Know when to Hold em - Are You Listening?

by Greg Miller
July 16/05

Opening Whisper

Don't fold 'em now. Hold them cards until you see the bull blink. As I said last week, when we saw the markets hold steady and rally after the London bombings of July 7, the support bottom was in and that was our clue that the markets would surprise the bears and go into rally mode. This week I have received several emails claiming that the top was in and that our buy signal was totally incorrect. Here we are, 3% higher on the Nasdaq 100 and with a system gain of approximately 6% for the week. And the biased sentiment of the contrarians just gets more bearish as the markets go up. The beauty of our trend timing system is that it profits based on market moves, not market opinions.

Of course, all good things must come to and end, but the S&P 500 may just be starting its breakout summer rally. Thursday's high of SPX at 1233 took out the March 7 high of 1229 and is a 4 year high. The bears will claim this is either a double top or some other arcane form of wave terminal bifurcation point. For the bulls, they are telling us that this is just a starting point from which the markets move higher as the bears cover their shorts. Technical buying will now move into stocks from bonds and also from the hoards of cash sitting on the sidelines. Volume has not been heavy. We may see volume increase in coming days as the bulls buy everything in sight and the bears sell everything they can to them. Market forces are positioning for a significant struggle as we get some big tech earnings next week.

Medium-term technical indicators are turning positive. We are in a quadrant 2 market moving quickly into quadrant 3 where we will see the MACD histogram continue to lengthen and eventually peak out. The Nasdaq Composite and Nasdaq-100 50 day moving averages are now above their 200 day moving averages signaling a buy signal for technology and the broader markets. Software Holders (SWH), Semiconductor Holders (SMH), and other technology has relative strength and is higher. The Retail Sales index ($RLX) has moved higher. In general, there seems to be room to move higher on most indexes before we get an inevitable rollover.

The sentiment indicators VIX and CBOE Put/Call ratio are at very low levels. We are in full-blown greed mode. But for how long? The lows on the VIX are not necessarily indicative that a top is in the market. Past assessment of new VIX lows seems to indicate that we must wait for the VIX moving averages to turn up before downward momentum begins in earnest. Picking tops based on VIX lows can be a losing game. The VIX can go lower!

Another thought; Perhaps we are seeing an early "year-end" rally. If this is true, then this might not bode well for stocks in the September-December time frame. Will we have a bad hurricane season? Does that portend a colder winter and higher oil prices? Wait and listen.

Our Trading System - What The Numbers Are Telling Us

This week's trend system chart has been expanded to include a CCI(12) indicator and we have shortened the parameter in the MACD Histogram to (12, 26, 8) to give us a little better indication of the "turn" at the top. These parameters are too fast if we are in a new bull market, but the high SPX/VIX ratio tells us that we are closer to a top than a bottom. This justifies our using shorter-term and faster indicators to lock in our profit when the top is in and get us to move quickly to the short side.

Our BUY signal is still in place and is likely good for another week. We need to hold our cards and place our bets on the long side. Our charts and recent good economic news will support our bullish approach for another week or two. However, we will watch the CCI closely and when it and StochRSI begin to turn down, we will take some chips off of the table. The name of the game is to RETAIN PROFITS.

NDX - Expanded 6 Month Chart Model - Friday July 15, 2005

What Is The Current Sentiment?

The Nasdaq Composite ($Compq) has been stronger recently relative to the Nasdaq 100 ($NDX). But that is changing as the NDX is catching up and had a better week than the Composite. This week both the Comp and NDX 100 moved upward relative to the S&P 500. This relative strength in the technology issues supports our buy signal.

3 year Weekly NDX / SPX Relative Strength Ratio

Weekly 2 year VIX Volatility Index

This VIX chart above must be worrying the bulls. We have made new VIX lows. And, of course, the SPX/VIX ratio is at new highs at 118. We have never been greedier. We need to watch the VIX. We must to remain at these levels or lower to sustain the current rally.

Sentiment appears to be strongly in the bullish greed direction. It would be a mistake here to try and predict a top based on a low VIX and CBOE P/C ratio. Economic data has been good. For now, the economic picture is fairly clear even if it is not wildly positive. That clarity is good for stocks. This could change as we get into earnings season. Oil seems to be stabilizing. If we get another significant rally next week, there could be lots of follow-on buying to support stock prices.

The following chart is the Bullish Percent Index on the Nasdaq Composite. We have broken the October levels and appear to be breaking out into new bullishness.

1 Year Bullish Percent Index on Nasdaq Composite

Where Do We Go From Here and How To Listen For the Next Signal?

Our subscribers were informed to hold to the buy signal before the close on Friday. We will remain in buy signal mode until the market tells us that we are wrong. When we know we are wrong, we must go to cash quickly. We have raised our stop to the low of this last week (NDX = 1535). Exit to cash on a daily close of NDX below 1535.

Market Listener Trend Timing Summary

Current Signal: 100% BUY (Bought RYVYX Rydex Velocity 100)
Subscribers were advised by email to BUY RYVYX before the close on Friday July 8.

Conservative Investors: You may want to decrease your RYVYX holdings and move partially to cash as we see more gains on the NDX.

Fault Tolerant Cash Safety Stop (FTCSS): Raise the Cash STOP to 1535 on NDX. Exit the long RYVYX position and go to the safety of cash on a daily close of the NDX below 1535. This stop is the low for the week of July 11. Any NDX weakness which breaks below that point could accelerate downward. We will raise stops if the rally continues.

An email will be sent to subscribers if there is a mid-week update.

The Market has a new trend direction. Are you listening and following?

The Market Listener Indicators
(YTD Gain/Loss with RYVYX & RYVNX approx. +23.9% as of July 15 Close)

Week Ending	Slo. Stoch. (fast)	StochRSI (fast)	ROC (fast)	MACD (slow)	ML Signal¹
July 15, 2005	Buy	Buy	Sell	Buy	Buy
July 8, 2005	Sell	Sell	Buy	Buy	Buy
June 24, 2005	Sell	Sell	Sell	Buy-	Cash
June 17, 2005	Buy	Buy	Buy	Buy	Buy
June 10, 2005	Buy	Sell	Buy	Buy	Buy
June 03, 2005	Buy	Buy	Buy	Buy	Buy
May 27, 2005	Buy	Buy	Buy	Sell++	Buy
May 20, 2005	Buy	Buy	Buy	Sell++	Buy
May 13, 2005	Buy	Buy	Buy	Sell++	Buy
May 06, 2005	Buy	Buy	Buy	Sell+	CASH
Apr 29, 2005	Sell	Sell	Sell	Sell	Sell
Apr 22, 2005	Sell	Sell	Sell	Sell	Sell
Apr 15, 2005	Sell	Sell	Sell	Sell	Sell
Apr 08, 2005	Sell	Sell+	Sell	Sell	Sell
Apr 01, 2005	Sell	Sell	Sell	Sell	Sell
Mar 24, 2005	Sell	Sell	Sell	Sell	Sell
Mar 18, 2005	Sell	Sell	Sell	Sell	Sell
Mar 11, 2005	Sell	Sell	Sell	Sell	Sell
Mar 04, 2005	Sell	Sell	Sell+	Sell	Sell
Feb 25, 2005	Sell	Sell	Sell	Sell	Sell
Feb 18, 2005	Sell	Sell	Sell	Sell	Sell
Feb 11, 2005	Sell	Sell	Sell	Sell	Sell
Feb 04, 2005	Sell	Cash	Sell	Sell	Cash
Jan 28, 2005	Sell	Sell	Sell	Sell	Sell
Jan 21, 2005	Sell	Sell	Sell	Buy-	Sell
Jan 14, 2005	Sell	Sell	Sell	Buy	Sell
Jan 07, 2005	Buy	Sell	Sell	Buy	Sell
Dec 31, 2004	Buy	Buy	Sell	Buy	Cash
Dec 23, 2004	Buy	Buy	Buy-	Buy	Buy
Dec 17, 2004	Buy	Buy	Buy	Buy	Buy
Dec 10, 2004	Buy	Buy	Buy	Buy	Buy
Dec 03, 2004	Buy	Buy	Buy	Buy	Buy
Nov 26, 2004	Buy	Buy	Buy-	Buy	Buy
Nov 19, 2004	Buy	Buy	Buy	Buy	Buy

¹ This Market Listener signal is our base signal. The MACD is our primary weekly input, but can be "out-voted" by the other faster indicators on a daily basis when we need to go to cash to implement our Cash Safety Stop (CSS). You should not base your trading on this or any other single indicator. With Rydex Dynamic funds, we can trade in the morning and 5 minutes prior to the close during the trading day/week when I see that one or more of the fast signal indicators have changed signals. This is particularly important if I am going to a CASH position in order to preserve capital. The above table shows the results of the end-of-week, WEEKLY SYSTEM MODEL SIGNALS.

Listen To What He Says

NAB Joshua 1:8,9 "This book of the law shall not depart from your mouth, but you shall meditate on it day and night, so that you may be careful to do according to all that is written in it; for then you will make your way prosperous, and then you will have success. Have I not commanded you? Be strong and courageous! Do not tremble or be dismayed, for the LORD your God is with you wherever you go."

I am working on the art of listening and hope that you are also.

Wishing you all the profit you can handle,

Gregory W. Miller, P.E.
The Market Listener
An Educational Newsletter For Stock Market Trend Timers

Subscribers receive mid-week alerts to market changes that impact our system. The alerts advise of changes in stops or signal changes prior to the Friday close of trading. If you have any questions, or would like to be added to my subscriber list (which is free for now), you can email me at subscribe@MarketListener.com. Just put "Subscribe" in the Subject block of your email and include your name in the body of the email.

The Market Listener Trading System - My trading system is the result of years of mistakes. I have reviewed lots of newsletters and gurus who have attempted to give their subscribers advance notice of coming market trends and cycles. For this and many other reasons, I always seem to be zigging when I should be zagging. After what has been literally years of research into cycles, Elliott Waves, and many other systems, I have learned that my own trading style is best handled by avoiding the "art" of prediction at all costs!!! When I looked at moving averages for indication of trend direction, it seemed that they too were always 180 degrees out of phase with what I should have done. My conclusion, after many losses and frustration, is that I needed to let the market tell me what it wanted to do. In particular, I wanted to follow the trend, which is your friend, until the market whispered, or shouted to me that it wanted to change directions. And then, I found that Stochastics and Rate of Change indicators help me go to cash until the trend reverses or continues. Thats how my trend following system & its cash management variable developed. I trade Rydex Venture and Velocity funds by which I can go short (x2) or long (x2) the NDX (Nasdaq 100 Index). I hope my newsletter and its insights can give you an education on alternative investment strategies. ??You might find your own technique or modify mine.

About the Author: Gregory Miller is a registered Professional Engineer (PE) in the State of Texas. He has been involved in electrical engineering and projects in the U.S. and some far-flung regions of the world. Greg has studied the markets for decades and enjoys applying his analytical abilities and computer number crunching to the science of investing. He is currently self-employed as an engineering consultant and forensic engineer. You can see more about his forensic work at http://www.forensicpe.com/.