Tuesday, November 23, 2010

Another confirmation of a major stock market top continuing the "irrational complacency" bust

For those who believe (hope) the advance/decline line paints a less bearish picture as has been

reported by some investment newsletters and advisors, note that the following indicator, which

even includes the bullish distortion of some 2,000 non-common stock issues traded on the NYSE

(since they are portfolio combinations of already counted common stocks and bond funds) and

incorporates both the number of traded issues and their share trading volume (in the lower two

chart panels above), shows strong negative, or bearish, divergence with the NYSE Composite,

(it’s not readily available for the S&P 500).  See the parallel down-sloping red dashed lines. 

The indicator is essentially a ratio of three ratios, where the numerator ratio is a 10-day moving

average of NYSE down volume divided by a 10-day moving average of up volume.  The first

denominator ratio is 10-day moving average of advancing stocks divided by declining stocks. 

The second denominator ratio is a 10-day moving average of advancing share volume divided

by a 10-day moving average of declining share volume.  The ratio of the two denominators are

also known as the TRIN or ARMS index.

Notice the huge negative divergence (upper versus lower red dashed lines) between the

S&P 500 (SPX) and one of the most important stock market timing indicators, which is an

effective timing indicator over several time horizons: advancing-decline share volume. 

The SPX is an excellent proxy for more than 5,000 exchange-traded common stocks). 

This negative divergence has now confirmed the recently failed double top “breakout” above

SPX 1220 (Apr 26) to 1227 (Nov 5), widely heralded by unsophisticated investors, but over

whelmingly-challenged by corporate insiders’ net selling to the extent of making an all-time

record stock market sell signal, especially in the market-leading technology sector! 

Advancing-declining volume also completes a near-perfect, and virtually unnoticed, H&S

pattern formed over the past 13 months whose downside-volatility target, using our Growth

Cycle Trend Projector (described at the bottom), is a return to the previous low at SPX 667.

If dollar volume rather than share volume is considered, the results are even more bearishly

divergent because the share volume of low-priced stocks, such as extremely actively traded

Citigroup (at only about $4), creates bullish distortions.

                             Growth Cycle Trend Projector

Our GCTP is a set of algorithms taking advantage of we call the statistical science of small,

including extremely small, dataset inference.  We have developed it is an extremely important

subset of the well-known statistical science of large numbers to reconcile, or project the most

likely outcome of, all possible technical price patterns and for logical decision-making with

very limited data, particularly with only one through five data points

The logic tests used in the development of the GCTP’s set of algorithms include: consistency

with classical technical price chart analysis, including many improvements thereof; devolution

of our idealized Growth Cycle, which corrects for what we call the Fibonacci Approximation

of Elliott Wave Theory; combinatorial mathematics and singularity calculus; and even the

Efficient Market Hypothesis, especially the semi-weak case thereof.

                                        GCTP Allows Trend Anticipation

One of the great advantages of our GCTP is that – before the next turning point - it suggests

whether the next trend (n the opposite direction) will be bigger or smaller than the current one. 

That is, even before the current trend, or swing, is finished, you can continuously query GCTP

to see if it indicates the next retracement move will more likely be only partial or more, perhaps

much than 100% of the magnitude of the current trend, in addition to consequently providing

a rough gauge of its likely duration.

                     Partial Positioning in Rebalancing and Reallocations

We use this advance projection aspect of GCTP in combination with our forecasting models

to assess the importance of the end of the current trend and start of the follow-on countertrend

– over all time horizons ranging from hours and days to decades and Supercycle Periods. 

Such assessments allow us to determine both the optimal number of partial positions, and

the timing of each one –scaling in and out - in periodic rebalancing for realizing (taking) profits,

as well as in establishing and closing out of the individual investments in portfolio (re)allocations.

GCTP will soon be available on an individual-use basis.

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