Signal Type	Trade Date	Index	Return since issued
		Nasdaq 100
		Russell 2000
		S&P 500

Cumulative Returns since First TimingCube Live Signal () as of

Index	Long Only	Long Only with Margin	Long & Short	Long & Short with Margin	Buy & Hold
Nasdaq 100
Russell 2000
S&P 500

Market Update

It has been a see-saw week in which the major indices did not move much overall. Markets sold off Tuesday after Google's CFO suggested that the search engine giant will experience slowing growth going forward. The fact that the remarks had such an impact on the market is testament to the nervousness of investors. Led by semiconductor stocks, the major averages rebounded the next day to recoup their losses on higher volume. Market participants seem to be torn between a robust economy and strong earnings on one hand, and the fear of inflation and higher interest rates on the other. On that front, it should be noted that the European Central Bank raised short-term rates by a quarter point to 2.50% and said that more hikes are coming. Of course, U.S. investors have had to deal with such rate increases for almost two years now.

The Nasdaq 100 and Russell 2000 respectively gained 0.47% and 0.25% on the week. As for the S&P 500, it was almost unchanged. All three indices now rest above both their 50-day and 200-day exponential moving averages (EMAs). There is no change for us and our active Buy signal remains in effect.

Trend Timing School

Consolidations

The daily see-saw action the markets have been inflicting on us lately is nothing but a typical consolidation pattern reminiscent of the grander scale consolidation that has been paralyzing the Nasdaq Composite index for the last couple of years. When we think of the various phases of the stock market, bulls and bears come to mind as well as rallies and corrections. Yet, quite frequently what we get are consolidation phases. Simply stated, strong sustained advances are often followed by a pause to let investors regroup and get used to the new price levels. They are areas of price consolidation. Markets can rally too far too fast and investors taking a breather is not only viewed as normal and expected, but many technicians view consolidation phases as necessary for the continued health of a bull market.

Looking at Chart 1 below, it is quite apparent how, after having gained over 90% from the October 2002 bottom, the Nasdaq Composite index has been confined to a narrow +10%/-10% range for over 2 years. The intermediate tops and bottoms clearly delineate a channel between resistance and support lines.

Chart 1: Nasdaq Composite consolidation and breakout



Consolidations in technical analysis terminology refer to areas of hesitancy but also of reinforcement and solidification in a chart pattern. They are viewed as bullish and they can be indicators for future price advances. They are also called continuation patterns because more often than not the price breaks in the direction of the previous trend. Such price consolidation patterns generally last from a few months to a year unless as our luck would have it, the Nasdaq Composites decides to make it two years just to test our patience.

Contrary to reversal patterns such as a flag or head and shoulder formation which signal a trend change, continuation patterns precede resumption of the previous trend. There are many different consolidation patterns such as the ascending triangle, double-bottom, cup-with-handle, pennant, and rectangle. They are all viewed as base-building from which the market will be able to launch renewed assaults on new heights.

One of the troubles with consolidation patterns, as with many other chart formations, is that you cannot be really certain of what they are until after they are complete. For example, if instead of breaking to the upside as expected for a continuation pattern, the indices broke to the downside, the formation would rapidly be re-labeled as some top formation (oh, did we forget to mention that rectangle formations can at times also be reversal patterns?). Even when you think a pattern is complete because of a technical breakout, you wonder if it is quite convincing enough.

We have written about the breakout from consolidation area for some time now (see Breakouts, December 2, 2005) and so far so good. The Nasdaq Composite has tested and resisted on multiple occasions at the 2200-2250 area. The longer it stays above that level, the stronger the bullish case. To reinforce the likelihood that we have completed the consolidation pattern, and finally entered a renewed forward push, we see many other indices which have broken out much more decisively, as exemplified by the Dow Jones Transportation Average in Chart 2 below. While we look optimistically at this being the resumption of healthy market moves, we are comforted by the fact that our Model lets us participate in all significant moves and keep us safe from reversals.

Chart 2: Dow Jones Transportation Average consolidation and breakout

FAQ of the Week

Question: What is your take on the new Nasdaq equal-weighted ETF?

Before everyone gets too excited, we must stress that the announcement said that the fund is under development. No availability date was given but it will probably be months before the ETF opens for trading. We first wrote about equal-weighted index ETFs in the August 19, 2005 Trend Timing School article which focused on the Rydex S&P Equal Weight fund. Much of what we said then applies to the newly announced Nasdaq 100 Equal-Weighted fund (QQEW), but the effect of removing the cap-weighting can be expected to be even more dramatic.

To understand how top heavy the normal "market cap-weighted" Nasdaq 100 index is, all it takes is a glance at the largest companies which have the greatest impact on the index value. As can be seen in Table 1 below, the top 10 holdings in the index represent nearly 40% of its value. This explains why bad news from the likes of Google, Intel or Microsoft can have devastating effects on the Nasdaq 100 index. In contrast, each of these companies will only account for 1% in the make-up of the equal-weighted index and fund.

Table 1: Top 10 Nasdaq 100 index holdings

Microsoft Corporation	7.07%
QUALCOMM, Inc.	6.52%
Apple Computer Inc.	6.09%
Google Inc.	3.61%
eBay Inc.	3.08%
Intel Corporation	3.08%
Amgen Inc.	2.88%
Cisco Systems Inc.	2.79%
Starbucks Corporation	2.32%
Gilead Sciences Inc.	1.88%
Total	39.32%
Source: Nasdaq, as of 1/31/2006

When it comes to our opinion about this upcoming ETF, we believe that as long as the mega caps struggle as they have for the last few years, equal-weighted investments which favor smaller companies will do better. But as we said before, if you are convinced that smaller companies will do better, why not go all the way and invest in the small-cap Russell 2000 which has been leading the pack as of late.

Warm wishes and until next week.

The TimingCube Staff