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Daily Newsletter, Monday, 04/11/2005

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Table of Contents

  1. Market Wrap
  2. New Option Plays
  3. In Play Updates and Reviews
  4. Trader's Corner

Market Wrap

Pop and Drop

Pop and Drop

The indices gapped up at the open, held the highs for a few minutes, and proceeded to plunge to the lows of the day. From that morning low followed a weak bounce that settled into an uneasy range beneath Friday's lows.

Breadth was lightly negative, with declining volume leading advancing volume 1.3:1 on the NYSE and 1.6:1 on the Nasdaq. Volatility rose for the QQQQ, with the QQV rising .77 to 16.61 and the VXO higher by .49 to 12.59. Volume was lighter than average across the indices, with QQQQ trading just 69.1 million shares, roughly 27 million shares below its average daily volume.

Daily Dow Chart


The Dow traded a narrow range, bouncing from a low of 10438 and failing at the low end of Friday's range from a high of 10482. So far, the daily cycle upphase that kicked off at the end of last month has been very weak, with the decline since Friday reducing what should have been a 2-3 week bounce to a net sideways drift. This would be consistent with a distribution range at the bottom of the decline from the March high- or, in other words, a bear flag. A break the lower rectangle support, confirmed with a violation of the April low in the 10340 area, should signal the next stage of the decline. However, a break of Friday's high above 10560 would give the upphase legs and set up a potential retest of 10620 resistance.

Daily S&P 500 Chart


By comparison, the upphase for the daily SPX has been much stronger. However, today's doji decline, narrow-ranged as it was and reversed at the final tick to close positive by 1 cent, violated the rising trendline, printing a range solidly below Friday's. This caused the slightest hesitation in the Macd oscillator, but it will take more downside tomorrow to edge the indicators closer to a daily cycle sell signal. Today's 1178.69 low confirmed the 1179 support, below which 1172 and 1162 come into view. A break above 1192 will invalidate this bearish interpretation.

Daily Nasdaq Chart


The Nasdaq got hit the hardest of its peers, declining .36% to finish at 1992.1. Like the Dow, its daily cycle upphase has been a sideways drift only, with the decline since Friday's high reversing half of the past 2 week's upphase in 2 days. Beneath today's 1991 low, 1965-70 is critical support, while the top of the range is at 2020-25. Bulls need to see that upper end broken in order to refute the corrective/bear flag interpretation of the current daily cycle upphase.

Analyst Abhijit Chakrabortti of JP million raised the firm's 2005 earnings outlook for the S&P 500 today from $72 to $74.5, saying that it sees concerns surrounding higher oil prices, interest rates and unit labor costs as "exaggerated." The first sees the possibility for an upside surprise both for the S&P and for its 5% growth target for the Eurozone. In its opinion, Japan has the greatest growth potential off all regions currently, and sees its 10% growth projection as being easily attainable.

There was some discussion over the weekend concerning Fed Governor Ben Bernanke, who was recently appointed by President Bush to head the White House Council of Economic Advisors. Bernanke, who is best known for his controversial "printing press" comments with reference to the ability of a "determined" central bank to create inflation at will, is currently favored as the most likely successor to Greenspan's chairmanship when the current Fed chief's term ends next year. A number of procedural and political hurdles remain, but for the moment, Bernanke is being viewed as the most likely candidate. In light of his previous comments, my interpretation of his appointment would be inflationary- that is, bullish for US asset prices and bearish for the US Dollar.

Daily TNX Chart


The Treasury auctioned $32 billion of treasury bills today, with $17 billion of 3 month bills and $15 billion of 6 month bills. The 3-month bills generated a strong bid-to-cover ratio of 2.77 at a high rate of 2.71%, with indirect bidders (foreign central banks) taking $2.2 billion of the total. The 6-month bills generated 2.25 bids for each bid accepted, with a high rate of 3.065% and indirect bidders taking $4.2 billion of the total. It's worth noting that while the 2.71% high rate on the 3-month bill auction is well above average for this and last year, the bid-to-cover was also higher than the averages for the past 3 years and indicated strong demand. Longer-dated treasuries firmed immediately following the completion of the auction and publication of the results on the Treasury Department's website. It was a good day for ten year bonds, with the ten year treasury note yield finishing the day lower by 4.6 bps at 4.445%.

On the daily chart above, we see Friday's gap up above the descending trendline that coincided with the daily cycle downphase. That gap was filled and the gains reversed today, with the descending trendline tested from above. Given that Friday's move occurred before the daily cycle stochastic reached oversold territory, a retest and even nominal new low for the TNX would not violate my interpretation last week that the daily cycle is aiming to turn higher. A sideways grind along the current range will give the cycles time to turn before the next multi-week leg up. A break below 4.35% would set up the current range as a bear flag and invalidate my thesis.

Chart of Crude oil


The week opened with crude oil prices lower following Friday's close near the lows of the week. OPEC was reportedly considering another 500,000 barrel per day production limit increase, which, on the heels of two 500,000 bps increases in the past few months, would bring the limit to 28 million bpd. With most recent estimates of current production at 29.83 million bpd, this move would be more of a technicality than anything else, because maximum production capacity remains a constant unaffected by such quota decisions.

Despite the opening drop and a narrow range that followed for most of the day, May crude futures ticked up and ran from their 52.25 low to finish 35 cents in the green at 53.675, one tick below the 53.70 high of the day. On the daily chart, we see today's bullish hammer having set a new low at a price not seen since October 2003- a fact which was briefly trumpeted in the financial press. However, the doji reversal is not a bearish formation, and nor is the flatline in the 10-day stochastic at what should be the midpoint of a more extended decline. A bounce from here would represent a bullish early reversal to the daily cycle downphase, well above the 50 level.


It was a quiet day data-wise, with no major economic reports released today. In corporate news, Circuit City (CC) reported a decline in fiscal Q4 earnings, with net income declining to $84.5 million from $89.6 million in the year-ago period and earnings from continuing operations down from $94.7 million or 46 cents per share one year ago to $82.5 million or 43 cents per share. However, these results included a number of one-time items, such as $30 million in lease termination costs and $4.2 million in accounting change expenses, as well as asset write-offs and the closure of a distribution center. Excluding these $38.6 million in charges, the nation's 2nd-largest electronics retailer behind Best Buy earned 60 cents, missing expectations for 62 cents earnings per share. Revenues increased from last year by 5.3% to $3.47B, meeting estimates, and gross profit margin rose to 24.4% from 23.8% in last year's Q4, boosted by the inclusion of international sales. Domestic profit margins declined due to slimming margins and competitive promotions on certain products. The company expects a 3%-6% revenue increase in 2006. CC gained 3.44% to close at 15.94.

InFocus (INFS) issued a profit warning this morning, expecting a 30-35 cent loss for the quarter, or 19-24 cents excluding restructuring charges. Analyst expectations had been for a 4 cent per share profit. Revenue is expected between $136 million and $138M, compared with prior expectations of $150 million to $160M, with gross margins estimated at 7-8% compared with prior estimates of 16-18%. INFS got smoked for 14.05%, gapping down at the open and staying there, closing at 4.71.

Shortly thereafter, Ingram Micro (IM) announced that it will outsource 550 associate jobs as part of an optimization plan, which it expects to save approximately $10 million this year. The company is expecting charges of $26 million to result from the plan. IM lost 1.24% to close at 15.87.

MSFT announced the settlement of its antitrust issues with GTW, in consideration for which it will pay $150 million to GTW over the next 4 years. GTW announced that it would use the payments for advertising, training, and r&d for new MSFT-compatible products. MSFT will take a $550 million charge for settlement reserves for antitrust claims, $123 million of which will be earmarked for the GTW settlement and $51 million for its dispute with Burst.com. MSFT gained .16% to close at 24.98, while GTW added 1.96% to close at 4.16.

NCR guided higher this morning, announcing its target for Q1 EPS at 16 cents per share, compared with its previously forecast 2-5 cents. Revenue is expected to come in at $1.34 billion for the quarter, and EPS for the full year is seen between $1.35 and $1.40. NCR added 1.88% to close at 35.31.

PG announced a 12% dividend hike, from 25 cents per share to 28 cents per share, to be paid on May 16 to shareholders of record on April 22. PG rose 1.47% to close at 55.30.

Ford's afterhours warning on Friday impacted the tape today, with F now expecting its automotive operations to be breakeven at best and placing its 2005 profit expectation at least 14% lower than previously anticipated. Citing higher raw material, gasoline prices and healthcare costs, F lowered its 2006 profit goal as well. Fitch lowered its rating outlook for F, Ford Credit, Hertz and numerous associated entities from "stable" to "negative." The downgrade cited production cutbacks, competition, consumer buying patterns shifting away from SUVs and other such pressures. The agency said that its future rating decisions will be based upon F's ability to restore market share, retain pricing power and reduce costs. F lost 5.08% to close at 10.47, GM lost 1.08% to close at 29.18, and DCX rose .05% to close at 42.15.

While the Fed tends to focus on the CPI and PCE data while talking down the impact or existence of bubbles, some of today's more negative news can be viewed as an "H-O" scale representation of a broader problem. F cites higher input material costs and waning demand, particularly in its less fuel-efficient mid- and full-sized SUVs. On the one hand, the Fed Chairman was unable to comment on the impact of higher oil prices on the economy. F can and did, however, with Friday's profit warning. Industrial and commodity-sensitive businesses are not alone in their woes, as the multiple hits from INFS, Ingram and CC demonstrate, with retailer CC indicating waning domestic demand for less oil-sensitive electronic gear and wholesaler Ingram seeking to "optimize" by downsizing and outsourcing.

Despite these ominous signs, however, the indices held together for the day. With options expirations distortions to be expected for the remainder of the week, however, it would be overly ambitious to read too much into the price action or lack thereof.

Complicating matters further, there's a full slate of economic data scheduled. Tomorrow we get the February Trade Balance, FOMC minutes and Treasury Budget for March, as well as the continuation of pre-earning announcements. As option writers attempt to steer the underlying securities toward their optimal strike prices to minimize the value of expiring options in-the-money, sudden whipsaws and reversals, as well as long, aimless narrow ranges, are more common and less predictable than usual. With all of these rocks being dropped in the point, Jim's maxim is most appropriate: "Enter Passively, Exit Aggressively."
 

 
 




New Plays

New Option Plays

Call Options Plays
Put Options Plays
None None

New Calls

None today.
 

New Puts

None today.


Play Updates

In Play Updates and Reviews

Call Updates

Anadarko Petroleum - APC - cls: 76.83 chg: +0.57 stop: 72.45

No change from previous update on 04/10/05. Oil stocks rebounded today and APC bounced from the $75.50 level. Traders could use this as a new bullish entry point but we would look for confirmation of the bounce with a new move over $78.50 before going long. APC also confirmed its earnings date for April 29th.

Picked on March 31 at $ 76.10
Change since picked: + 0.73
Earnings Date 04/29/05 (confirmed)
Average Daily Volume = 2.3 million

---

Carpenter Tech - CRS - close: 61.13 chg: -0.55 stop: 59.95

No change from previous update on 04/10/05. Our trigger to go long is $64.05. CRS confirmed its earnings date as April 25th.

Picked on April xx at $ xx.xx <-- see TRIGGER
Change since picked: + 0.00
Earnings Date 04/25/05 (confirmed)
Average Daily Volume = 334 thousand

---

Occidental Petrol. - OXY - cls: 72.77 chg: +0.55 stop: 67.99

No change from previous update on 04/10/05.

Picked on April 03 at $ 73.64
Change since picked: - 0.87
Earnings Date 04/26/05 (confirmed)
Average Daily Volume = 2.4 million

---

Oil Service Holdrs - OIH - cls: 96.85 chg: +0.85 stop: 92.49

No change from previous update on 04/10/05. The OIH is bouncing from the 50-dma near the $95.00 level as expected.

Picked on April 03 at $ 98.70
Change since picked: - 1.85
Earnings Date 00/00/00 (unconfirmed)
Average Daily Volume = 3.9 million

---

Potash Corp. - POT - close: 87.20 chg: -1.19 stop: 85.99

Uh-oh! Bulls need to be careful here. POT has broken down under minor support at the $88.00 level and looks headed for a test of the 50-dma near $86.00. We would not suggest new bullish positions at this time.

Picked on April 05 at $ 90.18
Change since picked: - 2.98
Earnings Date 04/27/05 (unconfirmed)
Average Daily Volume = 504 thousand

---

Red Robin Burger - RRGBE - cls: 53.58 chg: +0.99 stop: 49.49

Good news! RRGBE continues to out perform the markets. The stock added another 1.88 percent on above average volume after raising its Q1 outlook this morning. We are suggesting readers consider exiting now. Our profit target is the $54.00 level and we will exit at the $54.00 mark but you, the reader, can beat the crowd and exit now or anywhere near $54.

Picked on March 10 at $ 48.00
Change since picked: + 5.58
Earnings Date 02/14/05 (confirmed)
Average Daily Volume = 199 thousand

---

Research In Motion - RIMM - cls: 75.72 chg: -1.50 stop: 72.49

No change from previous update on 04/10/05. Our trigger to go long is $78.25.

Picked on April xx at $ xx.xx <-- see TRIGGER
Change since picked: + 0.00
Earnings Date 04/05/05 (confirmed)
Average Daily Volume = 10.1 million

---

Whole Foods - WFMI - close: 100.78 chg: -1.30 stop: 98.99

No change from previous update on 04/10/05. WFMI continues to consolidate lower toward the $100 mark and its 50-dma.

Picked on April 06 at $104.16
Change since picked: - 3.38
Earnings Date 05/03/05 (unconfirmed)
Average Daily Volume = 956 thousand
 

Put Updates

Allergan - AGN - close: 70.12 chg: -0.50 stop: 72.51

No change from previous update on 04/10/05.

Picked on March 13 at $ 73.09
Change since picked: - 2.97
Earnings Date 04/27/05 (confirmed)
Average Daily Volume = 777 thousand

---

Beazer Homes - BZH - close: 48.16 chg: +0.12 stop: 51.51

No change from previous update on 04/10/05. BZH is still near our target range of 48.00-46.50.

Picked on March 17 at $ 51.43
Change since picked: - 3.27
Earnings Date 04/28/05 (confirmed)
Average Daily Volume = 742 thousand

---

Intl Bus. Mach. - IBM - close: 86.20 chg: -1.40 stop 90.05*new*

Cautious comments and a reduction in IBM's Q1 revenue estimates from Prudential helped send IBM to a 1.59 percent decline on volume almost twice the normal on Monday. The stock is looking more and more oversold and due for a bounce. The good news is that IBM is nearing our target in the $85.00 region. Short-term traders, especially any who entered on the failed rally near $92, may actually want to consider exiting now for a quick profit to avoid any bounce. We are lowering our stop loss to $90.05.

Picked on March 17 at $ 89.86
Change since picked: - 3.66
Earnings Date 04/18/05 (confirmed)
Average Daily Volume = 4.8 million

---

Mcgraw Hill Cos - MHP - close: 85.64 chg: -0.40 stop: 88.51

No change from previous update on 04/10/05.

Picked on March 15 at $ 88.40
Change since picked: - 2.76
Earnings Date 04/26/05 (unconfirmed)
Average Daily Volume = 751 thousand

---

Pacificare Health - PHS - cls: 57.06 chg: -0.44 stop: 60.05

No change from previous update on 04/10/05.

Picked on March 20 at $ 59.04
Change since picked: - 1.98
Earnings Date 04/28/05 (confirmed)
Average Daily Volume = 1.1 million

---

Starbucks - SBUX - close: 47.51 chg: -1.11 stop: 51.75

Shares of SBUX produced another high-volume decline on Monday. We do not believe it is related to the news that SBUX purchased privately held Ethos Water today. Instead today's decline merely looks like follow through on Friday's breakdown. It is worth noting that SBUX bounced from its lows near $46.44 and odds are we can thank Goldman Sachs for that. GS came out with positive comments on SBUX suggesting the recent weakness may be a bullish entry point. We remain bearish and target the $45.00-44.00 range.

Picked on April 10 at $ 48.62
Change since picked: - 1.11
Earnings Date 04/27/05 (confirmed)
Average Daily Volume = 4.3 million

---

Wynn Resorts - WYNN - cls: 62.54 chg: -0.59 stop: 68.05

No change from previous update on 04/10/05.

Picked on April 03 at $ 66.04
Change since picked: - 3.50
Earnings Date 04/29/05 (unconfirmed)
Average Daily Volume = 1.1 million
 

Dropped Calls

PalmOne - PLMO - close: 24.37 chg: +0.10 stop: 23.85

We are really not surprised here. PLMO has been hinting at a breakdown for the last few days and thus our recent cautious comments. We had been expecting the $24.00 level and the 40 and 50-dma's to act as support. Shares of PLMO pierced all three of these levels intraday and traded to $23.63 before rebounding. We've been stopped out at $23.85.

Picked on March 23 at $ 25.71
Change since picked: - 1.34
Earnings Date 03/17/05 (confirmed)
Average Daily Volume = 3.2 million
 

Dropped Puts

None


Trader's Corner

Point and Figure - Bullish Percentage

So far in the series on Point and Figure charts we have covered: The Basics, Support and Resistance and Relative Strength, which is a lot about Point and Figure charts but there is still more. Today we will discuss the granddaddy of P&F charts the Bullish Percentage Index (BPI). If you dont want to use any other P&F chart you and you are an investor in this game called the stock market, you should take heed of this index.

In the last article on Relative strength I mentioned "When using the Relative Strength charts one has to remember the all important part of this analysis is the word 'Relative.' If the whole market is falling a relative strength chart will tell you the stocks that are strong relative to the broader index but they may be falling as well. So it would be wrong to use these charts to position yourself long. You should be using other tools to evaluate the state of the market and position yourself in stocks that reflect your bearishness or bullishness. In other words if you see the market bullish as a whole then start looking for bullish RS candidates but if you see the market bearish as a whole then start looking for bearish RS candidates."

Today will answer the question is the market as a whole bullish or bearish. Or better yet, it will answer the question; is the index I am using for comparison bullish or bearish? We also will answer some other investment questions like:

1. When risk is high or low?
2. At what point do I take my profits?
3. How do I time the market and know when to go long, short or stay flat.

Market Timing

Have you heard that you cannot time the market? Have you heard the age-old argument that if you missed the 10 best days in the last 15 years your returns would have been 140% as opposed to if you were a buy and hold your returns would have been 248%? What these buy and hold proponents do not tell you is that if you missed the 10 worst days your returns would have been 473% as opposed to the 248% with a buy and hold.

Market timing does not have to be perfect. Market timing does not mean you get in and out of the market at the bottoms or tops. It does, however, mean you get out of the market before a major bear market devastates the portfolio and in before or during a bull run. Market timing means you grab as much from the middle as possible. Sometimes that is a huge amount and sometimes it is not.

In 1940s an analyst named Earnest Staby wanted a contrarian indicator that would be bullish at market bottoms and bearish at market tops, just the opposite of conventional price charts and created the concept for Bullish Percent (BPI). A.W. Cohen, the same analyst responsible for the famed Investors Intelligence Sentiment Survey built on the Staby's work and in 1955 created the NYSE BPI.

This indicator is often referred to as the coach for NYSE stocks because it will tell us if the offensive or defensive team is on the field. X's mean offense and O's mean defense. "Based on a University of Chicago study 80% of the risk in any stock is based in the market and the sector." The Bullish Percent will tell you the risk to being bullish and the risk to being bearish and hopefully get you on the right side.

What is Bullish Percent

A BPI is the percent of stocks in a given index or sector that are currently giving P&F buy signals. For example, if 300 of the 500 stocks in the S&P 500 index were exhibiting P&F buy signals, the S&P 500 BPI would read 60%.

A BPI chart uses the same three-box reversal to shift columns as in the normal Point and Figure chart but each box constitutes 2 percent, and the vertical axis runs from 0 to 100 percent. It will, therefore, take a 6% change in order to reverse this chart.

Needless to say that when the BPI is in a column of X's, more stocks are on buy signals and when in a column of Os more stocks are on a sell signal. Changes in the index can only come from "first" buy signals. It is this first buy signal that is recorded. All subsequent buy signals are not counted until the stock gives a sell and then another buy.

The Bullish Percent is a one stock - one vote indicator.

The formula for the S&P would be:

Number of stocks in the S&P on a P&F buy
500

The formula for the NDX would be

Number of stocks in the NDX on a P&F buy
100

P&F BPIs are maintained for many major indices including the S&P 500, S&P 100, Dow 30, NASDAQ, and NASDAQ 100 but the mighty patriarch of the BPI world is the NYSE BPI. It documents what percentage of stocks in the entire universe of companies that trade on the New York Stock Exchange are exhibiting P&F buy signals on any given trading day. It is important to note that the Bullish Percent Index is not something that can be applied to a single stock but rather an index that is calculated for a group of stocks.

How do you use BPI charts?

As with your basic P&F chart, the letters and numbers in the columns denote the months of the year but with these charts the time spent in a column of X's or O's is usually measured in months, not weeks. The other significant change is that there are no bullish or bearish resistance lines, something I rely quite heavily on when using P&F charts, however there are levels that we calculate to determine our risk.

What we are trying to do with these charts is determine who has control of the index, the bulls or the bears and who has the greatest risk. Let's say there are 500 stocks in the NYSE and that over the next couple of weeks 20 stocks give a new buy signal and 10 stocks give a new sell signal, which nets out 10 new buys or 2%. Remember that each box on the chart represents 2 percent, so a 2 percent net change in new buy signals puts one X in the column. This, of course, assumes the chart is already in a column of Xs. Also remember the only way to move from one column to the next is through a three-box reversal so you would need a net change of 6% to reverse or 6% new sells to reverse. Reversing from one column to the next is synonymous to losing or gaining control of the index depending on if you are a bull or a bear. If the BPI is in a column of Xs the bulls have control but if the chart is in a column of Os the bears have control.

Using a football analogy the "field" is 0 to 100 percent and where you are on this "field" determines your "field" position. The column you are in tells you who has football and the field position tells you how much room you have to run.

Let's now talk about the levels of overbought and oversold or, sticking to the football analogy, the end zones. BPI rules say overbought at 70% and oversold at 30%. If the chart was 30% or below and in a column of X's the bulls have a lot of room to run the ball and the most risk is for the bears. Supply is starting to dry up and there is not many sellers (demand increasing) left to push the market lower. On the other hand, if the chart is 70% or above and in a column of O's the bears have a lot of room to run the ball. Supply is plentiful and there are not many buyers (demand decreasing) left to push the market higher.

Six Risk Levels for the NYSE BPI

1. Bull Alert - This risk level can only happen when the index is below 30 percent and reverses into a column of Xs. This is your most bullish signal; bulls have the least risk (good field position) and have taken control of the index (in possession of the ball).

2. Bull Confirmed - Occurs when a BPI chart gives a buy signal such as a double top or triple top break just like the basic P&F chart. However, it is important to note that a buy signal below the 30% level is quite different from a buy signal at 70%. Remember your "field position."

3. Bull Correction - When a BPI chart is in a bull confirmed state but the market takes a rest and reverses into a column of Os. If the BPI reverses back to a column of Xs, the bull confirmed state resumes.

4. Bear Alert - This risk level can only happen when the index is above 70% and reverses into a column of Os. This is probably your most bearish signal; bears have the least risk (good field position) and have taken control of the index (in possession of the ball).

5. Bear Confirmed - Occurs when a BPI chart gives a sell signal such as a double bottom or triple bottom break just like the basic P&F chart. However, it is important to note that a sell signal above the 70% level is quite different from a sell signal at 30%. Remember your "field position."

6. Bear Correction - When a BPI chart is in a bear confirmed state but the market takes a rest and reverses into a column of Xs. If the BPI reverses back to a column of Os, the Bear Confirmed state resumes.

Let's look at an example.

First question - without looking at anything else, would you be long, short or flat here? The column of Xs or Os determines who has the ball. And the 70% or 30% helps to determine field position and who has the most risk.

The chart is in a column of Os so the bears have the ball and field position says the bulls have the most risk so you would definitely not be long and I can't see any reason to be flat. The only position left is to be short.

Let's look at the annotated chart.

Starting in 2001, the BPI got below the 30% and the risk is for the bears. Then sometime in October 2001 it reversed to a column of Xs, this was a Bull Alert, " Bull Alert occurs when the BPI chart is below 30% and it reverses into a column of Xs."

The BPI did not give a Bull Confirmed until November of 2003, "Bull Confirmed occurs when a BPI chart gives a buy signal such as a double top or triple top break." This is the point where investors would want their portfolios into long positions or where you would start using your relative strength P&F charts to look for long candidates.

Then next signal you have is a column of Os that is a Bull Correction, "Bull Correction occurs when a BPI is in a bull confirmed state but the market takes a rest and reverses into a column of Os. If the BPI reverses back to a column of Xs, the bull confirmed state resumes. "

The Bull Confirmed resumed with the next column of Xs.

Now we get above the 70% level and risk is for the bulls and now we exit any long positions and await a short signal.

Sometime in March of 2004 we get the next signal, a Bear Alert, "A Bear Alert occurs when you are above the 70% level and the chart reverses to a column of Os."

Then in May of 2004 the BPI chart gives a Bear Confirmed, "A Bear Confirmed occurs when a BPI chart gives a sell signal such as a double top or triple bottom break." This is the point where investors would want their portfolios into short positions or where you would start using your relative strength P&F charts to look for short candidates.

Then next signal you have is column of Xs that is a Bear Correction, "Bear Correction occurs when a BPI is in a bear confirmed state but the market takes a rest and reverses into a column of Xs. If the BPI reverses back to a column of Os, the bear confirmed state resumes. "The BPI chart as now reversed back into a column of Os so the bear confirmed resumes.

The BPI is not a market predictor, just a very good way to measure your risk. When the risk is high we become less offensive. When the risk is low we become more offensive. In many cases, the truth lies somewhere in between. With that said I think this is an extremely good case for not been long this market and that now is the time to use your relative strength P&F charts to find your weakest stocks and think about short positions.
 

Today's Newsletter Notes: Market Wrap by Jonathan Levinson, Trader's Corner by Jane Fox, and all other plays and content by the Option Investor staff.

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