Point & Go Figure: The Trend is Your Friend... Until It's Not
In a way, the trend IS my friend.
"Trend" in Point & Figure is a rules-based concept. What are the rules? In PnF an orthodox positive trend line is drawn at a 45 degree angle on the chart from the lowest point on the chart preceding the first buy signal following a series of sell signals. A negative trend line is drawn from the top point of the chart, always at a 135 degree angle.
These rules are very specific. A stock is either above the positive trend line, or below it, in a negative trend. There is no room for disagreement. This is helpful in determining context and major market reversals because in the aggregate they can be measured on a percent basis and plotted on a point and figure chart. Below is a chart of the percent of S&P 500 stocks in a positive trend, courtesy Dorsey Wright.
What is important to note on this chart are the following:
1) The risk level is 70%; a "high-risk" level based on PnF percent charts.
2) The declining tops since February 2004, indicating fewer stocks able to re-establish positive trend on market advances and coinciding with the narrowing breadth shown by the PnF bullish percent index charts across all markets.
3) The potential triple bottom sell signal at 68%.
A sell signal for this indicator has not been generated since July 2002. At that time the sell signal occurred at the very, very low-risk level of 22%. Yes, that means that in July 2002 only 22% of the stocks in the S&P 500 were in a positive trend. Between March 2002 and July 2002, this indicator plummeted from 68% to 18%.
This chart shows the magnitude of the move higher from July 2002 and why risk right now is as high as it has been at any point since 2001, despite the recent "selloff" in the market.
What is interesting to me is that this potential triple bottom sell signal for this indicator is occurring with the bullish percent indexes for virtually all segments of the market negative. As well, long-term monthly DeMark indicators for many market indices are on "sell" signals having already generated price completions. Moreover, some Elliott Wave counts show the SPX and other market indices having a high probability of initiating (or soon initiating) primary wave three down.
The bottom line is that the technical evidence across many different disciplines is showing a confluence of high risk at this juncture. A move to 68% on the SPX Positive Trend indicator would add to that evidence showing that a trend change of major degree is taking place for the S&P 500.
Right now there are 350 (70% of 500) stocks on the S&P 500 above their PnF trendlines. It will take a net positive trend loss of 10 stocks to break a triple bottom on this indicator, registering the first sell signal since 2002. Which stocks to watch? On the negative side I saw 65 stocks I consider "at risk" for positive trend violations. Of those, I found 21, more than double the 10 needed, within 5% of their positive trend line.
Ace Limited (ACE)
ADC Telecom (ADCT)
Best Buy (BBY)
Capital One (COF)
Dominion Resources (D)
Federated Dept. Stores (FD)
Health Management Associated (HMA)
Marathon Oil (MRO)
Morgan Stanley Dean Witter (MS)
Proctor & Gamble (PG)
Adolph Coors (TAP)
Union Pacific (UNP)
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