Issue Date: 2003-Aug-03 

Hello Fellow ChartWatchers!

The markets moved somewhat lower this week, but the general trend since the start of July has been "sideways". Is this the top? John, Richard, Carl and Arthur all have differing degrees of bearishness in their articles this week ranging from Richard's short recommendation to Carl's "neutral" conclusion. It's great to see how different analysts approach things. But first, I've got another scanning tutorial for you...

Creating Your Own BPI

One of our most popular features is our collection of Bullish Percent Indices (BPIs). A BPI can be computed for any group of stocks - simply determine the number of stocks in the group that have a very simple pattern on their Point & Figure chart - the P&F Buy Signal - and divide that number by the total number of stocks in the group. We do that automatically for most of the major indices and S&P Sectors each night. You can see a list of all our BPIs here. Charts of our BPIs can be found here.

Despite our large collection of BPIs, people continue to ask us to add more. While we may add more in the future, I want to show you how Extra members can create your own BPI for any collection of stocks you can think of right now! This is also a great tutorial on using Extra's multiple-lists together with the scan engine.

The first step is to gather a list of symbols for the stocks that you want in your BPI group. For this example, I chose the following 30 gold-related stocks:

AEM,AAUK,AU,SIL,ASL,ABX,BGO,CBJ,CDE,BVN,DROOY,GLG,GFI,GG,GSS,HMY,
HL,IAG,KGC,MDG,MFN,MNG,NEM,PAAS,PDG,RANGY,GOLD,RGLD,SSRI,WHT

The next step is to put these stocks into a Favorites list in my Extra account. After logging into StockCharts, scroll down to the bottom of the "Your Favorite Charts" section of the "Members" page and click on the "Create New List" link. After entering the name "Gold Stocks" for this new list, you'll see the new (empty) list in Edit format. Find the "Many:" line lower down on that page and cut and paste a comma-separated list of ticker symbols into that box, then hit the "Add Many" button on the right. (Note: If you are using the list of gold stocks above, you'll need to cut and paste both lines separately). Make sure that you have all your stocks in your list before continuing.

Side Note: At this point, you can use the "format" dropdown at the top of the page to view these charts individually or together as a group - even as a group of P&F charts. See our Extra manual page for details.

Now you can use the Scan Engine's Standard Scan Interface to tell you how many of your stocks have the P&F Buy Signal right now. To get there, click on the "Members" tab and then click on the "Standard" link near the middle of the page. Once the Standard Scan page appears, click on the "Clear All Criteria" button near the bottom of the page to reset everything.

Now it's just a matter of selecting your new Favorites list from the "Group" dropdown and choosing "P&F Buy Signal" from the first "Predefined Chart Patterns" dropdown. To check your work, click "Update Criteria". You should see something like this:

Now, click "Run Scan". In a couple of seconds, a new window will appear with a list of the stocks in your group that have the P&F Buy signal. Scroll down to the bottom of the list to see the results count. That is the key number you need. In this example, on this day, 22 of those Gold stocks have P&F buy signals. That means that for today, my "Gold BPI" is 22/30 = 73.3%.

You can "back-calculate" your BPI for previous days by changing the "days ago" number next to the "P&F Buy Signal" dropdown in your scan. When I change that number from 0 to 1 and re-run the scan, I get 22 results again - that's common since the BPI for a small group of related stocks may not change for several days. I also get 22 results when I re-run the scan with offsets of 2, 3, and 4 days ago. However, when I re-run the scan with a 5 day offset, I get 21 results. That means my BPI was 21/30 = 70% on Friday, July 25th. Continuing back in time, I see that my Gold BPI was at 20/30 = 66.6% 7 trading days ago.

In theory, you can continue to "back-calculate" things up to 750 days into the past however that's really not a good idea since the calculations get less accurate the farther back you go. Still, with some persistence, you can get good BPI data for at least the past year or so.

The final step is to record your BPI data in a spreadsheet and then chart the results. Microsoft Excel works great, so do shareware programs like GUIPlot. If you find a particularly interesting BPI, please send us your chart and symbol list. We'd love to see it.

For more on using our Scan Engine, see our Scan Engine Tutorial.

- Chip Anderson

VIX and the S&P 500

The two charts below compare the VIX and the S&P 500 since 1998. The red circles on the VIX chart show the last four times that the VIX fell as low as the 20 level and then started to move higher. The corresponding circles on the S&P 500 chart show that each VIX upturn from 20 resulted in a market downturn of some sort. A lot of media types have been dismissing this indicator recently because it's stayed so low without a corresponding downturn in stocks. This week's upturn in the VIX suggests that its negative impact has yet to be felt. The VIX doesn't tell us how far down the market has to correct. But it's enough to warrant a more defensive posture in stocks. Seasonal factors have also turned against the stock market. The traditional summer rally usually runs its course during July. That's why July is usually a good month to take some profits during market rally. The rest of the third quarter isn't as promising.

- John Murphy

Since the last issue of ChartWatchers went out, John Murphy's subscribers received these timely, chart-packed articles:

HEALTHCARE & FINANCIALS LEAD FRIDAY DECLINE -- VIX IS BOUNCING -- SEASONALS ARE TURNING NEGATIVE
STOCK RALLY FADES -- RISING RATES HURTING HOMEBUILDERS -- BASIC MATERIALS ARE RISING
STRONG ECONOMIC HURTS HURTS BONDS, HELPS STOCKS -- THE SOX JUMPS 4%
MARKET REMAINS STALLED -- ADX LINE HAS TURNED DOWN -- LOW VIX IS IN DANGEROUS TERRITORY
FUND LEADERS FOR THE PAST WEEK FAVOR COMMODITY-RELATED AREAS
BASIC MATERIALS AND TRANSPORTS LEAD THURSDAY RALLY ON MORE ECONOMIC OPTIMISM
MARKET CONTINUES TO HOLD SUPPORT -- CYCLICAL LEADERSHIP -- GOLD JUMPS
LONG-TERM INTEREST RATES HIT HIGH FOR THE YEAR
DRUG STOCKS UNDER PRESSURE -- BONDS AND STOCKS ARE DOWN -- GOLD IS UP
MARKET ENDS WEEK ON STRONG NOTE -- CHEMICALS, INDUSTRIALS, AND OILS LEAD FRIDAY BOUNCE
IBM SPARKS TECH DECLINE -- NASDAQ LEADS MARKET LOWER --DOW NEARING RETEST OF 9,000 SUPPORT

Don't you deserve to see the same great analysis as soon as it's published?
Subscribe to John Murphy's Market Message today!

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Russell 2000 Short Opportunity?

Over the past several weeks, prices have attempted to rally in all the major indices; but, the “fastest” runner outside of the Nasdaqs – the Russell 2000 Small Cap Index – is showing signs of weakening from major resistance and pattern measurement levels. And given this – we think it prudent short positions be considered at the present time. Our target: a 50%-60% correction of the overall rise off the March low, which would carry prices back at a maximum to the level of the “double bottom” breakout, or to a minimum of 430. In either case – the decline is between 8%-10% from current levels – very normal within the course of a correction. However, if the 35-week moving now crossing at 403 average is closed below…then a material change in trend would be confirmed . Conversely…a break above trendline resistance would augur for much higher prices, but given the 14-week stochastic has turned lower…short positions are clearly warranted.

- Richard Rhodes

Want more of Richard's award-winning advice? Check out his Web site: TheRhodesReport.com

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The Not-So-Negative McClellan Oscillator

We continue to observe an internal correction of indicators while prices move sideways. Does this really reflect a process of undermining the foundation of the market that will eventually lead to a collapse? Not likely. We must remember that, under neutral market conditions, oscillators will tend to move back toward the zero line. Looking at the Advance-Decline Line (which is the raw data input for a number of oscillators) over the last several weeks, we can see that it is moving sideways, so clearly the market is in neutral, and, absent any upside energy, our primary indicators are falling back to the neutral zone by default.

But what about the McClellan Oscillator? It has become deeply oversold, so doesn't this reflect strong negative forces at work? No. Remember that the McClellan Oscillator is the difference between the 5% and 10% indexes. When the 10% index is above the 5% index, the McClellan Oscillator is positive. When the 10% index is below the 5% index, the Oscillator is negative.

If you look at the 5% and 10% indexes, which we display at the bottom of the McClellan Oscillator charts, you can see that several weeks ago they were both very high above the zero line and overbought. When the market shifted into neutral, the two indexes began to fall. Since the 10% index is faster than the 5% index, it fell faster and crossed below the 5% index, resulting in a McClellan Oscillator that appears to be very negative, but this picture is more one of upside pressure backing off, rather than an increase in selling.

In 2001 and 2002 we can see where the 5% and 10% indexes started their declines from around the zero line. In these cases, the indicators were reflecting neutral situations which evolved into severe weakness in breadth and, consequently, sharp declines in price resulted.

- Carl Swenlin

Visit Carl's website -- DecisionPoint.com -- for the most comprehensive collection of market indicator charts on the web. Breadth charts, Investor sentiment charts, P/E charts, even historical charts going back to the 1920s - DecisionPoint has it all!

Nasdaq: 5 Wave Advance or ABC Correction?

Technical analysis is just as much art as it is science and this makes charts open to interpretation. The advance in the Nasdaq Composite over the last few months provides a classic case and point. In Elliott terms, this is either Wave 3, which would imply further room to run, or Wave C, which would imply that the end is nigh.

In this week's chart, the Nasdaq Composite may seem overbought as it consolidates near the 62% retracement mark, but the trend remains up and the current move looks like a Wave 3 advance. Wave 1 extended from 1108 to 1521 (413 or +37%), and Wave 2 formed as an ABC (falling flag) correction back to 1253. Wave 3 is usually the longest in both duration and price appreciation. A typical projection is 1.618 times Wave 1, which would forecast a move to around 1920 before a pullback (413 x 1.618 = 668, 1253 + 668 = 1921). This would coincide with the Mar-02 high and give the index another 200 points upside.

The alternative count would be an ABC correction or massive reaction rally within a larger downtrend. With the index at the 62% retracement mark already, the move could be nearing an end. In addition, Wave C is expected to be relatively equal to Wave A (413 points or 37%), which would project an end between 1666 and 1716 (1253 + 413 = 1666, 1253 x 1.37 = 1716). The index
has overshot both of these levels, but the Nasdaq is quite familiar with overruns and has met resistance around 1700 over the last few weeks. Finally, 12-week RSI moved above 70 and has become overbought for the first time since Mar-00.

- Arthur Hill

FREE TRIAL OFFER - For a limited time, Arthur's website, TDTrader.com, is offering a two-week free trial including daily audio updates on the Nasdaq 100/QQQ, S&P 500/SPY and Dow/DIA.
Click here for details.

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