Hearing Test - Are You Listening?

By: Greg Miller | Sun, Jan 15, 2006
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Opening Whisper

I sometimes try to begin my weekly blog with an interesting topic that makes you think. Something unrelated to the markets or something that paints a picture and gives us another way of viewing the markets and our trading. Thinking, reasoning and interpreting are, in the very least, what separates us from the animal kingdom. All too often, we receive input and interpret it according to how we "feel". Detour. Now go to the following link and take the free hearing test. It requires you to have speakers connected on your computer. It really works!

Free Hearing Test: http://www.freehearingtest.com/test.shtml

How did you do? I found that I had some definite problems with my right ear at 1kHz and 8kHz. Let's see, my wife's voice must be right at 1kHz and she's usually on my right hand! Ha, Ha! Sorry sweetie, now you know why I sometimes don't listen. There is a real explanation!

Are we having fun yet? Where is all of this going Greg? I will get there, but one of the points to be made in this article is that we are usually taught that we should "focus" if we are to be successful. I would like to make a point that there is a case for NOT being TOO focused. We'll have more on this next week.

Developing both "sides" of our brains must be a lifelong habit or I suspect that we may fade all too soon into unnecessary senility and poor mental heath. I enjoy good music and I tickle the ivories myself in an amateurish fashion on occasion. It is my opinion that we can become so focused on trading that we lose sight of the other aspects of our lives. This is not a good thing. Nor is it beneficial to our trading. It is for this reason that I include a portion of scripture at the end of each weekly report. Balance. Break the rigormortic and uni-directional focus. Expand your thinking. Chill out and get both sides of the brain working. I suggest that it will help your trading and will help you learn to be more objective.

Here's what Mark Douglas says in his excellent book "The Disciplined Trader: Developing Winning Attitudes". Quoting; "To achieve a state of objectivity you need to operate out of beliefs that allow for anything to happen, as opposed to beliefs that allow only for the market to express itself in a limited fashion. If you operate out of a belief that anything can happen, then whatever does happen won't be threatening to you in any way, thereby causing you to avoid or distort certain categories of market information.

"Any limits you place on the market's behavior will be a compensating factor for your lack of trust and confidence to act appropriately in any given situation. This will be evidenced by the fear, stress, and anxiety that you will feel when the market expresses itself beyond your mental limits and you can't do anything to control the situation."

Douglas continues, and this is the very point of being a Market Listener; "However, you do have to have some belief or expectation about the future or you wouldn't ever put on a trade in the first place. To be objective, you will need to release yourself from 'demand-backed probabilities'..... Hence, our expectations of the future are actually demands that the environment (markets) conform to our expectations of it. Without really thinking about it, we will carry these same kinds of demands with us into the trading environment because of our natural resistance to letting go of our expectations." - unquote. Douglas goes on to advise that we should ask ourselves if anything "has to happen in our trades." Yes, many times I tell the market what it MUST do.

Frequently, I find that my market demands are so boisterous that they drown out the other "frequencies" that I should be listening to. How's your hearing? Identifying our "market demands" may reveal that we have areas in our trading habits that need to be silenced in order to increase our listening and hearing capabilities. Trading, like all other aspects of life, requires balance across a continuous spectrum of frequencies.

The Market News

Last week we said, "It appears that the market's main focus has been the FOMC getting to the end of its rate-raising cycle as evidenced by the ignition point which came on the publication of the minutes of the last FOMC meeting.... Based on the evidence we've seen this week, the market is likely to rally into March 28." Last week's focus transitioned this week to the news that Iran was breaking the UN seals on its nuclear processing facilities. But we've heard this all before, so what impact did it have on the market? Perhaps the real reason for the apparent impact was that the market was exhausted and ready for a consolidation point from which to go higher.

The positive for the week is that the markets did not crater in the face of global bad news, chip downgrades and subdued earnings. Sentiment held steady.

The average true range on the daily NDX price has backed down somewhat. That implies that we can tighten up on our stop level. The VIX and CBOE Total Put/Call ratio were fairly quiet and in limited ranges compared to the prior week. The major indices barely moved to the plus side while the Russell 2000 notched a 1.29% gain.

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Trend Compliance

We did get the definitive crossing of the 18 EMA on the Nasdaq Summation Index. Have we topped out on this index? No way. Channel that emotional bias and forget about picking a top until the top is in. The stochastic on the chart below is over 80 but can stay at that level for weeks.

6 Month Nasdaq Summation Index ($NASI)

The MACD on the above NASI chart has just moved back into positive territory intimating that we could see some more upside.

Moving On to Sentiment

The $VIX and $CPC are not at extremes so the mid-range readings are giving no clear direction. These option-related sentiment indicators need to move one way or the other before they give us some signal.

Hold the presses! Whoa! Here's a chart that'll knock your socks off!

I took a quick look at the VXN (Nasdaq 100 volatility index). Even though the NDX was up on the week, the VXN was also UP. I would have expected it to be down, a little. Let's look at a six-month chart of VXN.

The VXN has been climbing ever since December 16 th. Remember, like the VIX, a rising VXN means increasing fear. This is strange since the Nasdaq technology has been leading the charts higher.

So what is going on? Is this perhaps a bullish divergence in the contrarian sense? Does this mean that there is now quite a bit of room for the Nasdaq momentum and options traders to get back to buying calls instead of puts?

6 Month - Nasdaq 100 Volatility Index ($VXN)

And then let's take a second look at the VXN (chart below) from a longer term perspective as well. We inverted the scale in the next chart to show you the VXN so that tops correlate to highs in the NDX price.

Ouch! Now I see why the VXN has been climbing (inverted falling on the extreme right hand of the chart below). In the chart below we may see why the Nasdaq options traders are getting a little concerned. Folks, we've never been here before. We are in uncharted waters. Not even in the dotcom bubble days.

5 Year Chart of Weekly VXN

Looking at this chart, we can conclude only one thing,.... that we are in a Nasdaq 100 (QQQQ) options bubble! Andthe recent NDX price acceleration to multi-year highs may be worrying traders.

Has this options bubble already burst? This chart MAY, repeat MAY, be showing us a triple-top on the inverted VXN. And it could be that we are already on the downward slope. Ok, I'm listening now!

If this is a triple-top on inverted VXN, (triple-bottom on VXN), then we must expect much more volatility in the weeks ahead. Perhaps we are hearing the earliest whispers of an approaching sell-off in the markets.

The inverse VXN must hold above the October lows on this chart or there could be a significant move in the near future. Why? Because of the growing divergence between the inverse VXN and the NDX/QQQQ prices.

1 Year Inverted VXN (10DMA) and NDX

This divergence between the inverse VXN and the NDX price (price overlay chart above) is significant, particularly when the NDX is rising to multi-year highs. We might interpret this in a bullish manner in that the VXN has been too bearish and must catch up to the NDX, lending more fuel to the buying. Or we may interpret this in a bearish manner in that the options players, as seen in the VXN, are giving us a clue as to future market volatility and possible direction. A more significant move is coming soon. Probably down!

Risk Assessment
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Our Stop Level
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Watch the Member's Home page on our website for alerts if the market is acting crazy. This is the quickest way for us to get information to you. The speed and acceleration of a move against us could cause us to "stop and reverse" our signal. Stay tuned to the website Member's page for the latest updates.

Market Listener Trader Signals & Results

-2.9% 11.0% 36.1%
YTD 6 Month 12 Month

2005 Final Results +40.9%
2004 Results +64.4%

Historical results are not indicative of future results. Trading leveraged mutual funds carries risks including the risk of loss of principal.


Trigger Inputs
or Other
ML Signal ³
--- --- Recent Signals Not Shown
Dec 05, 2005 Buy Buy Buy Buy Overbought
Extreme - DSSI
Nov 07, 2005 Buy Buy Buy Buy   Buy
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
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.

Listen To What He Says

NAB Proverbs 3:19 The LORD by wisdom founded the earth, By understanding He established the heavens.
20 By His knowledge the deeps were broken up And the skies drip with dew.
21 My son, let them not vanish from your sight; Keep sound wisdom and discretion,
22 So they will be life to your soul And adornment to your neck.
23 Then you will walk in your way securely And your foot will not stumble.
24 When you lie down, you will not be afraid; When you lie down, your sleep will be sweet.
25 Do not be afraid of sudden fear Nor of the onslaught of the wicked when it comes;
26 For the LORD will be your confidence And will keep your foot from being caught.

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.

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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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