Signal Type	Trade Date	Return since issued
		World	U.S.
			Nasdaq 100 (QQQQ) Russell 2000 (IWM) S&P 500 (SPY)

Market Update

Stocks managed to post modest gains over the 5-day span. Continuing last Friday's rally, all main indexes moved solidly higher Monday as illustrated by the Nasdaq Composite's 4.1% daily gain. Investors were encouraged by week-end comments from President-elect Barack Obama that he will introduce an aggressive stimulus plan to boost the ailing U.S. economy. Optimism was also fueled by talks that a $15 billion rescue package for the auto industry was close to be approved by Congress. Stocks did not move much during the next two sessions, as investors awaited the lawmakers' approval of the plan. The bill was indeed passed by the House of Representatives on Wednesday night, but concerns that it would face stiff opposition in the senate caused stocks to retreat Thursday, the S&P 500 shedding 2.9% during the session. The selling was exacerbated by comments from JPMorgan Chase's CEO, who stated that the bank had experienced a "terrible" month of November. Stocks fell at the open Friday on news that the Senate had rejected the auto industry rescue package. Worried about the devastating consequences a bankruptcy of the U.S. automakers would have for the economy, the government stepped in and said that it would assist the troubled auto industry, possibly tapping funds from the $700 billion bailout plan originally intended to help the financial sector. Stocks reversed course on the news to finish the session in the green.

The S&P 500 (SPY), Russell 2000 (IWM) and Nasdaq 100 (QQQQ) respectively gained 1.21%, 1.71% and 2.56% on the week. All 3 ETFs remain located below both their 50-day and 200-day exponential moving averages (EMAs).

For its part, our World portfolio posted a 2.38% gain this week. The portfolio consists of the 5 top-ranked world ETFs as of December 5, 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.

Trend Timing School

The Law of Nature

Most technical indicators used in stock market investing are artificial man-made contraptions that have no importance or meaning but that which we collectively give them. All but one in fact. The lone exception is the Golden Ratio which is a number built into many things in nature, such as the spiral of a nautilus sea shell, the disposition of leaves (or petals or seeds) in some plants like sunflowers, rabbit breeding patterns and many geometric shapes. The Golden Ratio (or Number or Mean or Section), is known under many names such as Phi and Divine Proportion. The Golden Ratio is said to be the most economical way to harmoniously arrange living volumes, with less effort and maximum efficiency.

Since it exists in nature the number was not invented but rather discovered by many through the ages, but it is most frequently attributed to Leonardo Pisano, better know by his pen-name Fibonacci. He was a twelfth century Italian mathematician and his studies and writings popularized the ratio and its properties. Some say he discovered the ratio while modeling rabbit population growth, others say he was studying the Great Pyramid of Gizeh. Regardless, he could have read about it in earlier works by the Greeks Plato, Euclid and Pythagoras. The Golden Ratio was, and still is, used extensively in architecture and art, and stock market investments.

The Fibonacci numbers are simply based on the sequence of numbers in which each successive number is the sum of the two previous ones:

1, 1, 2, 3, 5, 8, 13, 21, 34, 55, 89, 144, 233, 377, etc.

As the numbers get larger, the ratio between two successive numbers in the series approaches 0.618 (try it: 233 / 377 for example). The numbers satisfy the equation:

F_n+2 = F_n+1 + F_n with F₁ = F₂ = 1

and the mathematicians find the actual value of 0.618 (with thousands of decimals mind you) by solving the equation:

x = 1/x - 1

Trust them, we do.

All of this is well and good, but what does this have to do with investing, you may ask. A number of astute souls reasoned that since human activity was determined by the laws of nature, stock market movements should also be influenced by them. Ralph Nelson Elliott (of Elliott Wave fame) and other researchers found that stock market retracements would often be 0.618 or 0.382 (the reciprocal) of the previous move. Note that the Fibonacci sequence also allows for a 50% retracement, which is one divided by two. Percentage retracements are useful to calculate how far a countertrend movement may go. They can signal in advance when the market may reverse and resume the direction of the original trend by offering resistance zones. Others in the investment community, such as William Gann and Dow Theory proponents had devised theories on retracements but they were based on a more rudimentary one third and two thirds ratio.

Now let's have a look at the graph of the Nasdaq Composite index since its low of October 2002:

Chart 1: Nasdaq Composite Fibonacci retracement lines


Following the Fibonacci number theory, after the prolonged bull market which took the
Nasdaq Composite from its low of 1,114.11 in October 2002 to its high of 2,859.12 in last November, the index had to retreat through the major support and/or resistance lines shown at 61.8% and 38.2%. It was the case in March and July of this year where the Composite rebounded right on the 61.8% retracement line. Following the recent market collapse, the index also seems to have used the lower retracement line (38.2%) as a resistance point in early November. Projecting that in the future, you would assume that according to the Fibonacci theory the recent Composite rebound from the November low would encounter some resistance around the 1800 mark. Looking back, it is also interesting to notice that the two retracement lines have been strong support and resistance levels during the previous 5-year bull market as shown on the graph.

All this being said, the Fibonacci theory is more an art than a science, and you will find many situations where it does not work that well. The market always has its own way, and it seems that it does not always follow the law of nature. Or is it human nature, the main force behind the market, which often goes astray from the perfect nature harmony?

For information, our proprietary trend following system makes no use of Fibonacci number, being based instead on a mix of more reliable price/volume technical indicators.

FAQ of the Week

Question: How Can I check the Signal over the phone?

Many of us spend at least some time during the year traveling or otherwise away from reliable e-mail or Internet service, yet needing to stay in touch with the signal without interruption. Some of our newest subscribers may not have discovered the various methods of accessing the signals via phone, and we will remedy this perilous situation right now.

Depending on the type of phone you have access to, there are three methods to get the signals:

Warm wishes and until next week.

The TimingCube Staff