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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
Last week, most everyone expected the traditional Thanksgiving rally, but after earlier solid gains, very few projected up markets in every single session of the week. All three indices ended the shortened Holiday week with gains of over 1%.

In sharp contrast, this week began with a broad-based consolidation on a jump in volume, not surprising when compared to the previous slow and shortened Friday session. Still, as the week went on, the weakness continued in the face of generally positive economic news. Consumer confidence rose unexpectedly on improved prospects on the jobs front. Oil prices continued their recent retreat, making new lows. All this and signs that the economy is growing at a faster clip than expected may convince the Federal Reserve Board to extend their rate hikes longer than recently thought. At the end of an otherwise strong month of November, the three days of consolidation started to look like the pullback or even reversal that some have been predicting. As it frequently does when you least expect it, the market left many shocked with Thursday's broad advance on heavy volume. Led by technology and small caps the rally spread enough for most indices to erase the losses from earlier in the week. The Philadelphia Semiconductor index jumped 4.21% on the day. A strong employment report from the Labor Department and a Greenspan speech warning about the risks of budget deficits helped cool things off on Friday, but the indices retained all of Thursday's gains by staying positive.

As a whole, the week ended mixed with the S&P 500 shedding 0.25% while the
Russell 2000 and Nasdaq 100 added 1.02% and 0.47% respectively. The Nasdaq Composite index has now made it seven straight gaining weeks. With the sustained market advance our Model remains firmly in a Buy mode.

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Trend Timing School
Breakouts

Breakouts are some of the strongest technical signals the market gives but surprisingly few investors pay attention to them. While breakouts play no direct role in our Model, they help confirm major trends, and inflection points. For us Trend Followers, having been stuck in an essentially trendless market for two years, we have been waiting with great anticipation for a breakout of the almost two years old trading range. A breakout is usually the sign that prolonged indecision has been resolved, which frequently leads to a significant change in the market's perception of value, i.e. the markets are moving higher. Now that a breakout seems to be at hand we should take notice, and enjoy it.

Breakouts happen to be a very serious and complex subject of technical analysis which literally takes many chapters to explain (If you want all the details see books that describe the theory of breakouts in the August 26, 2005 FAQ of the Week). We will take the simpler path and look at a few current examples. The first aspect of a breakout is to identify what you are breaking out from. A lot of technical charting deals with continuation patterns which can be anything from support/resistance line(s), trend line(s), and the shapes they can take when combined, such as rectangles, triangles, wedges, flags, pennants, etc. Ironically some authors classify these same exact configurations as reversal patterns and not continuation patterns.

A breakout is the market action of crossing or penetrating a previously established support or resistance line or pattern, and this can go in either direction. The key is that history has shown that more often than not markets continue to move in the same direction following a breakout, and therefore they are fairly broadly used as buy/sell signals. Looking at Chart 1 below, we can see the Nasdaq Composite breaking out of the horizontal resistance line defined by its previous high price. In this case, on November 17, the index exceeded the high established back in August and reached 2220, a level not seen in 4-½ years. As most things in charting, breakout lines are not lines as much as zones. To be comfortable we want to see the market advance 3% to 5% from the breakout point to really qualify as a breakout (we are currently 2.4% above the resistance level).

Nasdaq Composite breakout from resistance line



Taking the longer term view in Chart 2 below, we can now see a rising wedge pattern which in fact has lasted for nearly six years before being broken recently. Interestingly, the wedge would actually be defined as a rising triangle if the resistance/supply line at the top was horizontal. Where a rising triangle is viewed as bullish and is most frequently broken to the upside, the rising wedge is generally a bearish formation most often broken to the down side. Whether triangle or wedge, when broken to the upside the breakout is a super bullish sign.

Nasdaq Composite breakout from resistance line



Not all indices form identical patterns, and when they do, it is not necessarily at exactly the same time. Some indices like the Dow Jones Transports have broken out long ago while others like the Dow Jones Industrials languish. In addition there are many other indicators one can look for to find breakouts. For example adepts of Fibonacci have noticed that a number of indices have recently passed the magic 61.8% retracement number, which should place the bull market in a new phase.

Yes, the market has been moving up seemingly non-stop since mid October and many believe that it is time for a pullback, or worse, a trend reversal. Many look at indicators such as RSI, MACD, and Stochastics showing markets at overbought levels. Just remember that when markets are strongly trending, these momentum type indicators can stay in an overbought/oversold state for prolonged periods of time and become mostly meaningless. Weakness and a pullback is always to be expected after a breakout. Quite often the breakout line gets tested before the market pulls away to set new highs.

Chartists take this exercise one step further and use breakouts to forecast the target destination of a measured move, but this is another story and another day.

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FAQ of the Week
Question: Should I be concerned by Google being added to the Nasdaq 100?

It is but a rumor, since changes in the composition of the Nasdaq 100 index are not pre-announced until they happen after the middle of December, but the word on the street is that Google will soon be added to the index, and therefore to QQQQ holdings.

Normally the rules for inclusion require a stock to have been listed on an exchange for at least two years. But, as fate would have it, there are fast track options such as a company's market cap being in the top 25 percent of the 100 biggest companies, for example. This is the very path taken in 1999 by eBay which got included in the index a year after being listed.

So what if Google gets added? There are estimates that QQQQ would need about 1.8M shares of Google, about twenty percent of its average daily volume. Looking at the Google addition to
OneQ (the exchange trade fund tracking the entire Nasdaq Composite index) which already happened, there seemed to be no visible impact to either Google or the ETF. You should not concern yourself with changes in the constitution of the indices, which happen on a regular basis.

Warm wishes and until next week.

The TimingCube Staff

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