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Newsletter September 23, 2006 Open Yourself Up to the Risks of Life Market & Sector Review $ Weighted Advancing-Declining Volume Largest Changes In Raw Numbers (21 Days) This Week's Economic Reports Open Yourself Up to the Risks of Life "Values, not disasters, are the goal, the first concern, and the motive power of life." - Ayn Rand. This implies that while people and the world are imperfect, while pain, suffering, and disasters do exist, they do not have to be and should not be the focal point of living. Too often, pain and disasters are the focus of living. Rather than spending their time and energies on the pursuit of values, they spend it trying to avoid pain, and that makes pain the focal point in life. If avoiding pain is the focus of life, positive action is limited. If you allow pain to become the dominant force in life, you sabotage your ability to think, grow, and to produce. If the avoidance of pain is your focus, it becomes extremely difficult to experience the process of living with the passion and spontaneity that you are capable of. Life involves risks. The essence of maintaining your mental well-being as a trader is taking a position in which you feel confident, while always knowing that you may not be rewarded for your work, your thoughts, and your willingness to take a risk. Even more important, when you don't win, you have to be willing to pick up and do it again. You have to be open to the pain that so often accompanies honesty and growth. The same is true of every aspect of living. Virtually every act in life should be an act of love, the essence of giving of yourself, but giving with the knowledge that you may not get anything in return and, then being able to pick up when you are unrewarded and give again. By giving in this way, the returns come back manifold both financially and in terms of the happiness you experience. You can give of yourself by using your mind, and get your return by having new opportunities and experiences available. Through your actions and efforts you bestow upon yourself new options and alternatives. You can give to yourself by taking risks in the financial markets, and receive financial benefits. You can give to others simply by opening yourself up and letting others see the real you. By dropping the self-protective shields designed to prevent people from hurting or rejecting you, and get your return from those special friends who make you feel seen and understood, who act as the mirrors of your soul. Opening yourself up to the risks of life may be frightening, but the fact is, there is no alternative. You will suffer pain one way or the other. There is no freedom from risk. There is no freedom from fear. There is no freedom from pain. There is no freedom from the possibility of failure. There is freedom in the acceptance of all of these as part of trading, as a part of life, and moreover, as the least important part of both. Market & Sector Review $ Weighted Advancing-Declining Volume One of my longer term goals is and has been to provide for our members effective asset allocation models. Not asset allocation in the sense of the percentage of assets allocated to the stock market vs. bonds. vs. cash vs. real estate as an example, but asset allocation in the sense of which sectors of the market (i.e. major market, sector specific, group specific stocks, even hard assets) to be invested in or trading. Interestingly, the explosion of Exchange Traded Funds (ETF) brings effective asset allocation to the individual investor/trader. It is no longer for the exclusive use of major financial institutions and mutual funds. Exchange Traded Funds now cover almost every asset class one can think of. When developing an asset allocation model one must consider a great deal of variables and account for them. How do these different indicators and/or variables act in differing market conditions, in different stages of bull and bear markets, and in different stages of the business cycle? It is in that vain that I bring to you some back testing work as we move towards these goals. While I cannot share each and every aspect or present results against various asset classes in the space of a weekly newsletter, I share these indicators against one or two indices and/or sectors, simply to allow everyone to follow the thought processes involved. Personally I welcome questions, comments (good or not), and suggestions. Over the years some of my best ideas have come from others making a suggestion or a criticism. New subscribers may wish to review the two previous newsletters before continuing on: September 9 & September 16. This week we are going to take our other new indicator developed in the September 9 newsletter, dollar weighted advancing volume minus dollar weighted declining volume and back test several aspects of this indicator, again in an attempt to understand what it may or may not be telling us. Be a bit cautious; these back tests are very narrow in scope and have not been back tested against a variety of issues, in differing market conditions. You will however have the opportunity to follow them in the future visa-vie our Wednesday and Friday evening chart posting of indices and sectors. As in the last two newsletters I will use the NASDAQ-100 (QQQQ) for illustration, then perhaps move on to a few sector charts when we finish. The first step was simply to apply as many moving averages to the chart as I could, then visually inspect the consequences of a moving average turn. I know many traders have a tendency to apply short moving averages such as 5, or 10 days hoping to hop on a move as early as possible. A negative consequence of shorter term moving averages - whipsaws. Being a bit of a Fibonnaci freak as well as from visual inspection I settled on a first test; the 34-day EMA. If the 34-day EMA is rising, buy. If it's falling, sell. Try to remember that accumulation and/or distribution takes time; it's not a one day or even one week process. Test period: 1/1/2000 thru 9/19/2006. It doesn't take a rocket scientist to notice there is nothing to like about this condition whether it be on the long or the short side. So let's move on. A very often overlooked tool by many is a simple Rate-of-Change, that is the price (of your stock or indicator or whatever you are measuring) today minus the price X days ago. Instead of using a small rate-of-change (i.e. EMA greater or less than yesterday-rising or falling) let's expand that rate-of-change to 13-days and see what happens. Test condition now becomes is the Rate-of-Change over the last 13 days positive or negative. What a dramatic improvement! An annual return of 13% is certainly respectable but even more so considering the NASDAQ-100 is down in the neighborhood of 60% over that same time frame. As in last week's back test of Buying Power, this rate of change of the EMA has a tendency to keep you in during major trends, an admirable trait. Here is a graph of the signals over that last couple of years. The rate-of-change component is shown in the second indicator box for easy viewing and the third indicator box contains the Buying Power indicator from last week. After viewing the above results it occurred to me; why not just take a rate of change of the actual dollar weighted advancing minus declining volume. It's a bit unusual, at least to me, to find a systematic approach so short term oriented yet successful. At least it appears to be against the NASDAQ-100 or QQQQ. Not everyone is short term oriented but if you are this maybe the basis for a neat little system for trading the QQQQ. More work however needs to be done, more tests against more indices and sectors. But it's certainly worth following to confirm or rebuff your timing. Today's exercise is simply to determine if dollar weighted advancing minus declining volume is a viable indicator, not an indicator to end all other indicators. Whenever this work in progress is completed it will involve not one indicator but a combination of indicators and will also consider short-term and intermediate term factors for those traders that fit into each category. The research will also be performed on many ETF's as well. Stay tuned! Below are the same sector charts as I posted in last week's newsletter through Wednesday 9/20. Signals as generated by the rate-of-change of the dollar weighted advancing minus declining volume are shown as well. The rate-of-change of the dollar weighted A/D volume is now posted on all index and sector charts for your perusal. If you now go to the sector and index chart postings on site, as of Friday's close, perusing this week's indicator discussion with last week's Buying Power discussion, you should come away with a good feel for the rotation taking place in the market! What's hot and what's not! More importantly what may soon become hot and what soon may cool off. Largest Changes In Raw Numbers (21 Days) Report Explanation This Week's Economic Reports Have A Great Week! Bill Disclaimer: Trading in securities, of any type, may not be suitable for all individuals. The contents of this newsletter are not a solicitation to buy or sell securities. The opinions expressed are solely that of the author. You must do your own research, contact your own financial advisor for suitability of any investments. Data gathered is from sources believed to be reliable, but NO guarantee as to their accuracy is made.