How To Use The Daily Stock Barometer
10/23/2004 8:42:47 AM
The Daily Barometer is for
active traders/investors who want to know precisely when they should put their
money to work and more importantly, when not to. Today we have an
important warning about the current market action.
What's the warning?
I've been warning about the potential for a cycle inversion - and we're
setting up much like we did around the last one that occured on July 30th.
There's good news and bad news and I'll discuss that in my outlook
below.
The focus of my daily
barometer is to provide you a brief and accurate forecast of market
direction. I'm not going to waste your time by regurgitating what
happened the previous day - how can that make you money? Each day we'll
advise if we get a Buy or Sell Signal. These signals come roughly every 6
to 9 days and determine if we are in Buy or Sell Mode.
That's all you need to
know. You don't need to know what the GDP is and you don't need to
know what CNBC or the fair folks at Fox's Bulls and Bears thinks about who is
going to win the election. It's all noise. And the sooner you can
filter out the noise, the better you can hear what the market is actually
saying.
Each day, we'll either show
you a chart of the daily and 5-day stock barometer or a chart of the
intermediate term view (5 and 13-day moving averages), which will give us the
big picture on what the market is doing so you can position your trades or time
your investments accordingly.
Stock Barometer Analysis
In this view of the
intermediate term, we can see that we're on a Buy Signal from 10/15. We
also remain in Buy Mode, since the 5-day (black line) is still moving
higher. And we can also see that the intermediate term (yellow line)
remains pointing lower.
These lines represent the
energy of the market and the momentum of that energy. So the indicaotr
level is just as significant as direction. The fact that we're at a low
level means there's plenty of energy for the market to rally. However, the
momentum of that energy is having a tough time moving higher, as evidenced by
the yellow line remaining pointing lower.
It's important for me not to
formulate an opinion in this section of the report. There are more things
that we have to consider and the next thing is cycle time.
The Stock
Barometer, my proprietary measure of market energy, is made up of two lines, the
Daily Value (light blue line) and the more important 5-day moving average (thick
black line). The direction or slope
of the 5-Day moving average determines our short-term outlook on the market’s
direction. For example, if the
black line is moving down, we are in Sell Mode. A 5-day Buy or Sell Signal is triggered
when the indicator changes direction and is confirmed when the market crosses
its 3x3-dma. In addition, extremes
readings in the Daily Line can mark short-term tops and bottoms. The above
number represents the daily reading.
Stock Barometer Cycle Time
The main cycle we focus on
for the short term is the 6 to 9 day barometer cycle, which suggests that
energy in the market shifts higher or lower every 6 to 9 days.
Following a cycle like this teaches you patience, which is a tool that
almost every trader needs more of.
Monday will be day 6 in our 6
to 9 day Up Cycle. That means we're closing in on a top. However,
the market hasn't moved up much since our last buy signal on 10/15 (more so on
the QQQ side of the market).
We also follow other cycles,
such as the 10, 20 and 40 week as well as monitoring things such as the Bradley
cycle. The reason we follow everything we can is because other traders do
and we want to use all of the influences in the market to develop our longer
term outlooks or forecasted reversal dates.
Our next date that we've been
focusing on is 10/25. This was supposed to be a high, but Friday's action
suggests that either the cycle top was one day off or if Monday is a strong down
day that results in a bottom next week, that the cycle turned out inverting and
being a low. This is significant because it changes our whole forecast for
the remainder of the year, which I'll discuss below.
The Stock
Barometer signals are designed to follow a 6 to 9 day cycle that balances with
short term market cycles. Knowing
where you are in the current market cycle is important in deciding how long you
expect to maintain a position.
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I follow a series of price based spread/momentum
indicators for the QQQ, SPY, XAU and TLT that are tuned to confirm signals
in line with the Stock Barometer and used to provide signals to trade my other
services. Combined with up/down indicators you have a powerful tool for
pinpointing market reversals. I
provide charts of the spread charts, or up/down indicators at least weekly or
when they deliver reversal signals.
S&P Depository Receipts (AMEX:SPY)
You'll notice small
italicized print thoughout my articles. This is instructional
text that I repeat in each article. With these indicators we also
have Buy and Sell Signals and Buy and Sell Modes.
The SPY and QQQ Spread are in
Buy Mode with a divergence between their relative strength. For example,
the QQQ Spread is above zero and the SPY Spread is below zero. The QQQ has
been stronger than the SPY over the last few weeks. That means the market
is shifting towards risk, which is normally bullish for the
market.
Gold
& Silver Sector Index (Index:XAU.X)
The XAU Spread indicator is
also in Buy Mode, below zero and in a position to turn down here, which I
believe will be bearish and result in a large drop for gold. But I wouldn't
bet on it until we get a signal.
Bonds
(AMEX:TLT)
Bonds are close enough here
to call a Sell Signal reversal. The indicator is above zero, suggesting
that bonds may or may not break down. More damage normally occurs on a
momentum indicator when it crosses below the zero line.
We follow bonds because of
their normally inverse relationship with stock, so a sell signal and sell mode
in bonds can fuel a stock market rally. This is a liquidity
based rally that most technicians will miss. The bond market is roughly 10
times the stock market in size, so a sell off creates an excess of cash that
will see out a higher return that stocks provide.
I include
bonds in my studies and use Lehman's 20 year ETF. I won't advise of specific buy and sell
signals via alerts, but I will advise when we're getting buy and sell signals –
and if we’re in buy or sell mode, as the direction of bonds can have a
significant impact on the market.
Supporting
Secondary Chart
Each day I explore what other
critical indicators are saying. Sometime I'll use them to support my
position or sometimes to update you on an important development as we have done
with our cumulative breadth and volume charts which are still at a significant
level - but not confirming anything as yet.
Since I mentioned it, let's
take a look at the updated cumulative volume chart. We've been waiting for volume to
confirm the breakout by breadth. But we're not there yet. We're also
at a significant support level. The difference between a break out and a
break down is as significant as the difference between the 2002 market decline
and the 2003 market advance. (Of course, I'll let you know which way
it breaks - right when it breaks...)
I have over 75 technical indicators that break down the
market internals and sentiment.
These graphs are based on data that I've maintained over the past several
years in the development of my Stock Barometer. Each gives unique insight into the
market. I feature at least one here
each day in support of my current outlook.
________________________________________________________________________
Summary Of
Daily Outlook
Here is where I put all of
the above together and give you an outlook for the following days and
weeks.
I was expecting 10/25 to be a
top and if you look at the components underlying the market, it still looks as
though it is, but... If you remember back to the July 30th
inversion, we were looking for a low, the market quickly reversed 3 days before
and put in a quick top. Well, we could be seeing the same thing here,
except on the other side. I.e. the market is turning around to give us a
10/25 low and we'll see the market move higher into the election and for a
period after into a 11/12 top.
The reason that is
significant is because that will mark the top for the year and the market will
continue lower into the middle of January. We're not there yet, I'm just
warning you of the potential.
Because of this potential
divergence in outlooks, I closed out our positions in the QQQ and Rydex Trading
services. In addition, if the 10/25 top holds, then we'd expect a
retracement into the election and throught the week following.
The election is a week
away. So it's difficult to think that the market can rally when there's
fears of terrorism ahead of the election. If we get a sell signal on the
barometer next week, that will give us a projected bottom on the date of the
election. It will also set up the market with plenty of energy for a
strong rally for the rest of the year.
So stay tuned, because a lot
of this action will resolve itself over the next two weeks, it will also set us
up for great trades in our trading services.
As always, if you have any
questions or comments, feel free to email me at Jay@stockbarometer.com.
Regards,
Jay
DeVincentis
The 3x3-dma is a 3-day simple moving average, moved or
displaced forward 3 days. It's an
integral part of my view of the markets – and you’ll notice it as the thin black
line adjacent to the SPY data in my graphs (or a thick blue line in my stock
charts).
There is a very high degree of risk involved in trading. Past results are not indictive of future returns. Stock Barometer and all individuals affiliated with Stock Barometer assume no responsibility for your trading or investment results.