Current
Signal Performance as of
Signal
Type |
Trade
Date |
Return
since issued |
|
|
|
World |
U.S. |
|
Nasdaq
100
(QQQQ)
|
Russell
2000
(IWM)
|
S&P
500
(SPY)
|
|
The S&P 500 (SPY), Russell 2000 (IWM) and Nasdaq 100 (QQQQ)
respectively gained 5.64%, 5.22% and 5.06% over the five-day
span. Both the S&P 500 (SPY) and Russell 2000 (IWM) remain located
below both their 50-day and 200-day exponential moving averages
(EMAs) while the Nasdaq 100 (QQQQ) has recaptured its 200-day
EMA.
For its part, our World portfolio posted a
5.51% gain this
week. The portfolio consists of the 5 top-ranked world ETFs
as of June 18, which marked the beginning of the current 4-week
holding period. Please note that since we now have an active
Cash signal, the
World approach calls for selling your holdings
if you follow the "Long Only" or "Long
and Short" strategy. Only if you follow the "Buy
and Rebalance" strategy should you remain invested
in the top 5 ETFs, as the strategy calls for staying invested
at all times. Please go to the "Our
Service" page for all the details.
Our current Cash
signal remains in effect.
Looking at the recent behavior of the stock markets, some analysts
have detected a technically important occurrence: the breaching
of a strong support line. While our Model does not take resistance
or support lines into consideration, they are good to know because
they can call our attention to crucial turning points in the
market.
Technical analysts talk of resistance and support as price levels
that represent and frequently act as virtual barriers. The price
movement of a stock or index frequently reverses as it comes
close to such lines. Resistance and support price levels should
really be viewed as price areas instead of a precise pinpoint
number.
When approached from below they act as a price ceiling and are
called resistance lines. Resistance lines are formed by drawing
horizontal lines through previous intermediary tops. Once a
resistance line is penetrated to the upside (a bullish breakthrough),
it frequently changes its role to behave as a price floor and
offering price support. It becomes a support line.
Of course, the strength of resistance/support lines varies.
There are several tests used to determine how technically significant
a resistance/support line is, such as the number of times this
price area has been visited without decisively breaking down,
or the length of time it has held (the longer the stronger).
Maybe the most significant test of all is the change in trading
volume which created the tops or bottoms on which the lines
are drawn. An increase in volume at these turning points (or
the absence thereof) dictates how resilient the resistance or
support is.
You may ask "how is it possible for markets to care about, or
be influenced by, an artificial line drawn on a chart?" The
answer is, as with all things having to do with the price and
volume of the market, that they are a function of investor expectations
and supply and demand.
Looking at the S&P 500
index over the last 6 months, as depicted in Chart 1
below, we can see the support line at 1,050 which has been tested
quite a few times before finally being penetrated on June 29th,
date of our Cash
signal. The breaching of a support line is generally viewed
as a bearish sign, and the market generally moves lower afterwards.
However, if after the breaching of the support line, investors
started to question this new price level, and if large enough
numbers of them reconsider and buy, the market could rise again,
a pattern commonly known as a bear trap.
Chart 1: S&P 500, 6-Month View
If on the other hand price stays below the previous support
line, then we can look at it as a new resistance line. Breakout
of the resistance line becomes harder and harder with time.
The market is then expected to continue moving down. Of course
it is a too soon to call for a new bear market at this point.
Time will tell of course, and we rely on our Model to guide
us through these uncertain times.
Another good example of a support line turning into a resistance
line is what happened just before the financial crash in 2008.
Looking at Chart 2 below, one can clearly see
that the S&P 500 rebounded strongly at the 1420 level, until
it finally broke through that line in Jan 2008. From there on,
it stayed under that level despite a couple of failed attempts
in May 2008, eventually spiraling into the nasty bear market
that we all remember so vividly.
Chart 2: S&P 500, 2007-2008 View
Investor psychology admittedly plays a big part, but there is
nothing mysterious about why resistance and support lines work.
The basic laws of supply and demand tell us that the price is
the point of equilibrium at which buyers and sellers are willing
to buy/sell. Looking at the volume data at the bottom of Chart
2 one can notice that the volume tended to rise when
price reached the support line, meaning that investors saw it
as a good buying opportunity, and started to pile up thousands
of shares. But, once the market turned south, the same investors
were then happy to unload their shares at or near breakeven,
turning the previous support line into a resistance line.
Going back to the present situation, the high in mid-June was
achieved on low volume, but the selling that followed occurred
on higher volumes. The point is that there are many investors
out there who bought these shares and who are now maybe considering
selling them at or near the new resistance level. This is why
this resistance line could be a strong one, involving a hard
fight between bulls and bears, buyers and sellers. The flip
side is that if the strong resistance line is overcome it will
mean that the breakthrough rally is to be equally strong.
Only time will tell which way the market is going to go. But
in the meantime we are reassured to have our Model to rely on,
instead of having to guess which of the resistance/support lines
will be broken, and when.
Subscribers and casual visitors to our site frequently want
to double-check some of our published results or investigate
"what-if" scenarios with other securities for which they need
various trade prices. Of course there are numerous sites which
provide historical quotes, such as Yahoo!
Finance. If you use such sources you need to make sure to
use the open price on the trade date and, if necessary, to adjust
that price for any distributions and splits as we described
in the January
14, 2005 FAQ of the Week.
Now to see how any particular index or stock would have performed
according to the TimingCube
signal, go to the bottom of the "Results"
page and enter a ticker of your choice in the "Performance
with individual security" section, and click on
the button "Go". A new window will
be displayed. Simply mouse over the "TimingCube
Chart" button in the list at the top, and click
on it. You should then see something like this:
Chart 3: TimingCube
Chart
As illustrated in Chart 3, when you place your
mouse's pointer on any trade symbol (the green and red squares
along the yellow line), the actual trade date and trading price
will be displayed. The displayed prices are the adjusted open
prices on the trade date, unless you charted a mutual fund,
in which case you obtain the closing price on the trade date
(since you cannot trade a mutual fund at the open).
Warm wishes and until next week.
The TimingCube
Staff
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