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We Have Our Buy Signal!
The chart of the Summary Index below now sports one more little green triangle than it did yesterday. Yes, in the face of a market that feels utterly broken, the index has moved up above the 4.5 trigger level and given a major buy signal. If you step back and look at the 6 other buy signals -- each a green triangle -- you can see that three occurred days ahead of the turning point, two were a couple of days late and one hit it right on the nose. What about the new one? I can't say yet for certain, but at this instant it would seem that it will prove to be early. That is certainly better than being late, because it gives us a perfect opportunity to obtain a solid entry point. All we have to do is watch for a few days before committing the bulk of our investment. I'm comfortable with the equity exposure in the Discretionary Technical Portfolio now that I have bulked it up to 33.8% equity. It is now hedged against a rapid turnaround leaving us in the dust. However, now we will add to the position when the market demonstrates its ability to move to the upside. Our Discretionary Technical Portfolio is now over 8% ahead of the S&P 500 since inception, and will continue to increase its lead until the market starts up -- at which time we will increase our equity commitment sharply. The new Technical Trading Model Portfolio, which is designed to mechanically track the Summary Index buy and sell signals by being either 100% long or 100% short, will buy the S&P 500 Index at the opening today.
This is a good time to review the life-cycles of the Summary Index buy and sell signals of the past. The average length of a buy or sell signal was 84 days. The shortest signal lasted just three weeks, and there were four that remained in effect for around 35 days. The longest lasted for 215 days, and there was one that lasted for 209. I make no rule that requires my market participation during the entire period that a signal is in effect, but it does seem appropriate to trade only on the side of the signal until it is reversed. Said another way, I see no reason to go short now that the index has given a buy signal, but I also see no reason to require that we be 100% long. Yesterday there was a net change of two indicators from positive to negative. This was not enough to stop the advance of the Summary Index to 4.8, above our 4.5 buy level. The indicators are now positioned at 11 negative, 15 neutral and 3 positive. If there are no further changes either upside or downside, the index will continue to rise to 7.25 by the 11th of March and it will then turn down! If that happens, we will have a repeat of the "double dip" that occurred in July of last year. While it will not constitute a sell signal, we could see declining prices until the index turns up again. This is why I am waiting before adding to our long position at this time. The next chart shows the "double-dip" clearly. The enlarged chart of the Summary Index reveals the breakout and stop loss levels in terms of the S&P 500. If we can rally above the most recent high at 851.17, I'll add to the Discretionary Technical Portfolio's position in the S&P 500 (SPY). And, when we get above the breakout level of 865, I'll add some more. On the other hand, a close below 817 will be met with an equity reduction until the Summary Index -- which will surely have dropped below 4.5 again then -- reemerges. Take a look at the discussion of the July 2002 buy signal in the discussion of the Summary Index by clicking here -- in it you will learn a strategy suggested for a similar situation.
The S&P 500 Price/Volume Chart canceled its "continuation buy loop" when it retreated below the line just crossed the day before. Since the loop was not confirmed, it was therefore voided. The best we can hope for today is a drop in volume that will start us in the clockwise direction. Certainly an increase in volume with falling prices will create a bearish counterclockwise loop. There is no reason to buy unless the S&P moves up.
The NASDAQ Price/Volume Chart never completed a loop in the recent volatile days, but it has been moving in a counterclockwise (bearish) direction for all of February. True it has moved to the upside, but it has been counterclockwise all the while. Here too, there is no reason for additional investment until it at least moves higher.
The most dramatic of all is the chart of the NASDAQ 100 tracking stock (QQQQ), which I show here using the actual trading volume of the 100 stocks included in the index, against the price of the QQQQ's. The counterclockwise "continuation buy loop" stopped millimeters away from completion and then sharply reversed its field. If volume increases to the downside, a large counterclockwise sell loop will result. Again, there is no reason to increase long positions until the NASDAQ 100 turns up again.
The Dow Price/Volume Chart mimicked the S&P 500, but on lower, rather than higher volume. Once again, the best hope for the rally is for a couple of days of low volume.
The Smart Money Indicator (dark green) added 61 points to reach another all time new high as the result of a bigger decline at the opening than the decline in the afternoon. Certainly little comfort, especially since the Volume-Enhanced Version was not fooled. It did not advance, and certainly it did not reiterate the upside activity that characterized the last two market bottoms. Here again, there is no reason to suggest that further increases in long positions should be made until there is a marked improvement in price action.
One bright spot in an otherwise bleak landscape was the sharp decline in the CBOE Put/Call Ratio, which dropped to 0.63 and caused the 21-day moving average to remain unchanged at 0.93. When the 10-day ratio turns down, the indicator will move to positive.
Another ray of light was produced by the relatively small decline of the up volume as a percent of the up volume plus the down volume. It fell only to -81%, illustrating that there was some resistance to the decline. The percent of points lost was similarly restrained, in spite of a very steep decline in the indices.
The S&P 500 Boomerang Indicator continued to mimic its behavior of last summer, by turning down just as the Summary Index produced a buy signal. If this parallelism continues, it becomes more and more likely that a double dip by the index is in the cards. If that turns out to be the case, the way to play it is clearly to delay entry until there are positive price signs to accompany the positive direction of the index.
Fred Goodman, CFP, is a fee-only Certified Financial Planner based in Los Angeles. You can send him your questions and comments via e-mail at Fred@MarketMonograph.com. E-mail sent to Fred may be edited for clarity and brevity and published on this web site, and may include your name unless you request anonymity or specify not for publication. The charts and commentary represent what Fred thinks about the market and what he is 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 may make trades in securities mentioned in these commentaries. There is no guarantee that you will profit from trading as discussed herein. You may lose money and Fred assumes 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. All rights reserved.Fred@MarketMonograph.com 
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