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II Insight 

4 February 2010

Global leaders in Technical Analysis since 1947


Welcome to the February edition of II Insight.


The first month of the New Year turned out to be the worse month since February 2009. Although as things now technically stand, February 2010 could actually turn out to be a real winner.  That ‘technical standing’ is the crunch of this month’s report.


The ferocity of the January sell-off, with broad participation, has created oversold conditions going into a new month. This is clear from one of our proprietary indicators, discussed later in the report. Also this month, we consider an interesting correlation between our current Advisors Sentiment Survey and readings from 1986.  We also take a look at some excellent examples of the use of long-term moving averages for trend entry, charting both the Japanese Yen and the S&P 500. The latter of those is unfolding as we go to press and it could even turn out to be one of the best market entry opportunities of 2010!


Finally, congratulations to the winner of our January competition.  P.H. of Novato, CA is a long time subscriber and successfully answered the question we posed on 12 January: Year to date, the iShares FTSE 100 ETF(ISF) is.... up between 0 and 10%.  A copy of "Exchange Traded Funds & Index Funds", published by the Financial Times is on it's way.


Happy trading


Tarquin Coe, Senior Technical Analyst


Chart of the month - Advisors Sentiment Survey


Our chart of month for February is actually over twenty years. It presents a useful illustration of how current readings from our Advisors Sentiment Survey could pan out. “History repeats” is of course the philosophy of Technical Analysis.


The Advisors Sentiment survey for the final week of January revealed a sharp jump in Advisors looking for a correction. The survey revealed that 36.7% of Investment Advisors were expecting a “correction”. That reading is the highest in 23 years! It was just surpassed by a reading of 38.1% from the 21st of November 1986.

































The implications of that reading in 1986 were that the market reversed a brief, but sharp, decline. Within days the market embarked on a monster rally, leaving those waiting for a correction behind. The market went onto rise 40% plus over the next 11 months.


We have been running this contrarian survey since 1963 and if it didn’t work, it would have been binned a long time ago. Essentially, over the years we have learned that when Advisors think alike, as a crowd, they are generally wrong. The message from the high ‘correction’ camp reading is - there will NO deep correction! Most likely there will be a very sharp reassertion of the uptrend anytime soon, as was the case with the similar reading in 1986, then the S&P 500 rallied 4.5% over just a few days.


At the time of writing, the sentiment readings for the first week of February were still being counted. It is possible that the “correction advisors” this week could blitz the 1986 figure, and if that’s the case, it would be a stonking buy signal.


Advisors Sentiment figures are published every Wednesday as part of the US Market Timing Service. The Sentiment Survey is also available stand alone. Visit our website for further details.      


Indexes – the S&P 500


In the final days of January the S&P 500 tested its hugely significant 500-day exponential moving average (EMA). This average has supported bull markets and contained bear markets for decades. Note the pull-back and subsequent reassertion from this average with the October 2003 and August 2004 pull-backs.  The retreat to the average in October 2003 lasted just a few sessions, with an underside dip of 1.2%.


The recent end of January test of this average only overshot to the downside by 1%, so within the tolerance based upon past tests. The first day of February has seen the index clamber back above the average.
We have seen many technical similarities between the rally off the 2002/3 bottom to the move off the March 2009 bottom. This is one further example and we consider the risk to reward ratio as excellent at current levels. Only a sustained break of this average would call for a 20% plus correction, something we deem unlikely, at least until the index has made new recovery highs.
We have been monitoring the S&P 500 closely over the past week in the intraday Coe Report. On pull backs to the 500-day EMA we have been rebuilding a long book, having already unwound a 95% net long position in the first week of January. At the recent index lows our portfolio consisted of largely Bond ETFS with just 10% invested in equities (and they were defensives). Subscriptions now available on a monthly basis for just $35, click HERE for further details.

Selected short-side trades?

In last month’s edition of II Insight we focused on our "Top trades for the teens", and if you missed this you can view it on the archive here.

All the ideas were "bulls", and that’s fair enough given the longer-term time horizon. However, if the last few years have taught us anything, it is that there is plenty of money to be saved by avoiding certain stocks and sectors, and plenty more money to be made by shorting them!

We have observed that the recovery from the dark days of early 2009 has been strong, and remarkably broad in its breadth - broader than one might expect. Could the next year or so see a separation of the sheep from the goats? Given the pace of social and economic changes that our afoot in the world, it seems a fair assumption that many companies will not make it into the next decade.

I asked colleagues Dr Jackson Wong and Mark Glowrey in our London office to come up with a few candidates for companies in their local market that might not make the cut over the next few years. After drawing up "list of losers", we then looked at the technical picture to see if a short position might be called for.

Here’s the list:

British Airways: An ageing player in competitive industry; unprofitable and burdened with overstaffing and a huge pension fund liability. Technically? The stock has recently broken out of a triangle formation to the upside and may have a long-term base. The long-term fundamentals are grim, but now is not the time to establish a short position.

HMV: Retailer of books and records. Both sectors are under severe competition from online competitors, whilst the industry itself is under threat from the wider subject of digital piracy. Observations made in local book and record stores are not encouraging. And technically?  The stock holds the downtrend, extending to new price and relative lows. Like many stocks of this nature, there is as degree of oversold to deal with, but HMV is a candidate for building shorts.

Other stocks include Manganese Bronze, the maker of the much-loved London Taxi. The company’s virtual monopoly of supply is now under threat, and - let’s face it - building cars is a tough way to make a living. Technically, the stock has once again renewed its downtrend and remains a sell, even at the low absolute share price of 87p.

Would you like to hear more from the London team? II produces a daily UK hotline. Existing subscribers can add this to their package by going to the "my account" section. New subscribers can sign up here.        


Currencies – the Japanese Yen


For just over two years now, the Yen has been strengthening against the Greenback, as evident on the weekly CurrencyShares Japanese Yen Trust (FXY) bar chart. During this time, pull-backs to the 200-day EMA have provided excellent entry opportunities.


This long-term moving average was again tested successfully at the start of the New Year. The subsequent follow through has provided confirmation that the trend is still up. We are bullish and expect a break of the November 2009 highs in the weeks ahead.


ETFs, alongside all major investment areas, are analyzed in the weekly ETF Review by Tarquin Coe. That product also gives you online access to our extensive range of ETF charts, tools and indicators.  On a daily basis, and perfect for the pure currency player, we also produce the FX Hotline.


Investors Intelligence Proprietary Indicators – the Short Term Composite
The January equities rout has pushed our Short term Composite Indicator down to its lowest level since the March 2009 bottom.
Once this indicator turns up, confirmation of a general market reassertion would be provided. Previously, as in July and November, once this indicator turned, the market moved sharply higher. The speed of the reassertions was such, that blink and you miss it. As soon as this indicator moves, the US Hotlines will be onto it.
Point and Figure charts have been a staple of analysis at Investors Intelligence since the 1950’s. Veterans Mike Burke and John Gray have amassed 76 years experience between them of P&F chart reading. P&F analysis of the Short term composite and many other indicators are available daily in the US Hotlines.
For those who are unfamiliar with the indicator: The short-term-composite is generated from scores awarded to 29 market indicators (un-weighted) and is only concerned with the most recent action. The Indicator oscillates between values of 0 and 100. Above 90 is super overbought and beneath 10 is super oversold.
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US Sentiment holds the key
The Advisors Sentiment Survey continues to provide advance warning of major market turning points.  
The analysis and data regularly feature in the international financial press as a key indicator of market reversion.
Examples of these articles can be found on Barrons, NY Times, and Investor's Business Daily.
Want to know more?  Click here  - and you can subscribe for just $335 annually.

Historic Advisors’ Sentiment data since 1963 is also available; please contact us for further details.

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