I often write about secondary indicators when watching the market and posted a chart to my MSW community members last week highlighting a pattern for the number of stocks trading above their 50-day moving averages on the S&P 500. This chart shows how the market may be ready to roll over as it did in April of 2006. See my original blog entry on this possibility back in November 2006 named:
Secondary Indicators telling Stories
This is what I said in November when writing about the possibility of a market reversal:
“The number of stocks trading above their 50-d moving average in the chart titled $SPXA50R is flirting around the extended area of 80 for the first time since November and December of last year. The lesson we can learn here is the fact that the market didn’t roll over until May of 2006 which means that this secondary indicator is a warning of what may come in the future. I can say this with confidence because the indicator also bottomed a full month in advance of the NASDAQ bottom in July but predicted the move perfectly. Again, this is only a secondary indicator but we are now one month removed from the first peak above the 80% level which could be the start of the warning bells and red flags that the up-trend is winding down. The last topping warning took almost five months to materialize so keep that in mind.”
The last breakdown took slightly longer than four months to materialize according to this secondary indictor. Well, the current pattern is now in the fourth month. Is this coincidence? I don’t know but many secondary indicators have been lining up, calling for a possible reversal.
After writing my general market update thread on Monday which stemmed from my in-depth analysis for MSW members over the weekend, I decided to write this on the MSW Daily Screen Monday night after performing my research (2/26/07):
“I am only listing ticker symbols with brief analysis tonight because the market is looking weak. I ran multiple fundamental scans that turned up about 170 stocks but after doing technical analysis, I could barely come up with ten ideal stocks. Take this as another signal that the market may be near a top. I will stress once again that the trend is still higher but some minor flags are starting to creep into my research. This will be an interesting week to watch as I look to close another existing position now that it has hit its target and scan for new opportunities. I will not hesitate to short stocks in the portfolio if a trend reversal becomes obvious.”
Talk about multiple clues from my basic system of research. Now I just hope that most of my members took advantage of the information I have been writing over the past several trading days. We can’t do anything about yesterday as I was also caught on the long side of a couple positions but I did sell out of a position Friday and on Monday in real time in the MSW Portfolio. I send a real-time text message to all MSW members when I buy and sell into the portfolio. I saved the portfolio $4,000 in profits from my sales on Friday and Monday (GRMN and SLW). I still managed to give back several thousand dollars yesterday but the damage was much less because I was already getting sell signals going back to last week.
I finished my daily screen on Monday night with these words:
“I have been closing positions as they meet targets because the market is extended when viewing historical terms. I want my profits now before the market can get a chance to drop heavily one of these days. Don’t let this talk scare you because the overall trend is still higher and I will not hesitate to buy high quality stocks such as a PTR after the strength today.”
I am patting myself on the back because experience and nothing else made me sell and I am extremely happy. I am finally listening to my research, system and rules and not my gut and it is paying off!
Chris,
Great analysis. I’ve been smelling a correction since last year as well. I’ll have to take the data and crunch the neural net through it again.