Too Much Volatility
10/13/2007 10:13:46 AM
The volatility is forcing us to reconsider a change.
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Stock Barometer Analysis
The barometer remains in Sell Mode.
The Stock Barometer is my proprietary market timing system. The direction, slope and level of the Stock Barometer determine our outlook. For example, if the barometer line is moving down, we are in Sell Mode. A Buy or Sell Signal is triggered when the indicator clearly changes direction.
Stock Barometer Cycle Time
Monday will be day 3 in our Down Cycle.
The Stock Barometer signals follow 5, 8, 13, 21 and sometimes 34 day Fibonacci cycles 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, 10/19, 11/29. We publish these dates up to 2 months in advance.
Each day the market doesn't break down makes it more likely that the market may 'hang up' until our 10/19 reversal date and then turn lower.
My Additional timing work is based on numerous cycles and has resulted in the above potential reversal dates. These are not to be confused with the barometer signals or cycle times. However, due to their past accuracy 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, 1/25, 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.
The following work is based on my spread/momentum indicators for the QQQQ, GLD, USD, USO and TLT. They are tuned to deliver signals in line with the Stock Barometer and we use them only in determining our overall outlook for the market and for pinpointing market reversals. The level, direction, and position to the zero line are keys in these indicators. For example, direction determines mode and a buy signal 'above zero' is more bullish than a buy signal 'below zero'.
QQQQ Spread Indicator (NASDAQ:QQQQ)
The QQQQ Spread Indicator will yield its own buy and sell signals that may be different from the Stock Barometer. It's meant to give us an idea of the next turn in the market.
Gold Spread Indicator (AMEX:GLD)
To trade Gold, utilize the Gold ETF AMEX:GLD. This gives us a general gage to the overall health of the US Economy and the markets, as well as to assists us in the entry of positions in our stock trading service.
US Dollar Index Spread Indicator (INDEX:DXY)
To trade the US Dollar, I'd utilize the Power Shares AMEX:UUP: US Dollar Index Bullish Fund and AMEX:UDN: US Dollar Index Bearish Fund.
Bonds Spread Indicator (AMEX:TLT)
To trade Bonds, I recommend Lehman's 20 year ETF AMEX:TLT. Note that the direction of bonds can have an 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*
To trade OIL, utilize AMEX:USO, the OIL ETF. We look at the price of oil as its level and direction can have an impact on the stock market.
Supporting Secondary Indicator
I monitor over a hundred technical indicators, some that are widely followed and some that are proprietary. These indicators break down the market internals, sentiment and money flow and give us unique insight into the market. I feature at least one here each day in support of our current outlook - and to give you an education on what professional traders utilize.
Summary of Daily Outlook
We remain in Sell Mode. We were looking for the market to turn lower into 10/19. However, that's next Friday and also options expiration.
We've decided to bring back to the 5-day moving average option back into the barometer signal. Back in July, we issued a tweak to the system, to make it more responsive. That tweak resulted in the following signals:
Which resulted in the following performance:
What we have found is that while the improved response time has positioned us well for a few moves, there were a few periods of inefficiency that basically wiped out any benefits of the improved response time. As you can see, the first trade was quite timely, but offset by the next two. The next trade was profitable, but any gains were wiped out by a series of volatile moves where the market moved like 2-3 percent against the system in one day. There's nothing you can do about these days, other than grin and bear it. They're not that common, but where they occur in your trading can make or break a year.
While I am a system trader - I'm only one 'sometimes'. Understand that not all my trading is system based. That means don't judge my ability to trade by the performance of the system. This system only represents something that I developed back in 2000 to support my trading - but ended up becoming so popular that I created this site to deliver its signals. The purpose of a system is to give you an entry signal and tell you how long to be in the trade. Here's an example of another system:
Remember, the purpose of our system is to catch the mid term trends and not concern itself with the short term. Since I started this service back in 2004 (previously I had been providing the system signals to another service as far back as 2000), I tweaked the system back in May 1, 2005 and on July 17, 2007. Here's the profitability chart of those 3 systems:
As you can see, the initial system was very active, produced a good range of gains between 5-10% and limited losses to around 5%.
The May 1, 2005 tweak worked incredibly. In part, that was due to the market conditions at the time, but the system produced significantly larger gains per position while limiting losses to 5%. That was until I missed the trend mode in August of 2006 and tried to position against that trend through December. The hardest thing to do in this business is to admit that you're wrong. Had we been positioned for this trend, I believe the system would have done extremely well.
On July 17th, 2007, we opted to allow for the calling of earlier signals - using a simple change in direction of the barometer (higher than 4% change in reading) - or a change in direction that crossed the previous 2-day signal. While this got us into a couple of moves before they happened, it also created an inefficiency that wiped out any benefit.
Accordingly, we'll go back to the previous system, which basically means adding the 5-day back to the barometer signal and give consideration to the trend and support and resistance. We've also added a simple 9 day moving average to the market to consider with our trending conditions.
Yes, this adds a bit of subjectivity back to the system in that we can either enter on day 1, 2 or 3 of a reversal - or ignore a signal all together if the market remains in a trend or above or below resistance and support. But I believe that was the best performance that this system can deliver and accordingly this previous tweak to create a more responsive barometer has been negated.
Of course, I will entertain any questions I'm sure you have.