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SPECIAL REPORTS: TECHNICAL EXCELLENCE
A premature upturn in the Summary Index occurs during a sell signal -- when the Index has risen above 17 and then fallen back through that level. A full-fledged buy signal will be triggered when the Index falls below 4.5, and then turns up and emerges above the 4.5 level. But when the Index turns up before first going below 4.5, that's a premature upturn. The table below sums up the returns in the S&P 500 subsequent to each premature upturn by the Summary Index. The second column provides the low in the Summary Index from which the premature upturn begins. The next column lists the subsequent high in the Summary Index where it reverses and heads down again. The three S&P 500 entries represent the price at which one could have bought following the upturn, the subsequent high, and the price at which one could have sold or sold short after the Summary Index turned down again. Finally, the last two columns record the S&P 500 advance from the premature upturn by the Summary Index to the next high, and the return from buying the S&P 500 after the Summary Index turned up, and selling it when it turned down again. While there were 4 times out of 13 when gains between 2.6 and 5.2% would have resulted, there were 5 times when there would have been losses of that magnitude. All in all, the average result from the trades was essentially zero (-0.4%). Hardly worth the effort. However, it is interesting to note that the two biggest upmoves to highs occurred after the premature upturns closest to 4.5. After the June 1999 reversal at 4.72 there was a 7.6% move to a high, and after the February 2002 premature upturn from 4.65, the high was 6.6% higher. Another decent gain, 5.7%, followed the February 1999 premature upturn from 5.37. Here is the other side of the coin. After a Summary Index buy signal, there is an occasional premature downturn in the SI. Should you sell your long positions and go short? Well, according to the table below, that is an even less productive strategy than reversing field after a premature upturn. The average S&P decline after a premature downturn in the SI was 0.9% and the average return from trying to short the S&P and reversing when the SI turned back up again resulted in an average loss of 4.0%.
Bottom line: If you choose to play a premature upturn, make sure the Summary Index falls below 5.5 before turning up. Having said all this, the final decision as to whether or not one should reduce or eliminate short positions when the Summary Index turns up after a sell signal, rests with the trader. It will depend a lot upon one's risk tolerance and trading methods. For the Technical Trading Model Portfolio, by its automatic rules, no changes will be made if the Index turns up unless it first drops below 4.5. For the Discretionary Technical Portfolio we may adjust our positions, based on market action following a premature upturn, should one occur. What we do will depend a lot on the establishment of a new high by the S&P 500, on the Price/Volume Charts and on how low the Summary Index falls before turning up. 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. 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. 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. 
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