $39.40.

What Is The Current Market Sentiment?

This VIX continues to rise. The CBOE Total Put/Call ratio was down, well below rally-generating levels, but the 9 week EMA rose slightly. Though elevated, these 2 fear indicators are just high enough to be bearish factors without yet generating a fear extreme buy signal.

1 Year Weekly VIX

The Nasdaq Comp / SPX ratio has turned down after forming a third peak since January of 2004. Each successive peak was lower. The MACD of this chart has been a very reliable signal of market turns. The MACD is showing weakness at this point and any continued rollover will confirm the sell on all market indices.

6 Month - Weekly Nasdaq Comp. / SPX Ratio

The following ratio chart below looks at the two Rydex funds which we trade for our buy (RYVYX) and sell (RYVNX) signals. These two funds are leveraged for ± 200% of the NDX and therefore the ratio is sloped more dramatically. The daily delta between the funds helps highlight the market turns. The MACD histogram on this chart is showing a loss of technical strength at the recent July peak.

3 Year Weekly Rydex RYVYX / RYVNX Ratio

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

The daily SPX chart is in oversold condition with the slow stochastic below 20 and turning up. The market could be setting up for a push higher. But our philosophy doesn't allow us to act on the "maybe" of next week. We simply need to stick with our sell signal and set our exit stop level above which we would declare a sell signal failure and exit to cash.

Our Fault Tolerant Cash Safety Stop (FTCSS) is a very important part of our successful model. It may be MORE important than our buy-sell signals!!! It is based on market volatility and is a close "trailing stop" which, if triggered, would alert us that the market has moved counter-trend with a tremor of sufficient magnitude that it might create a change in trend direction. It is very important that we know when to admit our signal is wrong or confusing and move to cash quickly. Our FTCSS calculator is telling us that our NDX Sell Stop should now be located at 27 points above the current price of NDX (1573.72 + 27 = 1601, Add 5 pts to get away from 1600 level). Therefore our FTCSS is 1606. If the NDX is looking like it is going to close above 1606 any day next week, go to CASH (buy Rydex Gov't. Money Market RYMXX) before the close.

Market Listener Trend Timing Signal Summary
Current Signal: 100% SELL (Bought RYVNX Rydex Venture 100 Fund)

Subscribers were advised by email of the SELL signal before the close on Monday Aug. 8.

Fault Tolerant Cash Safety Stop - For the Week of August 22, admit failure and exit to cash (RYMXX) on a daily close of NDX above 1606.

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

The Market is whispering. Are you listening?

The Market Listener Indicators

(YTD Gain/Loss with RYVYX & RYVNX approx. +31.4 % as of Aug. 19 Close)

Week Ending Slo. Stoch.
ML Signal 1
Aug 19, 2005 Sell Sell Buy Sell Sell
Aug 12, 2005 Buy- Buy Neutral Sell Sell
Apr 08, 2005
Buy- Buy Buy Buy Sell
Aug 04, 2005 Buy Buy Buy Buy Cash
July 29, 2005 Buy Buy Buy Buy Buy
July 22, 2005 Buy Buy Buy Buy Buy
July 15, 2005 Buy Buy Sell Buy Buy
July 08, 2005 Sell Buy Buy Buy Buy
July 01, 2005 Sell Sell Sell Buy- Cash
June 24, 2005 Sell Sell Sell Buy- Cash
June 17, 2005 Buy Buy Buy Buy Buy
June 10, 2005 Buy Sell Buy Buy Buy
June 03, 2005 Buy Buy Buy Buy Buy
May 27, 2005 Buy Buy Buy Sell++ Buy
May 20, 2005 Buy Buy Buy Sell++ Buy
May 13, 2005 Buy Buy Buy Sell++ Buy
May 06, 2005 Buy Buy Buy Sell+ CASH
Apr 29, 2005 Sell Sell Sell Sell Sell
Apr 22, 2005 Sell Sell Sell Sell Sell
Apr 15, 2005 Sell Sell Sell Sell Sell
Apr 08, 2005 Sell Sell+ Sell Sell Sell
Apr 01, 2005 Sell Sell Sell Sell Sell
Mar 24, 2005 Sell Sell Sell Sell Sell
Mar 18, 2005 Sell Sell Sell Sell Sell
Mar 11, 2005 Sell Sell Sell Sell Sell
Mar 04, 2005 Sell Sell Sell+ Sell Sell
Feb 25, 2005 Sell Sell Sell Sell Sell
Feb 18, 2005 Sell Sell Sell Sell Sell
Feb 11, 2005 Sell Sell Sell Sell Sell
Feb 04, 2005 Sell Cash Sell Sell Cash
Jan 28, 2005 Sell Sell Sell Sell Sell
Jan 21, 2005 Sell Sell Sell Buy- Sell
Jan 14, 2005 Sell Sell Sell Buy Sell
Jan 07, 2005 Buy Sell Sell Buy Sell
Dec 31, 2004 Buy Buy Sell Buy Cash
1 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. With Rydex Dynamic funds, we can trade in the morning and 5 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 SYSTEM MODEL SIGNALS.

Listen To What He Says

NAB 2 Corinthians 6:1 And working together with Him, we also urge you not to receive the grace of God in vain -- for He says, "AT THE ACCEPTABLE TIME I LISTENED TO YOU, AND ON THE DAY OF SALVATION I HELPED YOU." Behold, now is "THE ACCEPTABLE TIME," behold, now is "THE DAY OF SALVATION" --.

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

Best Profits,


Greg Miller

Author: Greg Miller

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.

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.

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