System and Signal Tweak

By: Stock Barometer | Sun, Jul 15, 2007
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Bi-Weekly Stock Barometer No. 162
7/15/2007 11:15:48 AM

Current markets emphasize the need for quicker action from our system. Accordingly, we're making the following changes.

Welcome to the Stock Barometer. If you're interested in following our signals and learning more about our system, then I invite you to click here and subscribe to the daily service - since the market can turn on a dime and so too can our interpretation as the market gives its daily clues to the future. Or sign up for our free weekly newsletter, where we provide up to date articles from our various trading services. We're also going to be releasing a free trading video in 2007 - so sign up today.

First, I don't want to give an impression that I'm curve fitting here. Curve fitting is the taking of a system and fitting it to the current market conditions. All I'm doing is taking the calculation, slightly re-weighting 2 of the 12 components and modifying our signal timing to make it more responsive. Here are the details and what it means for us.

The barometer is a series of 11 algorithms. Each of which could be a system on its own. The algorithms are based on technical data that traders use to read the market. The algorithms normalize the data and coordinate the various time frames the indicators work best in. The 'tweak' was merely a re-weighting of 3 of the 11 formulas. The impact on the system is relatively minor. I consider it like a rebalancing of your tires - something you would do to make your car run a little smoother - nothing more.

The more significant change comes in the calling of the signals. Entry timing is the only area where there is a little subjectivity in the system. Originally, the decisions to issue signals were called in the following 'timing' order:

  1. a turn in the daily reading, or wait for
  2. a cross of the daily reading below the 5-day reading, or wait for
  3. the market to break a trend, or wait for
  4. the market to break support or resistance - but only if support or resistance has been established.

Item 4 is something that my associate and I discussed at great detail lately. This is basically when the market makes a move higher and then makes a turn lower. If the barometer issued a sell signal on the first turn lower, for example, it would enter sell mode. However, if there was no sell signal and the market turned back higher, then you are in buy/resistance mode because resistance had been established by the turn lower. And support had also been established by the turn higher. So basically the barometer will wait for the market to 'confirm' its next move by taking out support or resistance level.

This confirmation was costing us time on signals.

You have to understand that from a system perspective, there will always be a level of friction loss. The point of me originally making the system stay in buy or sell mode for as long as possible was to save money on reducing the number of transactions and profit as much as possible for as little work as possible. That's something that's going to change with the timing change of the system.

So now, the signals are going to be called a little differently. First of all, we're removing the 5-day line requirement; we're removing support, resistance and trend mode.

A signal is now issued on either

1) a change in direction of the daily line or

2) a change in direction that passes a reading from 2 days prior (noting that a change of direction already puts the indicator below the previous days reading (on a sell signal).

So what's the impact to you?

First of all, this doesn't mean we're not going to experience losing trades. In fact, we should have more. But that's primarily because we're going to have more trades.

Yes, this will definitely increase the number of trades per year. I'm guessing more than double where we are now.

This may also create some 'stop and reverse' days. A stop and reverse day is where we position for a move in one direction and reverse ourselves the following day.

Larger, more profitable trades may also be broken down into a series of smaller profits and losses. In order to recognize technical patterns, you need to build a delay into the system. The delay can cause you to appear to get out of sync with the market. And being out of sync is a hind sight observation. You can't trade in hindsight and therefore, to think in hindsight is a losing proposition.

Over time, the net impact should prove beneficial. The system will be more responsive. We'll do a more detailed analysis of the changes at the end of this year, after we have six months data.

Please let me know if you have any questions.

On to the charts.

Message From The Markets

Market action is ruled by sentiment and by monitoring market internals and studying sentiment; you can gain reasonably predict future market movements. The basis of the Stock Barometer system is overlaying extremes in sentiment with sound technical analysis to predict the likelihood of future price movement. Each indicator and chart measures the hope, fear and greed of investors and traders from different angles. Follow along with my charts and over time, you'll also learn to understand how to read the markets, which is essential prior to setting up each and every trade.

STOCK BAROMETER CHART

The Daily Stock Barometer is a proprietary measure of market energy. The direction of the stock barometer determines our short-term outlook on the market's direction. A BUY or SELL signal is triggered when the indicator clearly changes direction. If the line is moving up, we are in BUY MODE and if it's moving down, we are in SELL MODE. The black line is a 5-day moving average that we use to confirm changes in direction.

EQUITY PUT CALL RATIO CHART

The CBOE put/call ratio is comprised of two sets of data; equity options and index options. The index component contains items that are used as a hedge, thereby distorting the correlation and interpretation of the indicator. I use the equity put/call ratio. This is one of the most accurate read of investor's fear and complacency.

TRIN/ARMS CHART

Richard Arms developed the arms index. It is also referred to the Trading Index or TRIN for short. It is a measure of the ratio of up stocks and down stocks divided by the ratio of up volume and down volume. Our Spread Chart converts the arms index data into momentum Buy and Sell Signals.

TICK CHART

The tick index is represents the sum of all stocks ticking higher minus all stocks ticking lower (a stock is said to be trading on an up tick when it trades at a higher price than the last sale). It's utilized as a day trading tool as it gives you an up to the second read of the intensity of buying and selling.

BREADTH (ADVANCE - DECLINE) CHART

Each day several thousand stocks either advance, decline or remain unchanged. The number of advances and declines normally ranges from +2500 to -2500. A high number of advancing stocks normally marks a top just as a high number of declining stocks normally marks a bottom. Monitoring the 5 and 13-day moving averages of this allows us to better predict future prices.

VXO CHART

The VIX is a measure of volatility on options pricing. We use the old VIX, which is now called the VXO. The higher the volatility, the more likely the market is close to a bottom, as traders are willing to pay more premium for puts, which act as Insurance on their long positions.

Cycle Time

Monday will be day 2 in our up cycle. Changes to the system will mean shorter and more natural cycle times.

The Stock Barometer signals tend to follow a 5, 8 and 13 and sometimes 21 day Fibonacci cycle that balance with 'normal' market cycles. Knowing where you are in the current market cycle is important in deciding how long you expect to maintain a position.

Potential Cycle Reversal Dates

2007 Potential Reversal Dates: 1/10, 1/14, 1/27, 1/31, 2/3, 2/17, 3/10, 3/24, 4/21, 5/6, 6/15, 8/29. We publish these dates up to 2 months in advance.

I was in the camp that 6/15 appears to be a top, suggesting a move lower into 8/29. However, I am now leaning towards the opposite view - following this inevitable pullback.

My timing work is based on numerous cycles and has resulted in the above potential reversal dates. They're predictive and have nothing to do with the barometer cycle times. However, due to their accuracy in the past, I post the dates here.

2006 potential reversal dates: 1/16, 1/30, 2/25, 3/19, 4/8, 5/8, 5/19, 6/6(20), 7/24, 8/20, 8/29, 9/15, 10/11, 11/28.2005 Potential reversal dates based on 'other' cycle work were 12/27/04, 1/25/05, 2/16, 3/4, 3/14, 3/29, 4/5, 4/19, 5/2, 6/3, 6/10, 7/13, 7/28, 8/12, 8/30-31, 9/22, 10/4, 11/15, 11/20, 12/16.

Stock Barometer Buy And Sell Signals

QQQQ or SPY Chart: A chart is provided in every bi-weekly report and shows the barometer Buy and Sell Signals (which are provided in my morning updates) as well as showing the next highlighted 'reversal' window. The numbers adjacent to the buy and sell signals are the number of days between signal (cycle time).

Here's one years of our end-of-day buy and sell signals for the Stock Barometer over the past year. They're marked on the QQQQ chart with red and blue lines (or red and blue arrows). Note we recently changed bottom and top to read buy and sell.

 

7/19

Projected Sell Signal (5 days) Note our projected signal times will now be much shorter due to the modifications of the system.

 

7/12

BUY (15 days)

 

6/20

SELL (4 days)

 

6/14

BUY (20 days)

 

5/15

SELL (27 days)

 

4/5

BUY (7 days)

 

3/27

Projected SELL (13 Days from previous signal)

 

3/08

BUY (34 days)

 

1/18

1/18 SELL (4 Days)

 

1/11

BUY (17 Days)

 

12/22

SELL (6 Days)

 

12/14

BUY (0 days)

 

11/24

SELL (0 days)

 

11/14

EXIT/CLOSE/CASH (9 days)

 

11/01

SELL (18 days)

 

10/26

BUY (18 days)

 

10/2

SELL (4 days)

 

9/26

BUY (14 days)

 

9/6

SELL (15 days)

 

8/15

BUY (4 days)

 

8/9

SELL (12 days)

 

7/24

BUY (10 days)

 

7/10

SELL (29 days)

 

(historical reversal dates and performance figures are published at the bottom of the home page and updated annually)

The following work is based on my price based spread/momentum indicators for the USD$, XAU, GLD and TLT. They are tuned to deliver signals in line with the Stock Barometer. Combined with up/down indicators and you have a powerful tool for pinpointing market reversals.

Gold (GLD:AMEX & INDEX:XAU.X)

I monitor Gold in the form of GLD and the XAU as well as the US Dollar Index as a general guide to the overall health of the US Economy and the markets, as well as to assist us in the entry of positions in our Gold Stock Service.

Bonds (Amex:TLT)

I include bonds in our studies and use Lehman's 20 year ETF, as the direction of bonds can have an inverse impact on the stock market. Normally, as bonds go down, stocks will go up and as bonds go up, stocks will go down.

OIL Spread Indicator (AMEX:USO) *NEW*

We look at the price of oil as its level and direction can have an impact on the stock market, which we'll examine over the coming months and years.

Summary & Outlook

We remain in Buy Mode, but expect the market to move lower or consolidate at a minimum.

We have tweaked the system and modified our entry parameters to allow for the system to act more quickly to market conditions. This will result in more trades as the system positions for moves much more quickly. Maximum position per trade gains will lower from around 16% to roughly half.

The last tweak of the system occurred back in May, 2005. Following the previous tweak, the system returned almost 100% in less than 12 months. That was primarily due to conditions that were optimal for the system, immediately following the system change. I'm not saying that we'll get the same results - I'm just recognizing that the recent 6 months of sideways to slightly higher performance requires some review. I invite your questions.

Welcome to the Stock Barometer. If you're interested in following our signals and learning more about our system, then I invite you to click here and subscribe to the daily service - since the market can turn on a dime and so too can our interpretation as the market gives its daily clues to the future. Or sign up for our free weekly newsletter, where we provide up to date articles from our various trading services. We're also going to be releasing a free trading video in 2007 - so sign up today.

Have a great rest of the weekend.

As always, if you have any questions or comments, feel free to email me here at jay@stockbarometer.com.

Regards,

 


 

Stock Barometer

Author: Stock Barometer

www.stockbarometer.com

Stock Barometer is completely independent. We have never and will not ever accept compensation from any company whose stock we recommend.

Our goal is to make you money. We offer you the tools and information to do so and leave it to you, the individual investor, to apply them in the best way possible.

Important Disclosure: Futures, Options, Mutual Fund, ETF and Equity trading have large potential rewards, but also large potential risk. You must be aware of the risks and be willing to accept them in order to invest in these markets. Don't trade with money you can't afford to lose. This is neither a solicitation nor an offer to buy/sell Futures, Options, Mutual Funds or Equities. No representation is being made that any account will or is likely to achieve profits or losses similar to those discussed on this Web site. The past performance of any trading system or methodology is not necessarily indicative of future results.

Performance results are hypothetical. Hypothetical or simulated performance results have certain inherent limitations. Unlike an actual performance record, simulated results do not represent actual trading. Also, since the trades have not actually been executed, the results may have under- or over-compensated for the impact, if any, of certain market factors, such as a lack of liquidity. Simulated trading programs in general are also subject to the fact that they are designed with the benefit of hindsight. No representation is being made that any account will or is likely to achieve profits or losses similar to those shown.

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