VectorVest Views 8/13/04
THE MARKET TIMING GRAPH.
The Market Timing Graph is the single most important graph in VectorVest and deserves your immediate attention every day. It depicts the data shown in the Daily Color Guard Report and allows one to see the long-term trends of the stock market, as well as short-term direction. This graph, along with the Daily Color Guard Report, should dictate your investment decisions.
THE STANDARD GRAPH.
The Market Timing Graph may be accessed in several ways. I generally click on the Market Timing Indicator header located in the upper right corner of the Home page. You may also access it by clicking on Market Timing Graph located in the Charts and Graph Section at the left side of the Home page or you may click Graphs on the local Tool Bar; then click on Market Timing Graph.
I use the "Layout Bar" function to show a 1-Year, daily graph of Price and a 40-period MA of Price in the upper portion of the graph. Our MTI appears in the lower portion. Price, of course, refers to the Price of the VectorVest Composite and MTI refers to our Market Timing Indicator. The interpretation of this graph is almost self-explanatory. When Price, as depicted by the black data points, was hitting higher highs and higher lows as shown in the period from 08/13/03 to 02/26/04, the market was in an uptrend. When Price began hitting lower highs and lower lows from the peak of 04/05/04, the market changed to a downward trend. This is well and good in hindsight, but one needs to make a more timely analysis of the market as it unfolds.
If one were to look at a 2-Year display of the graph cited above, they would see that the 40-day MA of Price does a reasonably good job of signaling market direction. When Price rose above its 40-day MA in mid-March 2003, it did a wonderful job of signaling the monster rally. Although the uptrend was bumpy, it stayed in an uptrend until mid-March 2004. You can see, however, that it can give false signals in two ways:
(1) Price may fall below its 40-day MA during an uptrend or rise above its 40
day MA in a downtrend, and
(2) The inflection points of the 40-day MA are late in signaling trend changes
in fluctuating markets.
A faster, yet more certain analysis of market trend may be made by using the 40-day MA of Price in conjunction with the Color Guard and the Market Timing Indicator. Note, for example, that the Color Guard gave a green light for the Price of the V V C and an Up on the Primary Wave on 03/13/03. The Price of the V V C rose above its 40-day MA on 03/17/03 and the MTI rose above 1.00 two days later, reinforcing the Up signal and producing an UpUp situation. Our two-week rule and the BSR gave a Confirmed Up, C/Up, signal on 03/21/03.
Was there any way of sensing that this move could be forthcoming? Yes. When the Price of the V V C hit $14.21/share on 02/13/03, the MTI hit 0.58. When the Price of the V V C subsequently sank to $13.91 on 03/12/03, the MTI fell to only 0.61. So while the Price of the V V C hit a lower low, the MTI hit a higher low. This was a bullish divergence and suggested a turning point was imminent. You may also recall from my essay of 07/16/04 on identifying turning points, I wrote that the market is very oversold when Price gets very close to or goes below Stop. That certainly was the case on 03/12/03.
Now let's look at the rally itself. The Price of the V V C generally stayed above the 40-day MA throughout the rally, but broke below it on four occasions. On each occasion except the last, the MTI stayed above 1.00. On the last occasion, 03/10/04, the crossover produced a bona-fide down signal. The MTI went below 1.00 on the following day, and we received a C/Dn signal on 03/15/04. Except for one final gasp, the monster rally was over.
The MTI was also useful in anticipating the end of the bull rally. Note that it peaked at 1.70 on 01/21/04. The Price of the V V C peaked on 01/26/04 and subsequently hit three new highs with the last occurring on 04/05/04. Although the Price of the V V C was hitting these highs, the MTI began a pattern of hitting lower highs and lower lows. This pattern indicated that the upward momentum of the market had dissipated and the end of the rally was at hand.
Currently, the Price of the V V C is below its 40-day MA, the MTI is below 1.00 and we have a DnDn situation. Notice, however, that while the Price of the V V C is currently below the May 17 low of $20.32, the MTI is still above its May 17th level. This divergence suggests that the market is losing downward momentum and a turnaround may be imminent.
Another wealth of information also can be obtained by replacing the MTI with the BSR in the lower portion of the graph. In regard to the monster rally of 2003, the BSR rose above 1.00 on 03/21/03, giving the C/Up signal. It broke down quickly thereafter; then stayed above 1.00 until 03/11/04. The BSR also hit an all-time record high of 7.95 on 06/05/03, showing the incredible breadth of the rally. Currently, it stands at 0.24. At this level, it too is indicating that the market is oversold and a turnaround may be imminent.
The Price-Stop relationship, however, shows that the Price of the V V C is still well above Stop. It suggests that there's more room to move to the downside.
So there you have it. The market is in a severe downturn, but there are rays of hope that it may end soon. My gut feeling is that the market is poised to go up, but every rally gets nipped in the bud by bad news of one kind or another. Nevertheless, when the rally finally arrives, you'll see it first in the Market Timing Graph.