Author: Zeelotes

Subject: Re: Please Translate These Current Timing Indica

Date: 5/27/2009

Recommendations: 38

Steve wrote: Can anyone make any sense of this and tell me if they are long or short right now? Because I`m really not interested in being on the wrong side of a return trip back down to the March lows. Let me share my perspective on this... take it for what it`s worth. First Step: Bottom Finding Signals The first thing you look for as a market is tanking is a bottom finding signal. What we are looking for are historical extremes that have often marked major bottoms. 1. Market Tops/Bottoms -- this signal is based on divergences that are created in the 52 Week High/Low data. 2. Above Moving Average -- like the previous signal it is based on divergences and extremes in the index components that are typically seen at market bottoms. For example, from 10/6 to 10/20 there was a series of extremely bullish signals for #1. These were followed by another signal on 10/24 and then two more on 11/19 and 11/20. For the AMA there were a whole slew of signals from 10/6 to 11/21. For this year something similar happened. I saw the first signal in AMA on 2/23 followed by two more on 3/2 and 3/3, and a final one on 3/9. During a major market beating like we`ve seen in the last nine months, market bottoms produce multiple signals as illustrated above. In this environment it is best to be patient and wait for a strong consensus from multiple signals before pulling the trigger. It is also wise to set limit orders at prices 10-20% below the close price of one of the signal days... the level depends on the investment and its degree of leverage if it is an ETF. Second Step: Seek Confirmation from Lagging Indicator The NH-NL and Jim`s indicator fall into this category. When they fail to produce a signal within one month of the previous bottom signal it is time to begin to doubt that the bottom was any more than a bear market rally. Let me illustrate with a few examples. The signals in October and November were not confirmed by either indicator within one month. In fact, the only signal that has had a one month confirmation is the one from 3/9. The confirmation for NH-NL came on 3/25 -- 23 days later which fulfilled the one month requirement. Jim`s indicator provided further confirmation on 4/17. Both are still bullish. But how about farther back in history? In 2002 the Above Moving Average produced two Extremely Bullish signals on 10/7 and 10/9. The Market Tops / Bottoms produced a strong signal on 10/4 only. These signals were confirmed by the NH-NL on 10/30, while Jim`s indicator (my rendition, that is) provided further confirmation on 11/27. In this case, however, the NH-NL signalled to go back to defensive on 12/19. It was necessary then to wait for the next bottom signal. This bottom signal came on 3/11/2003 for the Market Tops/Bottoms. Nine days later on 3/20 confirmation came from the NH-NL indicator. Jim`s indicator remained bullish from the late November signal so it is ignored at this point. Another good example can be found in 2001. The Market Tops/Bottoms gave a signal on 9/20/2001, and confirmation came on 10/17/2001 -- just 27 days later. NH-NL went back to bearish on 2/22/2002. But the confirmation of the bottom was found within the requisite 30 days. In 1998 the same thing happened. The bottom indicator signalled a bottom on 10/7/1998 and confirmation came on 10/30 -- just 23 days later. Of course, what is just as important as confirmation, is the lack thereof. And when that happens it is time to go back to defensive. The point is this time around -- we see confirmation, not a lack of it, and that is bullish. Short-Term Indicators If your perspective is short-term, then it is possible to use overbought indicators such as the $BPNDX you mentioned. But it is important to keep in mind that they always produce false signals in the early stages of a bull market. Keep in mind that the most difficult problem for anyone who practices timing is the issue of remaining invested when the market is in bull mode. They`ll keep going to cash or defensive positions while they should remain bullish and long. This will destroy their previous profits during the bear market. This is why it is imperative that you keep the right perspective. The market is bullish about 67-70% of the time. Following short-term indicators can be profitable, but when the overall bias is bullish, as it is now, it takes special care. Most importantly, it is just not wise in my view to fight the overall bias. When the bear catchers were negative the overall bias was bearish and holding inverse ETFs or using shorts was fine, but doing this after the bias has switched to bullish is a recipe for disaster. The bias is now bullish so short-term indicators that produce signals can be followed but more to reduce exposure to highly risky, highly leveraged investments, rather than to actually go short or use inverse ETFs. When the NH-NL indicator (or another indicator that produces a bearish alert) changes the bias the potential for these will be back, but that is not the case now. The finance literature of late has a lot of people talking about a short-term peak. The more they talk about it, the more likely that it won`t happen. But if it does happen, there will be indicators to help in identifying the transition. Just don`t put too much credence in short-term overbought indicators and other TA indicators that tend to flash excessively after a major market bottom.