Hi All,
I've had a few questions regarding the direction of the market and "how are we going to know" when it starts to turn. Someone also asked if Dorsey knew the rally was about to begin in January and if he knew the market was about to fall in October. The answer is yes. The other question is did he let everyone know, the answer is yes. But it isn't as simple as him coming out and saying "OK folks, starting today, we have a rally" or "starting today every thing is going to hell". So, how do we know? I'm gonna tell ya.
Now, for those of you who are actively learning P&F don't panic that you don't know this stuff yet. It seems cumbersome I know but you will get there. And don't worry. You have me and Tom who will let you know what is happening, kay? Here we go.
There are indicators that measure certain aspects of the market. You will find these in Toms book starting on page 109. They are charted just like any chart and have X's and O's, give buy and sell signals etc.
Some of them are:
-NYSE bullish percent (also know as the big coach. Measures how many stocks are on P&F buy or sell signals)
-Optional bullish percent (buy and sells on optional stocks)
-10 week moving average (short term indicator. Percentage of stocks trading above their 10 week average)
-Hi/low index (short term indicator used in conjunction with the 10 week.)
I'll explain in a minute how these move together.
Also, we have the sectors. Obviously, when a market is in a rally like now, most if not all are doing well and moving up. We also have the bell curve. This measures how many sectors are in what percentage between 0% oversold and 100% overbought.
The first indicator usually to give an indication would be the 10 week moving average. This is very volatile in nature so it reversing up or down in and of itself is not enough to cause alarm. We simply take note and move to the next indicator, the Hi/ Low index. The Hi/Low should move in tandem with the 10 week. If both indicators reverse up or down we start to look at the optional bullish percent. This indicator has almost religiously given a signal that will be duplicated by the NYSE bullish percent. If the 10 week and the Hi/Low and the optional reverse we can assume the NYSEBP will be next. And what the NYSEBP tells us is whether we are on offense or defense.
Now, the sectors. Sectors will usually start to peal off after they reach the oversold areas. Sectors actually may start to reverse before any of the indicators start to.
The bell-curve tells us how much risk we have in the market. Obviously if everything is skewed to the right above the 50% level, we have an overbought market. If it is down below 50%, we have an oversold market.
How do we put this all together. Let's take a look at where we are now.
All of the indicators are in a column of X's and getting stronger with the exception of the 10 week which came in a little lower but not a reversal. The hi/low actually moved up percentage points. Remember, we want to see these move together so we really aren't concerned.
The bell curve shows us we have an average of 57.5 percent and what we would consider a "normal" market. It is starting to skew to the right with only 13 sectors at or below 50%. That leaves 26 above the 50% level, while 7 above the 70% level.
Again, all other indicators are positive and moving upward.
The NYSEBP is above 60% almost to the 70% level. Optional bullish percent is at 66.9%.
We will continue to watch the sectors. If we start to see them weakening and reversing down this will cause us to raise an eyebrow and pay close attention. If the indicators start to go than we know we may be losing the football. Right now, everything is still moving up BUT, we are in overbought territory. Buy on pullbacks and make sure FA is in place.
How did we know we were going down in October or rallying in January? Actually, maybe I'll write up examples. It will take me a bit so be patient. I'll post this first.
I hope this gives some idea of what is involved. It is a big puzzle with many pieces. The Dow can move many points up or down and the indicators stay the same. This is why we don't act impulsively.
I'm off to do my examples...wheew writers cramp.
Jan I am
I hope this helps. Long post, sorry. |
