11-20-12 Morning Comments

[Mike]

Today is day 4 in a possible market advance. We look for follow-through days on day 4 or later. We ignore days 1-3 because short covering masks true institutional buying intent. A move up of 1.25% on volume higher than the day before on the S&P, NYA or NASDAQ would signify a confirmed market rally. One of the contributions of the MarketSchool market exposure model is more certainty than the past as to how much index gain constitutes a significant move up. IBD has used 1% in old times but after 2000 has used any number between 1.2% and 2%. MarketSchool back testing has settled on 1.25% after an optimization study for the use of internal O'Neil portfolio managers, 1.25% is used for dates after 1/1/2000. IBD may still vary the threshold for the newspaper as they feel underlying volatility suggests. MarketSchool will reduce the threshold for low volatility periods to as low as 0.7%. Volatility in this context is the average percent gain of all up days in a 200-day lookback period.

I have conducted a study of external paramaters surrounding a follow-through day that tend to indicate more probability of a tradable rally ensuing from the FTD. The three paramaters that stood out are a coincident (±4 weeks) weekly Coppock buy signal, coincident (± 2 weeks) Eureka signal and an IBD 6000 index %E between 7.4% and 16%.

We had a Eureka on Monday. Eureka is defined as NYSE up-issues/down-issues > 2.98 and NYSE up-volume/down-volume > 5.4 and the ratio of the above (TRIN or Richard Arms Index) < 0.63. This level of market internals signify institutional activity on the long side.

IBD 6000 index contains all stocks in IBD's database trading above $5. %E means the perecent of stocks showing heavy distribution in that index. I have found that small %E represents too much investor complacency and probably too little money on the sidelines to drive a significant advance. %E is 11.5% this morning, in the sweet spot.

The weekly Coppock buy signal (google Coppock curve and see article on Wikipedia) is defined as the curve first going negative and then turning up by 1 point or more. The 1 point is used to keep fakeouts to a minimum. The Coppock on the NASDAQ and the DOW have entered negative territory and may or may not be in the zone to signal a buy signal in the next 4 weeks. It depends on what the market does.

We are entering perhaps a bullish time of the calendar. My intermediate term opinion is that this could create a tradable rally to the end of year. This would probably establish a right shoulder of a head and shoulders top in the market probably ushering in a new bear market next year. This is opinion of course but when I trade I determine what the market or stock is probably doing and act accordingly until the price and volume proves a new view is necessary. Thus when in a Market Rally I ignore all short term indicators until the evidence builds that the rally is finally over. When the market appears to be topping I don't fall in love with the upside for a long term advance. Of course I enter tradable rallies and if the market proves me wrong by breaking out, I go with the flow.

[mnoel]

Thank you very much Mike!