Market Timing Pro

Rally Confirmation

February 1, 2008

Today’s stock market rally has resulted in a bullish confirmation for several of the major indexes. This is a remarkable change since Wednesday’s one-half point rate cut by the Fed, and subsequent sell off by the financial markets, when things were looking quite bleak.

But on Thursday morning, after a triple digit decline by the Dow in the first minutes, the market reversed, made a steady advance on higher volume, and erased the losses, closing with a solid gain.

The Nasdaq 100 Index – NDX had a bullish trend continuation day while the Nasdaq Composite Index – COMPQ and the S&P 500 Index – SPX both had solid reversals.

So far bear market status, widely considered to be a 20% loss from prior rally highs, has not been reached by the biggest indexes. Only the Nasdaq 100 Index (NDX) and Russell 2000 Index (RUT) have reached official bear territory with a 20% loss.

Does this mean the worst is over? For the short term at least, we should see continued gains. For the long term, the jury remains out. Do not lose sight of the reason for the declines. Fed Chief Bernanke has lost credibility; by moving too slowly to reduce interest rates while ample evidence of a looming recession were appearing.

The charts show supports were broken that reflect data back to year 2003 and to the bear market before. This means we may yet have another wave down before the bottom is reached.

There may be a rally here. It may even last awhile and ease the fears of market participants. But that last wave down, Wave 5 for Elliott Wave enthusiasts, could still be ahead!

How High Can Streettracks Gold Shares (NYSE: GLD) Go?

January 31, 2008

Shares of Streettracks Gold Shares (NYSE: GLD) are again in rally mode after a short correction in mid-January.

Gold Shares have already pushed above most long-term resistance levels, so there is really no limit on how high they might go. But gold is volatile to the extreme. There are likely to be substantial corrections along the way and no one knows just when this rally will end.

So keep a trailing stop as shares rise, and be prepared to exit if it is hit. Right now the logical stop is at just below the last correction lows or at about $85 a share.

If you trade this ETF, be sure to keep a stop in place, as gold and gold stocks are the ultimate of volatile commodities.

The Fibtimer.com (http://www.fibtimer.com) ETF Timing Strategy may have a position in Streettracks Gold.

Electronic Arts Inc (NASDAQ: ERTS) Continues To Fall

January 30, 2008

Shares of Electronic Arts Inc (NASDAQ: ERTS) bounced along with the rest of the stock market on Wednesday and Thursday of last week. But after that two-day rally, shares of this widely traded stock rolled over and fell, while most stocks continued higher.

Electronic Arts has declined below last week’s two-day bounce and on Tuesday, January 29 th, closed below the lows of last Wednesday. In fact, shares are only just above critical support at $44.66 that, if surpassed in coming days, would likely result in continued declines to the 2006 lows at $40.00 a share.

Now is not a time to take bullish trades on this stock. A strong reversal from the $40.00 level could be a setup for a solid long trade, but the stock is not there yet.

Starbucks Corp (NASDAQ: SBUX) Stuck At The Bottom

January 29, 2008

Shares of Starbucks Corp (NASDAQ: SBUX) hit new correction lows last week at $18.00 a share. They have since rebounded a bit and closed Monday, January 28 th, at $19.66 a share.

Remember that Starbucks was at $40.00 before the decline in shares started back in 2006. It will take a gain of over 100% just to get back to those highs.

Having now lost over 50% of its share value, is the bottom in? We would not bet on it. Considering that $18.00 held on two attempts to cross below, if Starbucks does break that low, it would likely decline much further. That would be a good point for a short sale and a good buy stop after the trade is in place.

On the bullish side, Starbucks needs to close above $22.00 a share to break out of its downtrend. That is where we would consider long trades, with a stop of course.

Fibtimer.com (http://www.fibtimer.com) currently has a position in Starbucks Corp in its Stock Timing Strategy.

The Basics On Fibonacci Ratios & Elliott Wave Theory

This report takes a look at the basics of using Fibonacci ratios and Elliott Wave theory.
Fibonacci ratios and Elliott Waves help us look ahead and be prepared for what the financial markets will do over the coming weeks and months.

What are Fibonacci Ratios?

Leonardo Fibonacci was a 13th century accountant who worked for the royal families of Italy. In 1242 he published a paper entitled "liber abaci." The basis of the work came from a two-year study of the pyramids at Gizeh.

Fibonacci found that the dimensions of the pyramid were almost exactly the same as the golden mean or (.618).

Fibonacci is most famous for his Fibonacci Summation Series which enabled the Old World in the 13th century to switch from Arabic numbering (XXIV=24), to the arithmetic numbering (24), that we use today. For his work in mathematics, Fibonacci was awarded the equivalent of today's Nobel Prize.

Fibonacci Summation Series

The Fibonacci Summation Series takes 0 and adds 1. Succeeding numbers in the series adds the previous two numbers and thus we have 0, 1, 1, 2, 3, 5, 8, 13, 21, 34, 55, 89 to infinity. At the eighth series, by dividing 55 by 89, you have the golden mean: .618. If you divide 89 by 55 you have 1.618.

Do you see the pattern? 1+1=2, 1+2=3, 2+3=5, 3+5=8, 5+8=13.....

These ratios, and several others derived from them, appear in nature everywhere, and in the financial markets they often indicate levels at which strong resistance and support will be found. They are easily seen in nature (seashell spirals, flower petals, structure of tree branches, etc.), art, geometry, architecture and music.

"...Whether you see this as cosmic or coincidence makes little difference. It happens and tens of thousands of traders make decisions based on Fibonacci ratios, thus amplifying the results."

Why are they important to the financial markets? Because the markets tend to reverse right at levels that coincide with the Fibonacci ratios. Whether you see this as cosmic or coincidence makes little difference. It happens and tens of thousands of traders make decisions based on Fibonacci ratios, thus amplifying the results.

For example, if the Nasdaq rallies 100 points and then corrects, it will often correct 61.8%. Right at, or close to the 61.8% retracement (you have heard us use this term many, many times) the Nasdaq is likely to reverse and start advancing again. Of course it is not this simple. Fibonacci support and resistance levels can fail. There are other Fibonacci levels which may turn the markets (78.6%, 127.2%, 161.8%, etc.). But the fact that it does happen is what is called a trader's "edge."

A trader has an edge when he knows the probabilities of a particular action are greater than normal. Trading strategies are built around this information, or multiple similar probabilities.

Elliot Wave Patterns

Elliot Wave Patterns, in short, are usually a three or five wave series of advances, or declines, that define a trend. They are the result of crowd psychology, and thus are usually more reliable when found in broader based indices, such as the S&P 500 Index, Nasdaq Composite Index, etc.

Typically, if the S&P 500 Index moves higher in a 5 wave pattern, and then falls below the top of wave 3, it signals the start of a retracement that normally consists of 3 waves.

In a bear market it works the other way. A five wave pattern defining a declining trend, which is then reversed by a 3 wave rally, which eventually reverses and another five wave pattern begins to the downside.

Finding a wave pattern that completes at a strong Fibonacci support or resistance level can be a very reliable indicator of a change in trend.

By having an Elliott Wave pattern complete right "at" a Fibonacci support or resistance level, you in essence have increased the probabilities of being correct.

Trading Patterns

Because the markets often move in 5 wave and 3 wave patterns, and the turning points that create these patterns are often at Fibonacci support and resistance levels (61.8, 161.8, etc), you can expect that eventually, a way would be found to use them to forecast the future direction of the financial markets.

There are several trading patterns used by advanced traders, including day traders, which take advantage of the combined strength of Elliott Waves and Fibonacci retracements.

"...There is more to it than just knowing the patterns, including risk management and money management, without which the patterns are more likely to cause headaches than profits."

These patterns commonly repeat in stock and index charts and traders who use them are called "pattern traders."

Although pattern recognition is a potent tool in trading, we suggest that no one try using them without thorough training in pattern trading. There is more to it than just knowing the patterns, including risk management and money management, without which the patterns are more likely to cause headaches than profits.

An excellent book on such patterns is, "Profitable Patterns for Stock Trading" by Larry Pesavento. Larry is an authority on trading patterns, and I studied with him at his home in Arizona some years ago.

How We Use Them

At FibTimer, we use Elliott Wave Theory and Fibonacci support and resistance levels to map out where we think the financial markets are headed.

Recognizing that these tools are NOT always right, we use them to prepare for what is to come, but not for actual trading decisions. It is always good to have a feel for what the markets will do so that we are ready emotionally for the trading decisions ahead.

Although both Fibonacci support and resistance levels and Elliott Wave theory are good tools, they fail too many times to be used for market timing. Many would disagree with this statement, but our research shows that over the years they will give accurate forecasts only about 50% of the time.

They are great when looking at previous chart data, but because there are so many variables, they are not as accurate looking forward. Good... Useful... But not good enough for us.

All trading signals at FibTimer are generated by non-emotional and non-discretionary trend indicators. Our trend indicators catch "every" trend and when a trend fails, they quickly tell us to reverse so any losses are very small. Much better for "profitable" market timing as our market timing trade history pages show.

There is no way to separate emotions from market analysis. If a strategy offers variables that need to be interpreted, emotions will sway those interpretations. It is human nature and cannot be avoided.

This is why FibTimer follows non-discretionary trend following indicators... so that emotions cannot sway any buy or sell decision.

Bear Market Status Avoided... For Now

January 25, 2008

At the correction “closing” lows, reached on Wednesday January 23, the S&P 500 Index (SPX) had locked in a 15.9% loss. The Dow Jones Industrials (DJIA) had a 15.5% loss and the Nasdaq Composite Index (COMPQ) had a 19.8% loss.

So far bear market status, widely considered to be a 20% loss from prior rally highs, has not been reached by the biggest indexes.

Only the Nasdaq 100 Index (NDX) and Russell 2000 Index (RUT) have reached official bear territory with a 20% loss.

Does this mean the worst is over? Is it all bright skies and warm breezes ahead?

Do not lose sight of the reason for the declines. Fed Chief Bernanke has lost credibility, by moving too slowly to reduce interest rates while ample evidence of a looming recession were appearing.

Also the bad news, the anticipation of which sent prices tumbling, has still to occur. What will happen to the market when month after month we see deteriorating economic reports and poor corporate earnings? The sub-prime crisis may be far from over too.

Yes, the market looks nine months ahead. That is very true. But those nine months have not even started yet. Do not expect the market to stage a sustainable advance with so much potentially bad news still to arrive.

The charts show supports were broken that reflect data back to year 2003 and to the bear market before. This means we may yet have, at the least, another wave down before the bottom is reached.

There may be a rally here. It may even last awhile and ease the fears of market participants. But that last wave down, Wave 5 for Elliott Wave enthusiasts, could be a doozy!

Bottom In For S&P 500 SPDRs (AMEX: SPY) And Q’s (NASDAQ: QQQQ)?

January 24, 2008

On Wednesday January 23, 2008, after midday losses again decimated U.S. stocks, the S&P 500 SPDRs (AMEX: SPY) rebounded some 5.5% from intra-day lows and closed with a 3% gain for the day. The Powershare QQQs (NASDAQ: QQQQ) also rebounded from midday losses with a 5.8% gain above its intra-day lows. But the Q’s did not manage to close with a gain for the day.

What’s the deal? After reaching selling extremes, is a bottom in for stock market declines?

Looking at the S&P 500 Index (SPX) for guidance, we had intra-day lows exceeding those of the day before, and intra-day highs exceeding those of the day before. The SPX closed at those highs. This is a bullish outside reversal day, and a strong one at that.

Typically bullish outside reversal days are followed by higher highs. The expectation is that we will see a rally, at least for the short term.

But remember that the stock market has been correcting in expectation of bad economic news. There is a long way to go, and considerably more news ahead, along with likely poor earnings reports. The rally today does not mean the sky has stopped falling, only that the sun is peaking through the clouds and there is a strong expectation of some upside ahead. The clouds however, remain.

When making trading decisions based on an outside reversal, it is called trading reversals. Sometimes you win, but sometimes the reversal lasts only long enough to suck you into feeling warm and cozy. The markets then remove your funds in short order. If you do not understand how to spot the exit signs after trading a reversal, avoid trading and wait for a confirmed advance.

If you trade this reversal, keep your finger on the sell button and do not hesitate to exit on weakness. There may yet be lower lows ahead.

The Fibtimer.com (http://www.fibtimer.com) ETF Timing Strategy may have positions in the S&P 500 SPDRs and Powershare QQQs.

S&P 500 SPDRs (AMEX: SPY) Trade Below Critical Support

January 23, 2008

Shares of the S&P 500 SPDRs (AMEX: SPY) have declined steadily since Fed Chief Bernanke last spoke in mid-December. Now he has attempted to repair the damage.

After world markets suffered major declines on Monday January 22, a holiday for U.S. markets, the markets were poised for 4 to 5 percent losses at the open on Tuesday. But the Fed announced a three-quarter percent rate cut before the open and the potential (mini) crash did not occur.

Bernanke may have saved the day, but the jury is still out for the future. The SPDRs dove below $129.91 shortly after the open on Tuesday, which is the Fib 78.6% retracement level. They did not stay there and by the close, the SPDRs had recovered and were just a fraction above this support.

It is important to note, this is a critical support level for the SPDRs and is based on the entire advance since the July 2006 lows. If this level is surpassed over coming weeks, we will be looking for a test of those 2006 lows at about SPY 122.00.

The selling may have ended for Tuesday, but beware the coming weeks as investors try to decide if the bottom is in, or if further declines still lie ahead.

The Fibtimer.com (http://www.fibtimer.com) ETF Timing Strategy has a position in the S&P 500 SPDRs.

The Case For Market Timing Diversification

Definition: "Diversification" - a portfolio strategy designed to reduce exposure to risk by combining a variety of investments which are unlikely to all move in the same direction.

Many Market Timers Pay Little Attention

As we have written before, "market timing is the following of a long term strategy to profit from the financial markets, that also protects us from the inevitable down trends that occur."

Many investors who understand the potential of market timing, pay little attention to the potential of diversification. Many jump right into an aggressive timing strategy with little thought about how they will handle a period of losing signals.

But there is a way to jump right in, and also realize the long term potential of even the most aggressive strategies. It does require a bit more work, but not all that much. Just a few minutes a day to check for changes and make adjustments.

Aggressive Market Timers Can Benefit

Many market timers already follow well defined investment plans that include diversification. But as we just discussed above, some do not.

If you are one of those who do not... consider changing. Diversification is not only for those who are afraid of volatility. It has an important place in even the most aggressive of portfolios.

We have been market timing since the early 1980s and although we are quite aggressive, we diversify our timing funds, not just for safety, but also to "enhance" our profit potential.

"During a bull market, you will be fully invested most of the time, except in those few industry sectors that are not doing well."

Those who follow our Aggressive Bull & Bear Pro Timer strategy will make a great deal of profit over long time frames. Because the markets tend to trend most of the time and the aggressive strategies will catch all trends in "both" directions.

But non-trending markets can be quite frustrating and aggressive market timers, in our experience, become frustrated more quickly than most.

Aggressive timers.... try this strategy: Use the Aggressive Bull & Bear Pro Timer strategy for 20% of your timing portfolio. Use the Sector Fund Strategy for 50%. Divide the rest between Bond Timing, Small Cap Timing and Dollar Timing strategies.

Although the sector funds go to cash on sell signals, these industry specific funds are big winners when they trend. Often they will trend much further, by 100% to 200%, than the rest of the market.

When the bear growls, you will have 20-50% of your portfolio profiting on the short side, or in cash, plus those sector funds that are profitable even during a bear market (there are always some).

You will make money, but have only a small percentage of your timing portfolio at risk.

During a bull market, you will be fully invested most of the time, except in those few industry sectors that are not doing well.

Diversified portfolios have a dramatic effect in controlling volatility and drawdowns. Yet can be extremely profitable over time. The best of all worlds.

Even Conservative Market Timers Can Benefit

Those conservative market timers who are willing to devote at least a little extra time, can enhance their profits by adding the Sector Timer strategy as a percentage of their timing portfolio.

Being conservative does not mean you cannot be active. Using the Long term Timer strategy will always do well over the years because it is designed for long trending markets, and makes changes infrequently.

"Each market timer will have his or her own style. Even a very basic plan can be made more stable with diversification."

But if you used it as a base for your timing portfolio, say for 50% to 60% of it, you can easily be more active with the other 40% to 50%, and still be well within the guidelines of "conservative" investing.

Again we suggest using the Sector timer. In this case "because" it goes to cash during sell signals, and because it follows a diversified strategy of its own (multiple positions are always used), it can add considerably to your profit potential (sectors tend to trend longer and higher during bull markets).

Each His Own Style

Diversification can obviously be quite varied. Each market timer will have his or her own style. Even a very basic plan can be made more stable with diversification.

For example, if your core timing account follows the Long Term Timer strategy with 70% of its funds, allocating 15% for the aggressive Pro Timer strategy, 10% for the Bond Timer strategy and 5% for the Gold Timer strategy will cover most bases, and yet still offer an additional level of safety.

Conclusion

Consider at least some diversification for your market timing funds.

We mention the Sector Timer in several the diversification scenarios above. This is because it is "already" well diversified (at least eight sectors should be used), yet has the tremendous profit potential inherent in industry specific funds (sector funds usually trend farther, percentage wise, than the general market).

Diversification can dramatically help control volatility and drawdowns.

Diversification, when properly applied to your portfolio, will actually enhance your profit potential over time.

Market Losses Faith In Fed

January 18, 2008

The S&P 500 Index (SPX) has now declined 18.2% from its all time highs back in October, and 9.9% of this decline has occurred in 2008, in only 12 trading days.

The usual security of knowing the Fed stands ready to pump in reserves and lower rates does not appear to be supporting the markets this time.

Fed Chief Bernanke may have lost credibility, by moving too slowly over the past months, as ample evidence of a looming recession was growing. After last month’s Federal Reserve Open Market Committee meeting he gave no assurances to the markets that there would be continued easing ahead, as needed, even after calls asking for such assurances.

Now, finally, he is vocally promising a substantial response at the upcoming Fed meeting. Does this mean he missed the boat and is now behind the curve? Will aggressive rate cuts accomplish anything other than to raise inflationary pressures?

The jury is out, but the market’s verdict came in today with the Dow’s 307 point decline after Bernanke testified the economy needs help fast. Investors have lost faith.