Notice to New Visitors: We test assumptions commonly made by market "gurus" to see if they are valid.  Below, we explain why we use the Dow rather than the S&P500 in our analysis, even though it consists of only 30 stocks.  Another example is that a lot of people who like to consider themselves expert traders, prefer to use exponential moving averages rather than simple moving averages.  That is part of the "popular wisdom" of the market.  Exponential moving averages also seem to be more sophisticated.  However, few have really tested the premise that exponential averages are better because they are more sensitive to the latest behavior.  It turns out that the very fact that they are more sensitive to recent price action can actually be detrimental.  Like nearly everything else that really works in the market, the truth of the matter is counter-intuitive.  We have rigorously tested the profitability of simple against exponential averages.  After conducting thousands of tests on thousands of stocks in large databases using every moving average from 3 days to 200 days, and testing them over decades of market behavior, we have proven to our satisfaction that the simple moving average is just as good if not better than the exponential moving average as a signal generator (in terms of bottom line profitability).  Any gain in sensitivity of an exponential average can often be more than compensated for by simply using a slightly shorter simple moving average.  Often the simple moving average allows more time for momentum to build in support of a signal before the signal is given, and that results in more significant (and more profitable) signals.  In other words, being faster on the trigger is not necessarily better.  Our studies confirmed the studies conducted by Merrill Lynch in 1978.  Those studies showed that simple moving averages were superior to exponential moving averages.

You may be wondering why we use the Dow as a signal generator in our "Market Review." Our statistical analysis of a variety of trading systems has convinced us that the Dow Jones Industrial Average gives better trading signals for "the market" than the S&P500. The signals appear to be encumbered with less "noise." Hence, they can be more precisely defined. When timing the market with no-load index funds, use of the Dow as the reference for our timing models gave us more profitable results than use of the S&P500. We do believe that the S&P500 better represents the market as a whole. However, if we were to "time" the S&P500 Index or an index fund based on the S&P500, we would prefer to use the Dow as our reference signal generator rather than the S&P500 Index itself.  Note: Contrary to what brokerage houses and mutual funds want you to believe (because they want you to leave your money in their funds rather than move it around), it is possible to profitably "time the market." The average investor is just too emotion-bound and undisciplined Tto do it correctly. (We do not offer timing services.)

The Following Charts Are Updated Daily 

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Commodity Channel Index (CCI )
Dow Jones Industrial

Traders often check the CCI to see if there is divergence between it and its underlying security.  They also use it to detect overbought and oversold conditions.  If the Dow is making new highs but the CCI is not, for example, then the Dow is likely to undergo a correction.  The CCI usually ranges between +100 and -100.  If it is above +100, the underlying security is considered to be overbought.  If it is below -100, the underlying security is considered to be oversold.  However, there is much more to the CCI than this.  The CCI is a powerful analytical tool.  For additional information on the CCI, see Tutorial 13.
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Volatility Measurements 

Both charts on the left are based on the S&P100 Index.  The upper chart is Chaiken’s Volatility Indicator.  It calculates the 10-day moving average of the difference between the high and low for each day and then computes the percent rate-of-change of that moving average over the last 10 days.  The premise is that a widening of the range between the daily high and low indicates an increase in volatility.  Some believe that market tops are associated with an increase in volatility (because investors are expressing nervousness due to their increasing internal conflict between fear and the desire for more gain).  Market lows are supposed to be associated with relatively low volatility because investors have been disappointed so often that they don’t expect much.  Mr. Chaiken looks at it differently.  He believes that if his volatility measurement indicates there has been a significant increase in volatility over a short time that a bottom is near (because it is a 10-day measurement, it is sensitive to a panic-like selling climax).  He also believes that a gradual decrease in volatility over a long time is what you should expect as a bull market ages and approaches a top.

The lower chart on the left is a Volatility Index.  We want to know if the price action is becoming increasingly "frenzied" or "calmer" within a larger historical context.  Here we begin our measurement by computing the standard deviation in closing prices over the last 20 days.  For a historical context we use the 100-day average of the 20-day standard deviation.  This enables us to see how the current 20-day standard deviation compares to its average over the last 100 days.  

The chart on the right is the VIX.  It is a measurement of "implied risk" and differs from the two measurements on the left in that it is not a direct measurement of price volatility.  The VIX is related to the demand for puts and calls and their prices.  Traders associate readings above 45 with investor fear.  At these levels, we tend to see capitulation selling.  People are giving up what remains of their positive attitudes about the market.  This is seen as positive because it often means the market is bottoming.  A reading of 30 is associated with high volatility (there is heightened fear and uncertainty in the market).  Readings in the range of 20 to 25 are usually associated with a casual nonchalance on the part of investors.  Readings below 20 tend to correspond to a lack of investor "enthusiasm" (the market may be nearing a top).  The broken blue line is the 50-day moving average of the VIX.  In general, the VIX tends to increase as the market declines and decrease when the market is rising.  Why?  When the market is rising, it is believed to be less risky but more risky if it is on the way down.  

 Four Investment Time Frames^. 

There is a saying in the market that "the trend is your friend."  The idea is that people should buy when the trend is up and sell short only when the trend is down.  In other words, it is foolish to buy when the trend is down or to sell short when the trend is up.  This is a generalization.  Traders can profitably take positions in either direction regardless of what the general trend of the market is.  However, in taking a position opposite to the general trend of the market, the trader must adjust his strategy to compensate for the increased risk.  He must also pick his stocks and entry points very carefully.  

With the charts below, we are attempting to illustrate whether the current trend is bullish or bearish within the context of four different time horizons.  The blue, purple, and green lines are simple trend indicators.  Here, we merely ask if the current trend of the market is up or down (bullish or bearish) short-term (blue line), intermediate-term (purple line) and long-term (green line).  The trends on the left are dotted to better show trend acceleration (dots spread apart) and deceleration (dots bunch together).  The right chart also shows the current trend, but from the perspective of the short-term trader.  For each investment time horizon, the question answered is a simple one.  Is the line rising or falling.  More conservative investors and traders will wait for the trend associated with their preferred investment time-horizon to be supportive of the positions they intend to take.         

The DJIA Stocks  
(Indicator charts are below the DJIA charts)

So you can get a quick impression of what's happening in the market and at the same time review the general patterns of some major stocks, here are "snapshots" of all the stocks in the Dow Jones Industrial Average.  [Note: The last change in the components of the DJIA took place on June 8, 2009.  General Motors (GM) and Citigroup  (C) were removed.  Cisco Systems (CSCO) and Travelers Cos (TRV) were added.]  The dark red line in each chart is the 50-day moving average.  Each chart covers about nine months.  To save space, no details are provided here other than the symbol (lower right corner) and the closing price (marked with a yellow highlight).  A review of the strongest ETFs should give additional information about where the pockets of strength are in the market.    

Market Review Indicator Charts

Traders and investors are advised to make frequent reference to the following explanations until the meanings of the charts are immediately apparent with only a glance.  At the beginning of the day, make it a regular practice to perform a market review by checking the status of each indicator.  At some times the charts evolve slowly.  Even when the charts are changing very slowly from one day to the next, however, the daily review will help "anchor" in your mind the market environment and the general context for your trading/investing decisions.  A daily review will also help you to become sensitive to evolving market "setups" and signals.  There are times when one or more charts will alert the careful observer to a significant change in the market that calls for a change in approach.  Also, the charts do not always evolve slowly.  The point we are making bears emphasis.  You should always develop your strategy for the day only after evaluating the general status of the market and the context it gives for any trading plans you may devise.  These charts are updated daily.  

 
Chart 1: This chart shows the pattern of change in the Interest Rate Spread over recent months.  The last reading is inserted in the scale on the right of the chart in blue.  When the spread between short-term rates and long-term rates is +1.3% to +2% (short-term lower than long-term), the economy is thought to be in for a normal growth rate in the vicinity of 2% to 3%.  If the difference is more than that, it is probably because the the Central Bank is making money more easily available and the economy will likely undergo accelerated growth.  When companies can get cheap money, they can more easily afford to invest in projects, facilities, and equipment that will expand business or improve operations.  If the interest rate spread is negative (short-term money more expensive than long-term money, then money is being made more difficult to obtain by the Central Banks (they are attempting to reduce the rate of inflation).  This will, of course, slow down the amount of capital investment made by companies.  Economic expansion will be mitigated.  If the spread is a negative 1.5% (or even more), then the probability is 70% that economic recession will occur within a year.  This information can be the basis for some general guidelines.  If the spread is negative, make stop losses hug price action more snugly and use other techniques you may be aware of to guard or enhance assets in the event of market decline.  If they are enough higher that the interest rate spread is -1% or more, cash might be your best option.  The line in the chart shows a history of the spread between the yield of short-term (13-week) treasuries and the yield of long-term (10-year treasury bonds.  The actual current yields of each of these is posted in the data table.  If this chart indicates that the current spread is .76, then the current spread is a little more than ¾ of 1%.  The fact that the number is positive (the line is above zero) means the long-term rates are greater than the short-term rates.  If the number is negative (the line is below zero) it means the short-term rates are greater than the long-term rates.
  a.) If the spread is negative, tighten stops or take other protective measures.
  b.) If short-term rates are 1% or more higher than long-term rates, cash might be a more appropriate investment (Remember that the bear market that began in 2000 started under these conditions).
  c.) When the spread between short-term and long-term money is less than 1%, higher-quality growth stocks are better candidates.
  d.) When short-term money costs 1% to 3% less than long-term money, stocks are generally even more likely to be profitable.  A greater variety of stocks will advance in valuations.
  e.) If the spread is more than 3%, assume that inflation is just around the corner.   
 

 Chart 2:  The McClellan Oscillator  is at the top of this chart.   is a breadth-of-market indicator that is effective for interpreting short-to-intermediate-term market moves.  The McClellan Summation Index(bottom part of chart) is a running total of each day’s McClellan Oscillator value.  The Summation Index is effective for interpreting intermediate to long-term market moves.  Together, they can be useful in evaluating the dynamics of the ebb and flow of the market, and in planning entry and exit points.

McClellan Oscillator readings of 150 (plus or minus) are extreme and tend to correlate well with buying and selling climaxes in the market.  The McClellan Oscillator reaches these extreme values, measuring overbought and oversold conditions, in advance of market turns.  It then passes through zero at or very soon after market turning points (to put this in perspective, extreme readings occur much less frequently than a pass through zero.  McClellan Oscillator passes through zero tend to indicate market reversals at approximately 2 to 6 week intervals).  The type of action to be taken, if any, depends on the major trend of the market (as indicated, for example, by 50 and 200-day moving averages) and on whether the move originated from an extreme reading.  Thus, in the early and middle phases of a bull market emphasis might best be placed on buy signals.  In a bull market, buy signals occur earlier, and positions can be taken when the McClellan Oscillator clearly moves out of its basing pattern, even if it is still negative.  In a bear market, sell signals occur when the oscillator moves clearly out of a topping formation, even if it is still positive.  

The amplitude of the oscillations above and below zero correlates with the general volatility of the market.  The oscillator shows distinct cycles (lasting 22 to 24 weeks) between significant bottoming formations.  Divergence between oscillator moves and conventional market indicators forecasts an impending change in market direction.  Conventional trendline theory can be applied to oscillator patterns.  For example, a triple top formation in the McClellan Oscillator forecasts a termination of the preceding up-trend.  If the Summation Index is rising (or declining), it is intermediate-term bullish (bearish if declining) and the market’s trend is up (down if the Summation Index is declining).  If the Summation Index is declining, the first positive sign will be a slight narrowing of the gaps between postings.  The second positive sign the Summation Index will give is a flattening out of the entries (this stage is sometimes skipped).  The third positive sign is a reversal in direction.  The final positive sign is a slight increase in the distance between postings.  Some investors use the latter as a buy signal (alternatively, some may use the second posting in the new direction as an early buy signal).  They view the opposite conditions as negative, culminating in a sell signal.  Because of their sensitivity, the declines and advances of these indicators can appear to be much more extreme than the actual movements in the market.     

Chart 3: Dr. Felt created this proprietary Market Bias Indicator.  He uses the MBI in evaluating the general status of the market and the nature of any investment strategy shifts he may make as he adapts to the prevailing market environment.  For example, when the market has a negative bias (as shown by the Market Bias Indicator), it might be wise to move to cash, switch to a fund that goes up while the market goes down, place stop-loss orders on all positions, or to be extra cautious about taking new positions.  When the Market Bias Indicator "says" the market is favoring buyers, it is not as likely to punish investor aggressiveness (equity growth is expected).  If the black line of the Market Bias Indicator (the indicator line) is above the horizontal line, we believe the market is favoring buyers.  Here, the Market Bias Indicator is "bullish" (it is probably okay to hold our positions or to take new ones).  In this market environment, ignore the broken red line unless you are an aggressive trader.  If you are an aggressive trader, while the black line is in "positive territory," a move above (or below) the red broken line is a buy (or sell) signal respectively.  A rising (or falling) green line must confirm either of these signals before action is taken.  The green line is the "confirmation-line" of the indicator. If the black line falls below the horizontal line, we believe the market is favoring sellers.  That is, extra caution is in order.  The Market Bias Indicator (MBI) suggests a "sale attitude" only if the green line is declining while the black line is in "negative territory" (below the horizontal line).  While the black line is in "negative territory," a move above (or below) the red broken line is a buy (or sell) signal respectively.  Again, a rising (or falling) green line must confirm either of these signals before action is taken.  The green line will shift its position over time (appearing higher or lower relative to the other lines and the horizontal line).  However, the shape of the green line will not change.  The relative placement of this line is not relevant.  Only its direction is important.  The Market Bias Indicator is sensitive enough to have given a "sell signal" two days before the meltdown in 1987, yet it avoids whipsaws better than most indicators.  While there are numbers that determine line placement in this chart, this indicator was intended from the beginning to be a visual indicator only.  The story is told by position above or below the horizontal line, not by the exact numbers for the distances.  It does not add any more useful information to know that one day it is 25 points above the line and the next day it is 15 points above the line.  We can visually determine that it is closer to the line and estimate its rate of approach.  The same thing applies to each of the lines in the indicator.   Which ones are above or below which others and which direction are they headed are the important issues rather than the quantitative readings for each.  We want people to be able to glance at the chart and see a "picture" that tells them all they need to know.  We do not even look at the numbers ourselves when we use the indicator.  If we ever decide to place the indicator in the public domain, it will be necessary to divulge the equations used and the data needed.  However, the indicator is available nowhere else on the planet, and that serves our purpose at this time.  Systems and strategies tend to lose their power when they are widely disseminated.
All indicators, including this one, should be used in conjunction with other methods of analysis.  Bear in mind that an MBI buy or sell signal is not necessarily a buy or sell signal for individual stocks in your portfolio.  These signals are merely indicators of market bias.  Individual stocks should always be bought or sold on the basis of their own merit or lack thereof.

Chart 4: The Money Flow Indicator at the top of the chart attempts to measure money flowing in and out of a security.  The movement of money into or out of the market can give us clues about the meaning of price movement.  Look for divergence between the Chaiken Money Flow indicator and price action.  If the price moves higher and Chaiken’s Money Flow indicator moves lower, the rise in prices is not supported by an influx of money, and the rally is likely to be short-lived.  If Chaiken’s Money Flow is between zero and .10 (0 is marked by the horizontal red line and .10 is marked by the upper horizontal black line), then it is thought to be reflecting weak buying and it is not particularly bullish.  However, Chaiken Money Flow readings above .10 are bullish.  If Chaiken’s Money Flow is between zero and -.10 (the lower horizontal black line), then it is considered to be weak selling and it is not particularly bearish.  Readings below -.10 are normally considered bearish.  Readings of .20  are bullish (-.20 is bearish), and these levels are marked with heavy blue lines.  Readings above .25 (the upper horizontal blue line) are very bullish and indicate higher prices are probably ahead.  Readings below -.25 (the lowest blue horizontal line) are very bearish and indicate that lower prices are probably ahead.  The flow of money often precedes price action.  The NY Index and its 50-day and 200-day moving averages are shown at the bottom.  Please note how the flow of money often precedes price action.  However, money flow and price action will sometimes diverge.  When this happens, do not trust the current price action of the index or security to continue.  When money persistently flows into a stock, expect growth (rising prices).

Chart 5: There are 5 sub-charts within Chart 5.  The reference for these charts is the NYSE Index.  The NYSE Index includes all stocks listed on the New York Stock Exchange.  At the top of the chart you will see the Stochastic Oscillator, a short-term indicator (the first chart within Chart 5) .  It can be helpful in estimating when a security (or index) is likely to change its direction in the near future.  Most technicians consider it a "buy" signal when the Stochastic Oscillator falls below 20 (a few technicians use 30) and then moves above that level, and a "sell" signal when the Stochastic Oscillator rises above 80 (a few technicians use 70) and then falls below that level.  The 20, 30, 70, and 80 levels are all marked.  The Stochastic Oscillator can remain above 80 (or below 20) for prolonged periods while the stock or index continues moving to higher (or lower) levels.  If the stock (or market) is non-trending (moving sideways confined within upper and lower parallel boundaries), then trades based on overbought or oversold levels should produce the best results. However, if the market is trending upwards or downwards, then the Stochastic Oscillator can be used to enter trades in the direction of the trend.  There are also more aggressive traders who consider it a "buy" signal when the blue line rises above the red line and a "sell" signal when it falls below it.  Also, look for divergences. When the market is making a series of new highs and the Stochastic Oscillator is failing to surpass its previous highs, the oscillator is giving us a warning signal.  

The Chaiken Advance/Decline Oscillator is next.  It uses the same data that is used in the accumulation/distribution line.  However, it is created by subtracting a 10-day exponential moving average of the accumulation/distribution line from the 3-day exponential moving average of the accumulation/distribution line.  The premise for the Chaiken Advance/Decline Oscillator is that a healthy price advance is accompanied by strong volume accumulation (a rising Chaiken Oscillator).  It is a positive indication if the Chaiken Oscillator declines while the Index declines (volume is not supporting the decline).  Because volume drives rallies, lagging volume during a rally is a sign of weakness (the rally is "low on fuel"). The Chaiken Oscillator was designed to indicate the flow of volume into and out of the stock (Index in this case).    

Comparison of this volume flow to the NYSE Index can help identify tops and bottoms.  For comparison purposes, we have placed a chart of the NYSE Index in the he middle of Chart 5.  Look for divergences.  When prices reach a new high or low, especially at an overbought or oversold level (see the Stochastic Oscillator), and the Chaiken Oscillator fails to make a new high then reverses direction, it is a warning that price direction is likely to change.  The converse would hold when the Index is making new lows.  Another use is to view a change in direction of the Chaiken Oscillator as a buy or sell signal, but only in the direction of the trend.  For example, if the Index is above a rising 50-day moving average (the blue line weaving through the chart), then an upturn in the Chaiken Oscillator while it is in negative territory would be a buy signal.  

Below the middle chart of Chart 5 is the volume on the NYSE.  The curved line superimposed on the volume bars is the 50-day moving average of the volume.  A move in the Index accompanied by greater than average volume is much more significant than a similar move on mediocre volume.   

At the bottom of the chart you will find the Chande Momentum Oscillator.  The use of the Chande Momentum Oscillator (CMO) is similar to that of the Relative Strength Index (RSI).  However, the Chande Momentum Oscillator measures momentum directly by combining data for both up and down days in the numerator of its equation (The RSI uses up days only in its numerator).  In addition, the Chande Momentum Oscillator or CMO does not have any built-in smoothing that would obscure very short-term momentum extremes (RSI has such smoothing and tends to obscure these details).  The dashed lines in the bottom chart of Chart 5 mark the -50 and +50 levels of the indicator.  The heavy black line is the zero line.  Chande Momentum Oscillator indicates overbought (+50) and oversold (-50) conditions.  For example, at –50 the downside momentum is 3 times the upside momentum.  The Chande Momentum Oscillator can also be used to measure the degree to which the market is trending.  The more extreme the CMO, the stronger the trend.  A low CMO reading (close to "0") indicates the market is neutral or in a sideways trading range. 

The Chande Momentum Oscillator can help establish entry and exit points when used in conjunction with a trend-following indicator, such as a moving average.  For example, if a moving average has turned positive, you could enter the market when the Chande Momentum Oscillator is advancing (the CMO, unlike a moving average, does not lag the market) and exit when it moves lower or when the moving average gives a sell signal.  The moving average can give you the buy or sell bias and the CMO can function as your "trigger."  Finally, look for divergences between the action of the Index and that of the CMO.  For example, if the Index is making a new high (or low) and the Chande Momentum Oscillator is failing to surpass its previous high (or low), the CMO is "anticipating" a reversal in the Index.
 

Chart 6: The top portion of the chart shows the daily MACD, a popular buy/sell indicator, as it applies to the S&P500.  The MACD is the dark red line.  The basic MACD rule is to sell when the MACD falls below the broken signal line and buy when it rises above its signal line.  The MACD can give buy/sell indications in three ways: signal line crossovers (the indicator is bullish if it is above its broken signal line and bearish if it is below this line), overbought and oversold conditions (the MACD is in an Overbought/Oversold range when it pulls dramatically away from the broken line; when this occurs, it is likely that the S&P500 is overextending and will soon reverse direction), and divergences (a bearish divergence occurs when the MACD is making new lows while the S&P500 fails to reach new lows; bullish divergence occurs when the MACD is making new highs while the S&P500 fails to reach new highs (expect--these divergences are most significant if the market is overbought or oversold). 

The daily S&P500 is shown in the lower part of the chart. The dotted blue line is the 50-day moving average, and the purple line is the 20-day moving average.  These are intermediate-term, and short-term trend indicators respectively. 

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Left Chart: Oil Index     Right Chart: Gold - Handy & Harmon Base Price 

The dotted line in each chart is the 50-day moving average.

Gold: Spot Bid Price
 


Gold(Left) & Silver(Right) Charts