>>> Some think this cycle is difference and will run much longer and other think this cycle is the same and will end soon. My question is that what objective indicator do you use to make this call? <<<
If your indicator is fundamental, you will lose profits.
Fundamentals may get you into a trend very early, too early for those of us who rely on technical indicators, but fundamentals will get you out too late.
The market looks forward and sectors always pull back before the fundamentals are known to change.
If one were to stop and think for a moment, those who rely on fundamental analysis for price entry, look for reasons that may inspire buying from others. If we were to be honest, those who use FA to enter a stock will tell you their problem isn't the entry, it's the exit. The peak always comes when the fundamentals look great because the market looks forward. Fundamentals don't provide a basis for exiting a position that is reliable and consistent. It's also subjective. We normally don't find out that the fundamentals have changed until there has been a steep price correction.
If fundamentals are used to try and determine why people will buy in the future, why not just follow the money? Wouldn't it make sense that if money flows are strong, price will rise? If we see money flows growing progressively negative, wouldn't it make sense that price will fall?
Let's use the chart of the OIH to gauge the oil service sector.
When the price broke out to new highs the first of February, we saw an inflow of money stream. As money poured into the sector, prices took off to the upside. Money flow readings went from minus 10 around the third week of January to plus 25 the first week of March. Anything over plus 10 is heavy buying and anything below minus 10 is heavy selling.
stockcharts.com[h,a]daclyiay[d20041025,20050228][pb50!b20!f][vc60][iut!Lc20]&pref=G
Price is rising and money flows are confirming. All is well.
Now, let's take the chart up to date.
At no time in the previous chart did we see the price fall below the 20 day moving average. This was a strong Stage 2 uptrend. Now all of a sudden, the pull backs are falling below major support levels, levels that held during the strong Stage 2 uptrend. Not only has price fallen below the 20 day moving average but, every attempt to rise above it over the last 2 weeks has failed. This would indicate that we are now in a Stage 3 consolidation. Stage 3 is where one should be off margin and locking some of their profits in. Stage 3 is still good for holding the remaining positions but dosen't offer a very good reward to risk ratio for adding new positions. Adding may be successful but the risk is higher.
The money flow patterns have gone from plus 25, very, very bullish, to minus 19, very bearish. When you have negative money flow readings like we have now, the better reward to risk ratio is to sell into rallies and even short. (I've been shorting the last few days.)
The price has now come down to a line in the sand support level, the 50 day moving average. We may see a bounce here but I'm not sure how long it will last. In looking at the volume bars, the down days see a lot more selling than the up days see buying. I think it's clear from the volume that institutions are selling. Maybe it's end of quarter stuff, maybe not. In any event, if the price closes 2-3% below the 50 day moving average, the chart is telling you in advance that something has changed fundamentally. We just may not know what it is yet.
stockcharts.com[h,a]daclyiay[d20041225,20050324][pb50!b20!f][vc60][iut!Lc20]&pref=G
Now, in fairness to the longs, who are looking longer term, we are still in an uptrend. The price is well above the 20 week moving average and money flows are still strong over a longer term view.
stockcharts.com[h,a]waclyiay[d20040125,20050324][pb40!b20!f][vc60][iut!Lc20]&pref=G
Although I'm not predicting future price movement, the 20 week moving average has been a strong level of support with price bouncing higher every time it has come down to that level over the last 6 or 7 months. If it drops below the 20 week moving average, and you haven't left Dodge by then, don't expect to come out alive. Any profits gained during this recent Stage 2 uptrend will be lost.
So, to answer your question, the objective indicator I use to determine if a top is in is if price falls below levels of support, confirmed by negative money flows. It don't get no more objective than that, in my opinion.
dabum |
