To Tim and All... From Elder's email:
Date sent: Mon, 14 Dec 1998 13:43:16 -0500
To: info@elder.com
From: info@elder.com (Elder - Info)
Subject: Books & Trades #6 - Bearish Stock Market; New Software
BOOKS & TRADES #6
Monday, December 14, 1998
A periodic bulletin from Dr Alexander Elder
Director, Financial Trading Inc
info@elder.com
www.elder.com
Dear Client,
Today, I want to talk to you about the current state of the stock market.
A highly unusual sequence of events has taken place last week, giving a strong sell signal. On Tuesday, some of the market indicators have poked their heads up to their record high levels, giving the appearance of strength. Then on Thursday, in a hugely important turnaround, the New High-New Low Index (NH-NL) turned negative, showing that the leadership of the market has shifted from bulls to bears!
When NH-NL turns down after the market has gone down 200-300 points, that is normal. For the index to turn bearish when the market is right near its peak is a sign of great weakness.
If you have read my book TRADING FOR A LIVING, you know that I consider the New High-New Low Index the best leading indicator of the stock market (pages 194 - 200). The New Highs represent the leaders in strength and the New Lows the leaders in weakness. If you plot this indicator on your charts (easy to do with my Windows on WallStreet software, requiring just a few minutes of programming the first time you do it), you'll see that all major reversals of the stock market are preceded by reversals of New High - New Low Index. I consider NH-NL the single best leading indicator of the stock market. The fact that it has turned negative just a few days after a new high in several stock market gauges indicates that the recent rally was a fake-out, and those tend to precede vicious declines. I see a downside target of between ten and twenty percent from the peak, as a minimum.
Let us take a look at another favorite indicator - weekly ACD-Histogram. If you are using technical analysis software, plot a weekly chart of any stock market index, such as S&P500 or DJIA, and you'll see a sell signal as of last Friday. The best weekly technical indicator is in full agreement with New High - New Low Index. The sell signals are on!
What is an investor or trader to do? If you have any holdings that you do not wish to sell, make sure you have stops in place - protect your capital as well as the bulk of your gains. If you are comfortable with trading the short side, look into buying OEX puts, or specific stock puts, or selling short - short either the S&P500 in the futures markets or individual stocks. For your information, I have already taken my own advice.
Remember, markets represent crowd psychology on action, and the mood of the crowd changes very fast. Remember the happy complacency in August? Remember the despair at the October lows? Remember the incredulity of the rally in November? I believe that a new major reversal is upon us and the crowd is about to be surprised once again, becoming frightened but running for the exits too late in the game. Please reread the advice in the paragraph above.
If you would like to deepen your analysis of the market, I suggest you
look into two new software packages from Windows on Wallstreet - INTERNET TRADER PRO 7 and DAY-TRADER 7. I liked Windows on Wallstreet Professional 5 - but this is two generations ahead, just as their names suggests! You can read my description of both programs below.
Best wishes for successful trading,
Dr Alexander Elder
Director, Financial Trading Inc
info@elder.com
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