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No Buy Today
AT A GLANCE: Five indicators moved back to negative on Thursday, delaying at least until Monday the possibility of a Summary Index buy signal. The 50-day and 200-day moving averages are getting closer to a point where they may turn down. However, indicators like the OEX Put-Call Volume Oscillator and the S&P 500 RSI are becoming sufficiently overextended on the downside to turn around very soon. The Goodman Price/Volume Stock Selection System (GPS) bought three stocks for the GPS S&P 100 Portfolio. There were no trades for the GPS NASDAQ 100 Portfolio. S&P 100
Sells
I've been getting lots of questions from readers about how to trade GPS during this down market. The first thing is to remember that GPS is a long-only strategy that does no market timing. GPS simply finds stocks that are technically strong, based on their price/volume patterns, compared to other stocks in the S&P 100 and the NASDAQ 100. This means that if the market declines, these stocks will probably fall too, though hopefully less than others in the index. As mentioned on our Frequently Asked Questions page, in my own account and in those of my managed clients, I have chosen to buy all of the GPS stocks and to either short SPY and/or QQQQ to protect them when my market timing indicators say sell, or to amplify the long positions by buying SPY and/or QQQQ when the other indicators say buy. But that is only one way to do it. Another way would be to invest according to the percentages used in the Technical Trading Model Portfolio and Portfolio "Q". That would mean that one would now be 100% in cash -- but you'd be standing ready to go 200% long when there is a Summary Index buy signal during the current Trend Indicator Uptrend state, a condition that is likely to occur soon. If you have questions about the GPS, please visit our Frequently Asked Questions or send your questions via email. The market has been swinging back and forth between jubilant and morbid on a daily basis for two weeks, and today it started oscillating on an intraday basis as well. Until it makes up its mind we are better off sticking by our yearend decision to sell, and our decision to wait for the buy signals before acting. Five indicators moved to negative from neutral, so the Summary Index rose only to 4.35 from 4.30. The SI turned up, but it is still two indicators away from a buy signal -- that's what it will take to move the SI above the buy signal trigger at 4.5 by the close today. If no indicators move from the current 16 negative, 10 neutral and 3 positive, the buy signal will occur at the close of trading on Monday. The Trend Indicator continues to drift down, but it is still in an Uptrend state at 12.19, after falling from 12.80 little by little, eight days in a row. Since it takes a drop below 10.75 to reverse it to a Downtrend state, it will take some time to occur unless there is a rout.
The key support areas for the S&P 500 include the 1170's, where we are now, 1162, which offers rather weak support and then 1157, below which we spent so much of 2004. Below 1157 there is the 200-day moving average which closed today at 1133.50, but which is slowing down. As a matter of fact, the 200-day average will turn down if the S&P drops below 1150 next week, or below 1120 in the following week. The 50-day moving average is now above the S&P 500 at 1189.20, and therefore represents resistance rather than support. The shorter moving average will turn down if the S&P drops below 1160 in the next few days or if if fails to climb back above 1180 next week.
The S&P 500 14-day Relative Strength Indicator (RSI) dropped to 31.1% on Thursday, but it is likely to turn up again since the next four daily datapoints to roll off the calculation are losses that occurred two weeks ago. The indicator is still following its own performance of March 2004, and if the S&P drops 6 or more points today, the indicator will again drop below 30%, just as it did last March, one day before the rally.
The S&P Mid-Cap 400 Price/Volume Chart can complete a textbook, counterclockwise continuation sell loop if it follows the red arrow today. I show it because the other P/V Charts are producing a number of imperfect variations on the theme. While they are all bearish, none is a clear-cut sell signal.
The NASDAQ Price/Volume Chart is the index closest to a sell loop, but it has made a clockwise, rather than a counterclockwise loop and is more likely to make a low volume advance in the next few days.
The S&P 500 Price/Volume Chart has made a star formation, which you can read about here.
The Dow Price/Volume Chart has also broken to the downside from a star pattern. However, it may be rescued by a low volume day.
Even the XAU Price/Volume Chart is following the lead of the stock indices and will also be helped by a low volume advance.
Surprisingly, in view of the steady decline all day yesterday, the Smart Money Indicator (bright blue line) moved up four points. This was the result of a bigger opening decline than the decline at the close.
Yesterday I showed the OEX-CBOE Put/Call Oscillator, and this is its counterpart. Here we calculate an OEX Oscillator by subtracting the OEX 10-day average option volume (pink line) from the OEX 10-day average put/call ratio (green line). When the oscillator is falling, as it is now (maroon line), it reflects the fact that put trading is decreasing relative to calls, and that the volume is increasing at the same time. The only way that put trading can decrease relative to calls while the volume is advancing, is if there are a huge number of calls being traded. Since the OEX option traders are looked upon as the "smart money," the fact they are increasing their call trading as the market is falling suggests that they believe that the decline is coming to an end. The end of the decline is usually marked by a reversal of the oscillator, as pros start taking profits by liquidating their call positions when the market starts to advance. The horizontal lines are drawn from the oscillator lows for the last two years. In 11 out of 12, the S&P turned up when the oscillator made a bottom. Since the oscillator is now falling towards the previous lows, it won't be long before it turns up and the S&P 500 bottoms out with it.
Finally, those members of the American Association of Independent Investors (AAII) who voted last week were not as worried about the market as they were the week before. The 8-week moving average continued to decline, but the indicator is best judged as neutral -- there has not been an extreme high or an extreme low, and those are the conditions that have had the best track record in past predictions.
Fred Goodman, CFP, is a fee-only Certified Financial Planner based in Los Angeles. You can send him your questions and comments via email at Fred@MarketMonograph.com. Emails sent to Fred may be published on this web site edited for clarity and brevity, and including your name unless you specify anonymity or not for publication. The charts and commentary represent what Fred is thinking about the market and thinking of doing for his own account and for accounts he manages at the time of writing. Fred, his clients, or his family may have positions or make trades in securities mentioned in these commentaries. Mutual funds mentioned by Fred may be advised by institutional consulting clients of Trend Macrolytics LLC; Fred has no economic interest in such business relationships. There is no guarantee that you will profit from trading as discussed herein. You may lose money and both Fred and Trend Macrolytics LLC assume no responsibility for what you do or do not do with this information. Copyright 2001, 2002, 2003, 2004, 2005 and 2006 Fred Goodman and Trend Macrolytics LLC. 
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