11/12/2006 8:52:36 AM
As the market tries to break out of this consolidation, the system gives a secondary sell signal.
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With the elections in the rear view mirror and the only real casualty so far being the republicans and health care, all eyes are set on the rest of the year. As seasonality goes, we're in a positive seasonal period until the beginning of December, where the market usually consolidates into options expiration and then makes the famed 'Santa Clause Rally'.
But that's not what always happens. Seasonal tendencies are simply another form of a cycle and as I've said in the past, there are so many cycles that some are bound to be right and some are bound to be wrong. The key is to follow one and only one. System trading is akin to solving for an equation and in solving an equation, you fix as many variables as possible.
Of course, if you have any additional questions, please feel free to email me at firstname.lastname@example.org.
Dynamic Trading Signals are based on a series of Oscillators tuned to the short and intermediate term movement of the market. Our goal is to be in the market at all times and switch from bearish to bullish positions in line with the markets movements (except for the Options service, which is subject to greater volatility and time decay). Periodically we will go to cash and await the next system trade.
DYNAMIC TRADING OSCILLATOR
Discussion: Here we're taking a look at two of our indicators combined to form one. They form the basis of our signals.
10/20/40 WEEK CYCLE
The following chart shows our 10/20/40 week cycles. The 40 week is also referred to as the 9-month cycle. Cycles are not short term tools for determining precise entry and exit points, they're primarily used for intermediate or longer term positioning and forecasting.
INVESTOR'S INTELLIGENCE BULL BEAR SPREAD
Each week, Investor's Intelligence polls a number of newsletter writers. The poll results in a number of bullish advisors and a number of bearish advisors. The difference between those two numbers produces the following chart. It's believed, that when a majority of newsletter writers (like us) are bullish, that the market is near a top, and vice versa. The direction of this line is as critical as the level.
EQUITY INDEX OPTION VOLUME RATIO
The market is all about risk, and there are two primary classes of participants in the market, the individual investors and the institutions. Individuals primarily trade equity options and institutions primarily trade index options. So the relationship between the two gives us an idea of how much risk the individual is willing to take on. At tops, the individual tends to take on too much risk, making this indicator rise. At bottoms, the individual is usually washed out of the market, making this indicator fall.
QQQQ v. SPY RELATIVE STRENGTH
Risk tells us a lot about the market. This indicator looks at risk from another perspective. When market participants overall increase their willingness to take on risk, it's bullish for the market. That risk shift is shown on the above chart as a shift in relative strength from the Nasdaq to the NYSE. Note when we refer to Nasdaq, we're primarily looking at the QQQQ - since that's the focus of our service. And when we say NYSE, we look at the SPY.
This indicator looks at the flow of money in and out of various investment vehicles. For the most part, when money flow reaches an extreme, in either buying or selling, the market is at a top or a bottom, respectively.
Dynamic Trading remains on its current SELL SIGNAL.
Friday's bounce came on decreased volume and while that's not what you want to see if you're bullish, it is also not what you want to see if you're bearish, as we've been looking for some sort of follow through to Thursday's weakness.
Technically, Thursday's trade broke the previous high on decreased volume. Think of it as less people going into your store and you trying to charge higher prices - it's just not going to work as a matter of supply and demand. This supply and demand relationship is a good way to interpret volume action of the market. But it isn't a precise timing relationship, as prices can remain going higher on decreasing volume for some time. However, it's the previous highest volume day that you should look for next. On the Qs, that's the 8th and the 1st of November. Since those days occurred in the current consolidation, they're not as significant no until prices move away from the current price level. If prices move higher, then they'll act as support - if prices move higher, then this level will act as resistance.
How does that work into a longer term forecast? 11/28 has been a focal point of our cycle work. It's the last remaining reversal point of the year, so a reversal into that date would set up a nice year end rally. However, continued strength means we plan for a bullish move into 11/28 and follow seasonal tendencies from there.
Best regards and good trading!