Jinkies!

I could have used a stronger word to describe what happened in the market last week but this one is more family friendly:} You may recall that last week I stated that I was back in mutual funds. This was primarily due to the fact that the S&P Index closed above 1110 last week, a very important price level. The expectation was that for the next several weeks there was a high probability of a sustained move up. Well, price action this past week may have thrown a wrench into that. The index closed lower at 1076.76 this Friday. It is still possible that we may eventually see a rally due to the fact that the long term trend is still up. But after last week it is conceivable that we may see further short term weakness before that happens.

IMPORTANT ENHANCEMENT...From now on I would highly recommend you check the blog after 7 PM EST Monday - Friday. There will not always be a post but when there is it will be an important one, informing you of an important trend change. No longer will you have to wait until the weekend to find out if you need to make an adjustment in your portfolio. I will still continue with the Saturday and end of month updates as usual.

FOR YOUR EDUCATION...Up until now I've hesitated to show any of my proprietary charts. After all, the knowledge I've gained over the last 20+ years is too valuable. I don't want to just give away my secrets. However, I also understand that some of you may be thinking "Is this guy just flying by the seat of his pants"? Just to help convince you that I'm not I'm going to share with you today one of my most important charts. As I shared with you in one of my April articles I look mainly at four elements to determine the long term direction of the market; price, volume, momentum and market breadth. Of these four I place the most weighting on price action. The chart I'm going to share with you today (click on image) focuses on price action and momentum. The most important things you need to know about this chart:



1) Notice there is an upper pane with what appear to be blue and red bricks. This is actually a method of charting price I discovered which Japanese traders use. In simple terms this technique plots price movement and does not take into consideration the time element. When price moves a predetermined distance up a blue bar forms. When price moves the same predetermined distance down a red bar forms. In my view the advantages of using such a chart over traditional time based charts are many but the most important is that it is much easier to analyze price movement.

2) In the upper pane there is also a moving average which is blue when rising and red when declining.

3) In the lower pane is a momentum indicator. Notice this also turns blue when rising and red when declining.

4) There are two simple rule I use with this chart. A) If the trend has been down then the trend will change to up ONLY if a blue price bar forms, the moving average turns blue and the momentum indicator turns blue. B) If the trend has been up then the trend will change to down ONLY if a red price bar forms, the moving average turns red and the momentum indicator turns red.

IMPORTANT NOTES: Notice I've highlighted the last four major trend changes on the chart with a vertical cursor and arrow. Also note that the long term trend remains up (green arrow) even though the last bar on the chart is red. This is due to the fact that the moving average and momentum indicator remain blue. Have a great weekend everyone. If you have any questions or feedback, please comment.