Judy, I wanted to respond to your excellent question in the best way I know how. The p&f sector classifications give the investor an idea of the RISK associated with an investment in a particular sector. Chartcraft is fond of saying when a sector reverses up to Bull Alert status that the reversal is "good for a trading move to the upside or better". As Tom has said, a Bull Alert market doesn't mean you can rush out and buy stocks with abandon and throw darts at stocks in the sector. Stocks with strong RS are the best candidates for purchase on the reversal. The risk of loss in a stock in a Bull Alert sector and market is diminished, however, there's still risk. An eventual move to a Bull Confirmed market would give the investor greater certainty about the underlying strength of the sector, but as always, each stock must be watched on an individual basis.
Now, another point that I alluded to in my previous post is another name given to the classification of sectors that reverse down from Bull Alert status. These groups are also classified as "Bear Market Bottom". This classification falls outside the 6 major classifications Tom writes about in his book. Classically speaking, these groups are now referred to as Bear Confirmed once again, however, as you'll read in this repost of something I wrote yesterday, Bear Market Bottom might be more apt. Dr. Carroll Aby has written a fantastic book on p&f charting that was revised in 1996. Chartcraft had major influence in the writing and concepts discussed in the book and Dr Aby, like Tom, advances the art of p&f charting with his thoughts and techniques. I wrote the following on the Motley Fool Oil & Gas board. I was attempting to explain what a reversal from Bull Alert to Bear Market Bottom meant for the sector, however, I believe it will serve to further your understanding of the meaning of this "behind the curve" classification change:
>>>Tomorrow, the Broad Industry Group Bullish %'s are published by Chartcraft, the company that I get most of my point & figure charts and data from. I can say with pretty good certainty that the sector will reverse the necessary 6% from 34% to 28% at least. Yesterday alone, the group was down 5.880%, almost enough to reverse it down from yesterday's action alone. This reversal will be classified as a "Bear Market Bottom". Here's what Dr. Carroll Aby wrote about this reversal in his wonderful 1996 book "Point & Figure Charting: The Complete Guide" (my notes will be in parenthesis):
"If two or more columns of O's (Falling number of stocks in a group with bullish p&f charts) dip below 30% after rallies from less than 10% (The current oil service sector rally started at 8%, fitting this criteria perfectly. This reversal, however, would be the first since this rally began), 20%, or 30%, the bottoming process simply requires more time to complete. Multiple downturns below 30% following a Bull Alert market advance provide reassurance that little downside risk remains and suggest that investors accumulate long positions and call options. Consider buying longer call options during a bear market bottom when the industry bullish % shows multiple columns of O's moving from above 30% to below 30%. Bear market bottom patterns suggest that additional
time may be needed before a sustained advance materializes".....
I believe what's happening with the oil serivce and oil sector stocks is that everything is being drawn out much longer than anyone would hope or like, however, I believe a bottom is being put in. Selling Climaxes occurred in the early summer and the stocks were slow to react to these not so classic examples of selling climaxes. Some stocks in the sector had more than one SC. Many of the stocks then moved from bottom fishing patterns (long tail downs and low poles) to initial double top buy signals and some triple tops. Now, most have given sell signals and are at or slightly below their new long term support lines that were drawn in below their August bottoms after their buy signals. Though volume is not really a consideration to p&f chartist's, I'm told by a very good source that this retracement in the oil service stocks is occurring on declining volume which I'm told is quite
bullish.<<<
I hope this was of help and I'm sorry for rambling......
Your pal,
Bruce |
