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Turbo Model
Classic Model




Signal Update
Current Signal Performance as of
Signal Type
Trade Date
Index
Return since issued
Nasdaq 100
Russell 2000
S&P 500
QQQQ

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
QQQQ

Note: QQQQ returns are included for continuity sake.

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Market Update
Not surprisingly, markets bounced some this week, as they were very oversold following the heavy losses of the previous days. After moving mildly higher the first two days of the week, major indices plunged on Wednesday thanks to a worse-than-expected CPI number, with the Nasdaq 100 and S&P 500 hitting new lows for the year. Then, a string of good earnings reports ignited a big rally on Thursday, with several indices logging gains in excess of 2%. However, the move occurred on lower volume than on the previous day's drop, hinting that it may have had more to do with short-covering than with a rush of buyers putting new money to work. Indeed, on Friday, markets resumed their march lower after an earnings warning from Costco and disappointing quarterly results from such companies as Eastman Kodak and Maytag overshadowed Google's stellar report. From a technical perspective, the picture has not changed: all major indices remain below their respective 200-day exponential moving average (EMA).
For the week, the Nasdaq 100 and S&P 500 respectively gained 0.90% and 0.83%. The Russell 2000 did better, finishing the week 1.51% higher. Our active Sell signal remains in effect.

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Trend Timing School
Trend lines

Anyone looking at a graph of the stock market, or even individual securities, can readily see that they do not bounce around in random fashion but display clear organization and patterns. Stock market prices move in trends. These trends can be up, down, or sideways (which we sometimes refer to as trendless), and they can be of short or long duration. As long term Trend Timers know, profits are made by exploiting major trends, be they up or down, by riding them for all they are worth, until they reverse. The investor's challenge is to recognize the significant trends at the earliest possible without getting tripped by the innumerable false alarms along the way. Technical analysis has traditionally placed a lot of importance on charting and the recognition of key formations and patterns. As arguably the most basic charting technique, trend lines are widely used and valued because they are so effective and reliable at graphically representing trends and spotting trend reversals.

For once the tools are cheap, since all it takes is a piece of paper, pencil and a ruler. As we have discussed many times, up trends are characterized by higher highs and higher lows. It so happens that quite frequently the higher lows follow a straight line. The tops are less even. For down trends the reverse is true, with lower lows and the tops of intermediate rallies frequently lining up in an orderly manner along a downward slanted straight edge.

Drawing trend lines is a successive approximation process. From what you suspect is an intermediate low all you need is a second close at a higher price to draw your first minor up trend line. Such short term trend lines are often too steep to last and generally get broken rapidly by a pullback, thus terminating that trend line. If such a pullback stops at a price higher than your starting point and is followed by a renewed rise, it forms a new higher intermediate low which lets you draw a new lower slope trend line which intersects those two intermediate lows. And so on and so forth. Minor trend lines are of little importance for either trading or investing. Traders attempt to exploit intermediate trend lines while we concern ourselves primarily with the major ones of longer duration.

The reason trend lines are so widely used is that they serve as support, and when they are penetrated it most often signifies the end of that trend. As always in investing, nothing is perfect and there is not a 100% certainty with trend lines either. Many get broken early and penetrations are not always meaningful. However, in most instances, when an important trend line is decisively broken, it is easy to recognize and represents a high probability indication of a significant trend reversal. There are various tests used to determine how technically significant a trend line is, such as the number of bottoms that have touched or come near the line without decisively breaking it (the greater the number the higher the importance of a trend line). The length of the line is also critical and the longer it has held, the greater its significance. Conversely, there are also tests to determine the validity of a penetration such as the extent of the breach (we want to see at least 2% to 3%), and the volume of trading when the break occurs (we look for an intensification of trading).

There are many types of special trend lines successfully used by market technicians, such as trend channels, necklines, rectangles, triangles and wedges, but today we focus on the simple major trend line.

Looking at the three year chart of the Nasdaq Composite index above, one can see that since the bottom reached in October 2002 a clear up trend has been in place. Since a correction formed an intermediate low during March of 2003 proficient charters have drawn the major up trend line (green line) which has held for over two and a half years. As is so frequently the case with major trend lines it served as support during the 2004 decline, and in August the index seemingly bounced off the imaginary line in a renewed rally.

Much more significant is what happened recently. Earlier this month, after a few valiant attempts to resist at the trend line, the Nasdaq Composite had a decisive downside breakout. While experienced charters will not hesitate to take such an important event at face value, the market generally obliges by supplying other pieces of evidence to corroborate trend line readings. In this instance we had several, starting with the almost simultaneous breakdown of the 200-day exponential moving average (EMA) support. Also, the market's failure to make a substantial new high during the late 2004 rise had created what many suspected could be a major double top formation, a very bearish reversal formation (the other top took place in January 2004). Chartists will take the major trend line technical breakdown as sufficient evidence to turn a possible double top into a highly probable one. Note that the double top formation would be complete if the Nasdaq Composite further declines to penetrate the next support level at 1750.

Trend lines play no direct part in our Model, but over the years we always gained in being aware of them. In times of doubt and confusion their simplicity and clarity often provides insight and reinforcement that no amount of words can match.

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FAQ of the Week
Question: Who pays dividends when shorting an ETF?

When you hold a stock or ETF and a dividend is paid out, you are the happy recipient. On the other hand, if you are short that stock or ETF while a dividend is paid you get to pay it out of the cash position in your account. The payment goes to your broker who lent you the security in the first place.

If, when, and how much dividends are paid depends greatly on the individual security. For ETFs it is fairly common for cash dividends to be paid annually or quarterly, but there is no official schedule and they are not a sure thing, even if they were paid in the past. QQQQ paid cash dividends in December of the previous two years. IWM and SPY have a track record of paying dividends on a quarterly basis. In fact, if you were one of the lucky few to successfully short IWM at the beginning of the current Sell signal (most brokers did not have shares available), your next statement will reveal that you graciously paid your broker a cash dividend of $0.548 per share on March 24, 2005.

Warm wishes and until next week.

The TimingCube Staff

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