Dow 11K Sell Bell? - Are You Listening?

By: Greg Miller | Sun, Dec 18, 2005
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Opening Whisper

I don't think the Nasdaq 100 (NDX) has been this flat for 3 weeks in a row since December 2004. It seems that the Christmas rally may be over. For some reason this song came to my mind as I am watching the markets tread water today, and ever since the first of December.

Where have all the flowers gone?
Long time passing
Where have all the flowers gone?
Long time ago
Where have all the flowers gone?
Girls have picked them every one
When will they ever learn? When will they ever learn?
.....

Listen here: http://www.niehs.nih.gov/kids/lyrics/flowrsgone.htm
One of Peter, Paul and Mary's famous songs. Words and music by Pete Seeger.

Where have all the buyers gone? For that matter, where have all the sellers gone? What "kind" of resistance are we seeing here? I don't think that the resistance is from the index price levels themselves. Certainly the Dow Industrials should not be inhibited just because of the big round 11,000 number. There must be something else troubling this market. But what? Earnings going forward? Mutual fund flows? Interest rates? Debt?

We are trend followers and not trend predictors. We can't buy and sell the news. We can only profit from price movement. And right now it's NOT MOVING! We will likely see a move soon to break out of the flat channel that the Nasdaq 100 is in currently.

Many of our subscribers have told me that they are in cash waiting for the next move. That's not a bad idea. We may see a little more buying before year end. My only hesitation to the buy side is that any break to the upside may be a false breakout. If they ring the Dow 11,000 bell on or before December 30 th, that bell may signal the top. The selling may then begin in earnest in the early days of January. Why should Dow 11,000 be the bell ringer? No reason at all other than this market is acting very flakey and without conviction. A deja-vu Christmas rally and selling into January?

"When will they ever learn? When will they ever learn?"

What Is The Current Market Sentiment?

The market has no new trend other than the bullish trend from mid-October. Sentiment has clearly moved to the extreme bullish side. Investors' Intelligence bullish - bearish divergence has not been at this bullish extreme since the first week in August and that extreme was a sell signal.

The CBOE Total Put/Call Ratio weekly chart below is confirming a short-term top.


2 Year Weekly - CBOE Total Put/Call Ratio ($CPC)

The November 2005 low in the CPC (bearish) has been fighting the seasonal year-end rally. It's kind of like sending Christmas cards to friends. In most cases, it's just expected. So the November/December rally happens just because it's expected. But some expectations can end badly as they did in January 2005.

Both VIX and CPC are closer to bullish sell signal extremes than they are to bearish buy signal extremes (in a contrarian view).

The weekly VIX chart below shows just how quickly bullishness has accelerated into options since mid-October. You don't have to guess or predict to believe that these low VIX readings are usually the signal to sell the markets.


2 Year Weekly - VIX Volatility Ratio ($VIX)

MARKETS SELL OFF IN JANUARY!!!

Do you remember how the markets closed out 2004 and started 2005? The selling was significant in January. Will it be a repeat performance in early 2006? We are nearing a potential inflection point in the market. Your subscription to the Listener could help you prepare for the next market "whispering".

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The markets played out almost exactly like last year during the 3 rd Friday of December when the NDX was down on the day. NDX was down 0.77% on the day and down 0.23% on the week. SPX was up 0.63% on the week.

If the analogy to last year holds, then the final nine trading sessions of the year will be characterized by rising prices on dramatically lower volume. Placing a bullish bet at this point might be in accordance with the trend since mid-October, but it would have a lot of risk should the low-volume day/swing-traders decide to exit early. The long side does not appear to have much value at this point.


6 Month Daily Nasdaq Summation Index

The Nasdaq Summation Index ($NASI) has been a good indicator signal for the NDX. If you pull up a $NASI chart of December 2004, you will see that it dipped to signal an early exit before the January 2005 sell-off. We are possibly seeing similar action in the NASI chart above.

Trend Compliance: The NDX market looks to be making a slow-motion roll-over. This sure does feel like December 2004 all over again.


1 Year - NDX ZigZag (5%)

The Markets Are Whispering - Are You Listening?

Market Listener Trader Signals & Results

CURRENT RESULTS
33.9% 8.7% 38.5%
YTD 6 Month 12 Month
Market Listener Trader YTD return in the hypothetical account
(Updated as of Dec. 16)

Recent
Signal
Slo.
Stoch.

(fast)
StochRSI
(fast)
CCI
(fast)
MACD
(Variable)
Trigger Inputs
Proprietary
or Other
ML Signal 3
--- --- --- Recent Signals Not Shown
Oct 31, 2005 Buy Buy Buy Sell Cash Stop Cash
Oct 28, 2005 Sell Sell - Sell   Sell
Oct 19, 2005 Sell Buy - Sell Cash Stop Cash
Oct 05, 2005 Sell Sell Sell Sell   Sell (100%)
Sep 30, 2005 Sell Buy - Sell   Sell (50%)
Sep 15, 2005 Sell Sell - Buy   Sell
Sep 14, 2005 Sell Sell - Buy Cash Stop Cash
Sep 07, 2005 Buy Buy Sell Buy (mod.)   Buy
Sep 06, 2005 Buy Buy Sell Neutral Cash Stop Cash
Aug 08, 2005 Buy- Buy Buy Buy   Sell
Aug 04, 2005 Buy Buy Buy Buy Cash Stop Cash
July 08, 2005 Sell Buy Buy Buy   Buy
June 24, 2005 Sell Sell Sell Buy- Cash Stop Cash
May 13, 2005 Buy Buy Buy Sell++   Buy
May 06, 2005 Buy Buy Buy Sell+ Cash Stop Cash
Feb 11, 2005 Sell Sell Sell Sell   Sell
Feb 04, 2005 Sell Cash Sell Sell Cash Stop Cash
Jan 14, 2005 Sell Sell Sell Buy   Sell
Dec 31, 2004 Buy Buy Buy Sell Proprietary Cash
Oct 15, 2004 Buy Buy Sell Buy   Buy
Oct 08, 2004 Buy Buy Buy Buy Cash Stop Cash
Oct 01, 2004 Buy Buy Buy Buy   Buy
Sep 24, 2004 Buy Buy Buy Buy Cash Stop Cash
Aug 20, 2004 Sell Buy Buy Sell+   Buy
Jul 16, 2004 Sell Sell Sell Sell   Sell
Jul 02, 2004 Buy Sell Buy Buy Cash Stop Cash
May 14, 2004 Sell Sell Sell Sell Proprietary Buy
Apr 30, 2004 Sell Sell Sell Sell Cash Stop Cash
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 or proprietary 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 can dynamically adjust parameters based on current market conditions including volume and sentiment factors. We also employ proprietary indicators which can override the current model.

We want to wish you all a very Merry Christmas and a great and prosperous New Year.

As we close out 2005, we want to take this time to thank all of our readers and subscribers. Our interaction with you this past year has been most appreciated. We are looking forward to making next year even better. - Greg

Listen To What He Says

KJV Luke 2:7-14 And she brought forth her firstborn son, and wrapped him in swaddling clothes, and laid him in a manger; because there was no room for them in the inn. And there were in the same country shepherds abiding in the field, keeping watch over their flock by night. And, lo, the angel of the Lord came upon them, and the glory of the Lord shone round about them: and they were sore afraid. And the angel said unto them, Fear not: for, behold, I bring you good tidings of great joy, which shall be to all people.

For unto you is born this day in the city of David a Saviour, which is Christ the Lord. And this shall be a sign unto you; Ye shall find the babe wrapped in swaddling clothes, lying in a manger.

And suddenly there was with the angel a multitude of the heavenly host praising God, and saying, Glory to God in the highest, and on earth peace, good will toward men.

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.

Links:
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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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