MomentumCycles

Momentum Cycles Update:

All the indicators that we have, other than the put/call ratio, are in the position to support a rally. It may be possible that traders who are anticipating the Santa Claus rally have loaded up on calls. The best way to play this is to wait for a close above the triple switch, seen below, or above the yellow moving trend line on the CODI chart, accompanied by a day with extremely positive breadth. A breakdown below 7556 projects 7400, and below that the October lows. Click here to hear our frequency analysis for the entire 1997 year. Event risk is very large presently because of the situation in South Korea, which is apparently bankrupt. Japan may possibly be in a similar situation, although their economy is at this point somewhat stronger, or perhaps they are more able to disguise their problems. A close below 14000 in Japan would be bearish. Normally event risk is not something traders should pay too much attention to because often by the time the news is out, it has already been discounted. However, the bankruptcy of South Korea and the possible bankruptcy of Japan transcends the normal definition of event risk.

Breadth:

McOsc issue and volume oscillators edged higher in shortened trading day with very light volume. NYA advances and declines were pretty much in balance keeping a check on price advances or declines. CODI has made another anticipatory buy pivots. Now if breadth will turn positive next week and the OEX closes above its yellow adaptive trendline, then just maybe the indications from the Volatility section below will be the direction to trade.

Volatility:

All three of the implied volatility related indicators are hinting towards the long side next week. The Zone Timer made a buy pivot in Zone 1 which prefers the long call position. The Z score also pivoted downward near its zone 2 with the green line crossing below the redline inferring that closing fear is less than average fear and thus more confidence on the long side. MVIs have pivoted upward again hinting at rally attempts. OEX P/C ratio for Friday is 0.843, still bearish.

RSI, SMI:

XAU appears to be running into resistance. Yields are near a potential breakout. SPX looks oversold on the RSI chart.

Fib Zones:

NDX OEX TYX XAU

Special Interest:

Canmine Resources exchange was not open today.

The Swing Machine is provided courtesy of C. Lee and is an experimental statistical tool that is presented as an alternative way of looking at potential moves in an index. It might become a useful tool in the future, but for right now it is just under evaluation. The current swing chart is based on DJIA data back to 1900. Price moves and swing retracements were selected that had the highest frequency of occurrance.

Pivot Zone:

Monday's Pivot Zones are shifted marginally higher implying another attempt at basing and possibly the beginnings of a rally. Today's price movement saw the OEX rise to R1A and fall back to the Keyline where it made another halfhearted try to rise and finally closed near Monday's Keyline.

Momentum Cycles Update for Tuesday, December 30, 1997:

The international banking community gave a wakeup call to a Santa who overslept this year from an overdose of fermented Korean kimchee.The real fallout from the pricking of the Asian bubble may come after it's time to print up all those billions{trillions?} neccessary to bail out those loans.The Santa rally didn't start exactly on December 23rd as forecast here 3 weeks ago, but in terms of OEX points, we called it within 4 OEX points of the second bottom.The action after the 23rd was a retest of the 7563.23 tick low.{As we said, less risk near 7600 than 7800.}At this point ,the retest was apparently successful.The market is at the second major inflection point of 453 OEX,which we projected as important resistance on the weekend Mcosc chart.Traders who have learned to read our nightly pivot charts KNEW the market would test 453 after the previous R level was exceeded.A close above 453 leaves 456 ,then 473 as the next important numbers.Hesitation at the 21 day moving average might also be expected.

The market has recently been in the habit of staging Friday-Monday one-day-wonder rallies that end with an end-of-week hangover.Continued positive breadth this week would restore a lot of confidence.We are also right at the edge of the downchannel in place since the December 5-8 highs.A violation of the channel would bring in trend followers.

Strangely, during the last week, there wasn't a lot of negative volume, and positive volume is right on the edge of violating its downchannel.The 3 week oscillators have turned up from levels that are often identified with bottoms{see this link} and 5 day breadth and volume are in position to turn up with one more day like Monday.The option premium ratio's last reading was .52, a level most often associated with positive market action.The last readings were .43,.39,.43,.52.The option premium ratio often leads the market up and down, and the reading of .43 occurred on the last 32 point Dow drop.So while the Dow was still dropping, the premium was already rising.

In conclusion, continued upward price movement and good breadth tommorrow or Wednesday will hopefully give the bulls enough energy to get through resistance at 453OEX, and violate the December downchannel.

Breadth:

Tally HO! Hopefully we will get more than a one day year end rally. NYA breadth looked strong enough to carry through. If price can break resistance on the McOsc chart and Fib charts below, then we could have a decent New Years eve party. Flow Rate Net finally saw an entire day above zero along with its shorter term cousin, TICK. Advances over 1200, declines below 1200 and Flow Rate Net positive all day were stated here as requirements for a day like today. You will note a new Probability Cone addition to the OEX price plot on the McOsc chart. Cone #3 is based on 21 days of closing prices. It reflects the +1, -1 standard deviation probability expectations looking into the future. It could be used for decision making when trading options. In some knowledgeable circles a one standard deviation move is the maximum expected excursion in one day. CODI below its red trendline and the OEX closed above its yellow trendline reinforcing the CODI buy pivot on Friday.

Volatility:

Z Timer pivoted on Friday one day ahead of the gonzo move. The Fearless Z Score also was in agreement on Friday. The levels their buy pivots occurred at were a clue to the strength of the move. Pivots in the far out zones have further to go and can last longer, i.e. they are the lower risk trades. MVIs have been oversold for some time with a triple tag in place on the -2 band. %b gave a buy signal today. RSI oscillator on the MVI chart is holding back one more day by closing just below the zero line.

Of Special Interest:

If I were a speculator, ho, ho, I would say that Canmine Resources may have seen its last trade at 1.35c. Let's give it two more days before such a bold statement. The artificial intelligence engine gives CMR a 98 up rating as the price phase indicator ticked upward today. Remember we have been banking stock below 1.5c on improved fundamental expectations in 1998. This is an investment, not a quick trade. See http://www.canmine.com for current updates from the company management.

RSI, SMI:

Both RSI and SMI for XAU, TYX, and SPX are at important inflection points, and their charts should be monitored daily at this site. Investors are still trying to decide how to allocate their money between the three asset classes.

Fib Zones:

NDXTYX OEXDJI SPX

Pivot Update:

Pivot zones are shifted upward for Tuesday 12/30/97. Indexes closed above their Tuesday Keylines reflecting the "strong" post holiday and pre-end of year market. Since the market was pretty flat after the early gains were made it suggests a lot of churning at resistance levels between R2 and R3 pivot levels. Best guess for Tuesday would be a slight retracement towards the respective Keylines and then more rally attempts. DJIOEX SPX

Momentum Cycles Update:

Wednesday 10.25 a.m. update:

Concerning the long OEX position taken at the lows last week or early this week, partial profits should be taken on a 50% move. We had that yesterday and almost a 100% move from Friday, so half should have already been taken off. The market still could pull up later today. One way to look at it is to ask are the options over priced? For example if the 455 was purchased at 11 and they were 20 yesterday, you have to ask yourself will they be 475 by Jan 16? If the answer is no, then sell them all.We still feel the probability is good for several more days of up action,but wise traders always have an exit strategy.

Traders who entered long OEX positions either on the CODI buy alert last week or the Zscore or Ztimer signals on December 26 {or even December 29!}may be able to pay their entire holiday credit card charges soon if this rally continues.Click here to see the results of a representative option position taken over the last several days.

The option premium ratio gave another set of rally continuation signals with Monday's closing reading of .53.Longer term cumulative volume and breadth measures turned up today from downtrends.These measures are slower to react to price movement,and imply therefore more upside to come.The DJIA closed today exactly at the 21 day moving average, which was discussed yesterday.Rallies from the lower 3.5% band sometimes oscillate short term around the moving average before heading to the upper 3.5% band.This rally has had the help of oversold readings, Santa Claus, New Years, monthly reinvestment money, and short covering.

Breadth:

Tuesday had another strong day with price and NYA breadth. McOsc issue and volume are both now above the neutral zone having decisively crossed the zero line generating a classic buy signal for institutions. OEX firmly penetrated and closed above the 453 resistance level and NYA closed above long term resistance 509. Flow Rate Net was again positive all day as the money reservoir continues to pour into equities. TICK had a firm Tuesday afternoon.

Volatility:

MVI regular parked at the zero line on Tuesday's close. A pause on Wednesday would be fully justified but seasonality is against it. MVI could go another 2 standard deviations before pulling back in any meaningful way. Z Timer and Z score have moved out of the most opportune zones for call buying and ended the day in the neutral zone. This location is sort of like the vertical position of a pendulum with inertia that does not reverse until it reaches the end of its swing at higher price levels. OEX and CBOE Total Equity Put Call ratios continue to drop to levels seen at various times during the triple top formed since last summer.

RSI, SMI:

Gold stocks bounced off the 50% line in the XAU RSI chart keeping the XAU rally alive. Gold was given a promotion on TV today by a mutual fund analyst and a metals analyst. The fund analyst forecasts gold one hundred dollars higher by December 1998. The metals analyst sees it plus or minus fifty dollars near term and higher longer term due to fundamental and psychological perceptions of its value.Where were they at XAU 63?

Fibonacci Zones:

All charts are looking strong in daily trends, and weekly trends will be challenged this week and next if the price advances continue.Traders should read the comments every day on these charts because the end of the year and the start of the next is often when longer term investors make decisions about asset allocation.We try to track money flow currently in transition between bonds, precious metals stocks, and equities. XAU TYX DJI OEX SPX

Canmine Resources:

Price continues to inch higher as the end of the year approaches. Price phase is looking up as are the breadth measures.Remember, the Binco drilling this January north of the present Thompson belt is the lottery ticket on this stock.Pricing presently does not include the possibility of a major discovery there.

Pivot Update:

The pivots for Wednesday are shifted up another notch after the OEX and SPX tagged their R4 levels prior to the close. The DJIA was stalled at R2A Classical pivot most of Tuesday. Sometimes an index will prefer the classical pivots one day and then the statistical pivots are the ones to rule the next day. Sometimes the Keyline will play a part on weak openings and on strong days like today the indexes will jump to the first resistance level. It is on days like today that the anticipatory indicators like CODI and Z Timer get you in ahead of the moves. The question always remains what do you do if you missed the takeoff move. Bull moves do not give late comers a chance to get on during pullbacks as the pullbacks, if they even occur, are short in time and price. The best times to enter are at the extremes of CODI and Z Timer. As of Tuesday close both are half way through their potential moves and risk of being long is higher than it was three trading days ago. CODI is in the indeterminate region where whipsaws will drive a trader crazy and the Z Timer is in neutral, albeit with zone crossings to the upside.

To quote from the Wednesday,December 31, 10.25 a.m. update:

"Concerning the long OEX position taken at the lows last week or early this week, partial profits should be taken on a 50% move. We had that yesterday and almost a 100% move from Friday, so half should have already been taken off. The market still could pull up later today. One way to look at it is to ask are the options over priced? For example if the 455 was purchased at 11 and they were 20 yesterday, you have to ask yourself will they be 475 by Jan 16? If the answer is no, then sell them all.We still feel the probability is good for several more days of up action,but wise traders always have an exit strategy."

Momentum Cycles Update for Friday,January 2,1998.:

Traders sold 1/2 their OEX long call position on the Wednesday early a.m. update.Since most traders entered on Friday December26, or at the latest on the open on Monday, December 29, they have a double on their initial investment.Taking half off the table at that point was simply good money management.We had noted that there would be some oscillation around the 21 day DJIA moving average, which is what we got.Also, we saw CODI entering the sell zone Wednesday, and some hesitation at the previously posted resistance levels at DJIA 7956.Traders had an a.m. exit point, and an early afternoon exit point as well,at these levels.

Early January has some of the crosscurrents seen in December.Floor traders will tell you this time of year is often difficult to trade.Accountants will often advise their clients to postpone wanted 1997 selling until January 2,1998 since taxes on these gains will not have to be paid until April 15,1999.Traders often rebalance their asset allocations near the beginning of the year,and those who use the Dow"dogs" method will be selling their gainers and buying the losers.In addition,monthly,quarterly, and yearly reinvestment money will seek new homes at the start of the year.

Seasonally, after the monthly money flow ends, there is often a selloff in January.From the position of our CODI chart, which has entered the high risk for longs area,our best guess at this point for weakness would be January 7 to January 9 close. We will monitor the indicators daily as usual to try to time risk as accurately as possible.

Please continue, as previously advised, to check back during the day if intraday updates are made.We post them in red if an addition is made from the previous p.m.Remember, the market at these levels is showing increasing intraday volatility.Moves that would in previous years take a week are compressed into hours.This tendency will increase.We will eventually get ,in our lifetimes, entire bull and bear moves within a single day.The more traders that have live feed, the faster the markets will get.

1998 will see an increase in volatility.In Chinese, the character for crisis is the same as opportunity. With 3 traders at OEXTRADER you get 3 thinkers for the price of one.We hope to make next year's crises your opportunity!

Breadth:

NYA advance decline breadth narrowed somewhat on Wednesday producing an apparent topping in the McOsc issue volume oscillators. OEX index formed a "terminal" candlestick. CODI continued to drop into the Sell Alert zone. Flow rate showed some last minute selling in the waning hours of 1997. Even the CBOE Total Equity Put/Call ratio is giving a contrary sell alert at 0.455. Now lets not get too excited or overconcerned just yet about these indicators. It was stated a few updates back that the UC payroll indicator would be kicking in a few days late because of tax accounting requirements that the January 1 retirement and payroll checks be credited on January 2. This indicator has a high correlation between the deposit date and when end of month rallies start. Additionally we have a holiday effect in force. The prudent course of action here is to do nothing until the beginning of month seasonality is further developed. The expectations are for some "DOW 5" stock reallocations by DOW Trust funds in the first few trading days of the new year. Payroll monies should kick in giving a further boost to equities, perhaps we will get a quadruple top in equities before we are set up for a put trade in the next week or two.

Volatility:

One day of rest on the MVIs does not violate the trend. In fact it is healthy to have a pause to digest the gains of the previous two days. Z Timer went flat in the neutral zone also. It just might make a secondary buy pivot on Friday or Monday and head up to higher zones. A little closing fear was reflected in the Z Score by the closing Z(green) crossing below the red fear reference line. What it is saying is that there was more concern about market direction going into the close than there was throughout the day. It is just something to be aware of since the Z score and Timer are anticipatory by a day sometimes. Also the -1, -2 levels on the Z score have witnessed market reversals. If breadth does not improve next week then the outlook will be adjusted accordingly. The ten day and 100 day volatility cones on the McOsc chart are almost congruent up until the January expiration. The expectation here is that prices will be contained within these cones until then.

The new year brings a new insight. Attached is a quick study of the ODDS Probability cones by Don Fishback as implemented in MetaStock 6.5. Below the OEX chart is a Projection Band oscillator by Mel Widner. Briefly reviewing the concepts and thesis of volatility and price forecasting we need to look at historical volatility derived from price behavior over a specified period of time in the past and implied volatility derived from options that expire in the future. We also need to select a price range expectation defined as %Probablity generally measured as 1 or 2 standard deviations, 68% and 90%. In beginning this simple experiment the question arose as to which provided a more correct view of the future pertaining to price behavior, i.e. "does the past foretell the future or does the implied volatility of the options foretell the future?" The first set of cones was laid out using the blue and red cones which both have the same 68.269% probability, statistically meaning that 68.269% of future prices would be contained within the cones. The blue cones have a 22 day lookback period for determining volatiltiy and the red VIX cones have a 22 day look forward implied volatility derived from OEX options pricing. Clearly the VIX cones came closer to containing prices within a +1,-1 Standard Deviation. Two questions arose from this first study. One, is the look back period for historical volatility in error, and or if the lookback period is correct, then what probability would be needed to make the cones coincident. The ODDS MetaStock cone indicator permits a quick study of the lookback period by clicking and dragging a stem from the apex of the cone backward in time. As the stem is lengthened or shortened the cone's "mouth" widdens and narrows as historical prices vary with the time period selected. Ranging from 1 day to a hundred days would not bring the historical cones at 68% probability into coincidence with the VIX cones at the same probability. So the Historical cone lookback was left at 22 days and its % probability was varied to find the coincidence. In all cases a lookback of 22 days with a % Probability of 90% produced a cone that was coincident with the VIX cone at 68% probability. Is that orgasmic or what? Maybe only a statistician's mother can appreciate this. Going another step further with the mathematical crystal ball, the Widner Projection Band Oscillator(PBO) was inserted below the cone plot to attempt some directional analysis. To quote from page 480 of the MetaStock 6.5 manual, "The Projection Oscillator is basically a slope-adjusted Stochastic. Where the Stochastic Oscillator shows the relationship of the current price to its minimum and maximum prices over a recent time period, the Projection Oscillator shows the same thing, but the minimum and maximum prices are adjusted up/down by the slope of the price's regression line. This adjustment makes the Projection Oscillator more responsive to short-term price moves than an equi-period Stochastic." In keeping with the same historical and implied periods of 22 days, the same period was selected for the PBO. Overbought/oversold levels can be used as well as 50% line crossings for signal generation. As of the low on 12/26 prices are climbing the VIX 22day/68% cone and the HIST 22day/90% cone. The PBO has crossed above the 50% line and is reaching for the arbitrary overbought 80% line. Even the PBO will saturate as the standard stochastic does when price is trending. It appears that there is price time probability potential for higher prices ahead.

RSI, SMI:

Have you taken a look at the prices of where the blue chip gold stocks are selling? It is a real shocker if you haven't taken a look for a few years. Prices at these levels are an invitation to allocate 5 to 10% of your portfolio for a core holding that is not traded until the XAU blows off in an eyeopening rally. Gold and gold stocks are not known to trend very well. Rather they have long periods of being "cold" and then they run very hot for a brief period in which you cash in. You could simply buy the stock of Barrick Gold or Homestake and sit on them next year. Other alternatives are Franco and Euro Nevada that have royalty participation in many mining properties. Both trade on the Toronto exchange as FN and EN respectively. Onward to yields and equity indexes. Yields are pushing on that 6% level again and US blue chip equities are trying to keep the bull alive. RSI and SMI charts are slow to change.

Fibonacci Zones:

See respective charts for commentary. INDU, NDX, OEX, SPX, TYX, XAU.

Stocks of interest:

Another close at $1.5c for CMR is making the chart look much better. The formerly divergent indicators may become convergent in a rising price trend.

Stat Pivots:

The Classical and Stat Pivots present a very interesting picture. Note that the Classical pivots have narrowed their range between R2A and S2A and have tightened up about the Keyline. On the other hand, the Stat Pivots have stepped higher again forecasting higher prices ahead for the indexes even though Wednesday's closing prices were near Friday's Keyline. DJI OEX SPX