What Does Mechanical Investing Mean? By Investopedia

Buying and selling stocks according to a screen based on predetermined criteria, usually with the help of technical indicators such as relative strength or momentum. This method allows traders to enter transactions without emotion and backtest their strategies by using historical data from any time period.

For example, one of the most common mechanical investing systems is called the Dogs of the Dow. This strategy involves buying the 10 stocks on the Dow Jones Industrial Average with the highest dividend yield at the beginning of each year. The portfolio is then adjusted each year to only include the 10 highest yielding stocks. Proponents of mechanical investing say that using this method of investing removes all emotion by allowing a computer to do the work of deciding whether investing in a certain asset is warranted.

Is Mechanical Trading Right for You?

By Ken Long Long of Van Tharp Institute

When considering any trading strategy, your main criterion should be bottom line performance, that is, your bottom line performance. The primary question to answer is, “Could I execute the trading strategy according to the rule sets as defined?”

In this sense, whether a system is purely mechanical or discretionary or some combination of both is irrelevant. The rule set either makes money according to the plan or it doesn’t. If it does, then you can either follow those rules or not and make money or not.

Before you commit a lot of time and money to developing or investing in a particular trading system, it would be nice to know if your personality type fits that trading system. A lot of people believe that while they are working on developing their own trading system that fits them really well, they can trade a mechanical system since they just have to follow its rules to make money. Then, they discover that the mechanical system needs some of tinkering: bending the rules or otherwise adding a dose of discretion. Tinkering means breaking the rules (which may not have fit them) and they find they don’t make money, even though they know the mechanical system makes money. It comes down to following the system’s rules.

Here’s an example from my own trading experience from which I have had to learn to leave a system alone and follow its rules—even though that’s hard.

I have a mechanical system that is in the market only 10 to 15% of the time in a given year. It waits for specific high probability conditions to arise in the market, then it takes a position that is clearly against the mass psychology. It aims to capitalize on the market’s tendency to revert to the mean after extreme moves. The rule set guarantees that you enter the market in a direction completely opposite of what your natural human psychological tendencies advise.

I have back-tested this system extensively in multiple market types over the past 15 years with great results. I have traded it profitably with real money for more than four years. I have abundant evidence to be rationally satisfied that this system has a high probability of success and reliable results. Every time it fires a signal, though, I am still uncomfortable entering the position because of my psychology. I have had to learn how to accept the uncomfortable feeling as a positive sign of a good trade. Now I manage my psychology so that I can enter the position at appropriate risk levels when the system generates the signals.

In a larger sense, I think the following elements are necessary for pure mechanical traders:

* They have confidence in their analytical judgments.

* They have confirmed the reliability of the system.

* They have identified the risk level that allows them to apply their trading system without the danger of blowing up.

* They are committed to their periodic performance review and can approach the entire situation with analytical mind and rigor.

These are rare qualities for most people but for someone who wants to develop and exploit a good mechanical system, they are ideal.

Click here to learn more about Ken Long and the Van Tharp Institute

Click here for Dr Van Tharp Trading Workshop Schedule

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Click Here to Replace Buy-and-Hold with an Upgrading Strategy

“Trends don’t last forever, so why would you hold the same investment forever?”

History will repeat itself - are you ready?

* Did you successfully avoid the recent Bear Market?

* Or did you ride the market down with the “Buy and Hold” crowd?

* Did you see the warning signs before the bear market took hold?

If you are like most average American households, you saw your investments plummet in value by over 50% in the course of a few short months.

By the time the bear market hit the newspapers, most of the damage to Main street investor portfolios was already done.

Buy and Hold Facts

* You experienced a lost decade of returns if you practiced buy and hold during 1998 and held through 2008

* You experienced a 37% drop if you bought and held in 2008

* It will take a 58.7% positive return just to get back to break-even levels if you bought and held in 2008

* Trends don’t last forever, so why hold a stock forever?

* Tying up capital in a losing trade prevent you from participating in other asset classes and sector that are outperforming the market

* The mantra of “buy and hold” is preached by the mutual fund sales industry as a client retention strategy to prevent people moving from fund to fund. It’s a lot easier for mutual fund sales staff to increase commission income by signing up new customers, as opposed to growing the assets they manage on behalf of existing customers. It’s a business that was build on a model of paying a captive sales force generous long-term fees

The Bottom Line on “Buy-and-Hold”

The strict practice of “Buy and Hold” is an outdated investment strategy that has not performed well over more than a decade. Alternate investment strategies exist that not only outperform buy and hold results, but will also help preserve your portfolio capital in times of market distress. One of the best alternative investment strategies to Buy and Hold is Upgrading…

So What is Upgrading?

Upgrading is a process of continuously investing within the top performing segments of the stock market. Throughout business cycles and changing economic environments, stock market leadership regularly rotates through different sectors, regions and asset classes. As new leadership positions in the stock market emerge, an upgrading process will continuously guide you into the best performing sectors of the market. Before you can
implement an upgrading system you need to create a system that will regularly compute and rank all available sector investments by their overall performance potential.

How Do You Rank and Analyze Sectors?

The Sector Timing Report strategically analyzes and ranks sectors, indexes and alternate asset classes by their performance strength using our proprietary SECTOR SCORE ranking engine.

The SECTOR SCORE is a multi-variable mathematical model that analyzes multiple timeframes of price trend data movement within each sector, as well as its comparative pricing movement in relation to the overall market index.

The Sector Timing Report then ranks sectors in descending order of SECTOR SCORE each month to sort the marketplace leaders to the top of a ranking list.

The highest ranked sectors are outperforming the rest of the stock market index over the longer term, and this is where you will want to position your portfolio. As leadership of market sectors change, you will see new leading sectors rise to the top of the rankings, while under performing sectors drop in ranks.

When Buy and Hold becomes “Buy and Sold”

Once a sector has fallen out of favor and is no longer within the top-quartile of sector out-performers, or it has broken out of its up-trend, we will sell that sector and shift our gains into the next highest-ranked sector in our SECTOR SCORE ranking index.

How Has Upgrading Performed?

Over the long term an upgrading process can help you outperform most mutual fund managers and the market index. During bull markets you will see the strongest sectors driving market gains ascend to the top of the list, while in bear markets you will see alternate asset classes, inverse sector funds and safe haven sectors dominate the top of the ranking list. The Sector Timing Report has outperformed the market and most mutual funds and advisory newsletters over the last several years, and successfully avoided the carnage of the 2008 bear market.

Click Here to View the Results of the Sector Timing Report Model Portfolios

Upgrading is Simple to Use

To use the Sector Timing Report you simply remain invested in the top ranked sectors and indexes on the report. It really is that simple. The best feature of all is that the report is designed to allow you to create your own unique portfolio and it gives you all the tools you need. You can follow an upgrading process on many different types of sectors or asset classes as our ranking report is broken out by asset class categories, and offers an intuitive and easy to use system.

As sector rankings in the Sector Timing Report change over the month, simply rebalance your portfolio by selling sectors that have dropped in ranking and replace them with the new leaders on the report.

Staying on top of the markets with the Sector Timing Report only requires a couple of minutes each month to check-in with the new sector rankings.

Is Buy and Hold Officially Dead?

Although Buy-and-Hold strategies do not work well over a long-term contraction cycle, or even in a sideways cycle, there are other core strategies that will work just fine.

In fact, these strategies will work in UP, DOWN, or SIDEWAYS markets if you pay close attention to the trends and cycles within the sectors of the markets you are trading.

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It’s FreeWeek at EWI:

Click here to get charts, analysis and forecasts of Asian-Pacific and European markets.

Good Labor Day Weekend!

Our friends at Elliott Wave International have just announced the beginning of their wildly popular FreeWeek event, where they throw open the doors for non-subscribers to test-drive some of their most popular premium services — at ZERO cost to you.

You can access EWI’s near-term analysis of Asian-Pacific and European markets from EWI’s Short Term Update services (combined valued at $98/month) right now through noon Eastern time Friday, Sept. 10.

The timing couldn’t be better. Editor Chris Carolan has been on top of the recent market action in Asian-Pacific and European markets. This unique event only lasts a short time, so don’t delay!

Click here to learn more and get instant access to EWI’s FreeWeek of Asian-Pacific and European markets now — before the opportunity ends for good.

About the Publisher, Elliott Wave International

Founded in 1979 by Robert R. Prechter Jr., Elliott Wave International (EWI) is the world’s largest market forecasting firm. Its staff of full-time analysts provides 24-hour-a-day market analysis to institutional and private around the world.

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Click Here for Market Timing Strategies That Outperforms Buy-and-Hold

Discover a technique that outperforms Buy and Hold strategies by a factor of 84 times.

But First Ponder these Questions

Have you ever wondered why banks and mutual fund companies religiously preach “Buy and Hold” as the only investment strategy for long-term success?

Or, why the average management expense ratio for mutual funds is twice the cost of Exchange Traded Funds?

Especially when you consider that studies have show less than 12% of mutual funds can actually outperform the long run returns of benchmark indexes like the S&P 500?

* Maybe . . . having buy and hold clients maximizes mutual fund salesman trailer fees and commission earnings?

* Maybe . . . mutual funds are not set up to handle short term sales and redemptions effectively, and therefore need to create a compelling argument to practice Buy and Hold?

* Maybe . . . having buy and hold clients is easier to manage and allows them to focus their time on looking for more new clients to pay them even more trailer fees?

Market Timing” is the Future

There is no doubt that buy and hold has worked well for investors during bull markets, but what about sideways markets and bear markets? With the baby boomer generation approaching retirement years over the next decade, many economists are predicting that a net REVERSAL of capital flows will have a significant negative
effect on the markets, as well as making it more volatile.

Boomers will become net sellers of their invested capital as they liquidate long positions to finance their retirement cash flow needs. Wouldn’t it make sense to adopt a strategy that works in up, down and sideways markets?

Consider these studies:

“The Performance of Professional Market Timers” Journal of Financial Economics, November 2001 reviewed the actual performance of professional market timers over a period of 9 years and concluded:

* there is evidence of significant ability to time the market over all tests and portfolios

* most deliver returns that exceed buy-and-hold returns

* had lower levels of volatility compared to the S&P 500 index

“The Truth about Market Timing” Barrons article, Nov,5,2001 cites a study showing that since 1966 the buy-and-hold investor would have turned $1.00 into $11.71. During the same time period, if the investor missed the 5 worst days of each calendar year, that
same $1.00 becomes $987.12. A full 84 time the buy-and-hold amount!

Obviously, it is not possible to miss the worst 5 days of each year, but it highlights the point that market timing preserves your capital during downtrends so that more of it can be invested in future market upswings, which has a multiplier effect on your portfolio.

Consider these facts:

* 88% of Mutual funds fail to meet the S&P500 index return

* Mutual funds fees are TWICE the cost of ETFs on average

* High MER fees chew up a portfolios value over time when utilizing a buy and hold approach in sideways or downward markets

* Statistically speaking you are better off buying the S&P500 Exchange Traded Fund Index than trying to pick the next mutual fund that will outperform the index

* Most mutual funds are stuck having to ride down major market corrections, as they are not permitted by their investment policies to liquidate their entire holdings

* The mutual fund industry focus on “relative” performance measures has lost sense of investors needs. Do you know of anyone that would celebrate losing only 30% of their portfolio value in a given year? Fund companies brag of these returns as long as the benchmark index they measure their performance against has lost more!

The Benefits of Market Timing

* Timing the entry of new positions into strong trending sectors allocates your capital into the strongest segments of the market

* Timing strategies are usually mechanical in nature, and simply follow what is actually working in the market

* The biggest benefit of market timing is its ability to preserve your capital during downward retraction movements in the markets and sectors. The ability to preserve capital during these periods has a powerful and dramatic effect on your portfolio value over the long run.

Click here to learn about another simple capital preservation strategy that can MAGNIFY your portfolio results substantially over time.

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Click Here To Follow the Sectors, not the Broad Market Indexes

“Investors that understand how market indexes are constructed uncover great opportunities”

Consider these 2 questions carefully

* With over 10,000 listed companies in America, are the 30 companies in the Dow Jones Industrial Index a true representation of the market?

* If the S&P500 Index is in a downward trend, does that mean all stocks and sectors are performing poorly?

Learn to tune out noise

Obviously, the answer to the above 2 questions is a resounding “no”. Media reporting of the daily movement of stock market indexes has reduced the analysis of the market into a couple of meaningless sound bites that serves no useful purpose for investors with a strategy.

“Dow up 130 points today”

“Stocks retreated sharply today taking 150 points off the Dow”

“The market opened in weak territory on rumors of…”

The unfortunate result of this reporting bias has been the “conditioning” of mainstream America to emotionally react to a daily fluctuating average, and make ill-advised investment decisions with their life savings.

What to remember about Indexes

An index is simply an average of it underlying parts.

A Numerical Example to make the point:

Suppose we created a simple index of the market consisting of 20 equal sized sectors of the economy, each starting with a value of 10. In this example, the index starts with a total value of 200 points (20 sectors x 10 = 200 points).

Now lets assume at the end of year 1, the index is now worth only 175 points (it dropped 25 points, or 12.5% of its value).

If we break down the yearly result by sectors we discover:

* 14 sectors each dropped in value by 3 (a total value of 98)

* 4 sectors were unchanged (a total value of 40)

* 2 sectors increased by 8.5 points each (a total value of 37)

* Overall index total = 175 (down 25 points, or 12.5%)

The Results

* If you bought the index, your loss was -12.5%

* If you bought the top 6 sectors your gain was +28.3%

* If you bought the bottom 6 sectors your loss was -30%

* If you bought the 2 strongest sectors your gain was +85%

The Bottom line

If you continuously invest in the strongest sectors of a market, your returns will outperform that market index.

It’s really that simple.

How We Identify Market Leading Sectors

The Sector Timing Report strategically analyzes and ranks sectors indexes and alternate asset classes by their performance strength using our proprietary SECTOR SCORE ranking engine. The SECTOR SCORE is a multi-variable mathematical model that analyzes multiple timeframes of price trend data movement within each sector, as well as its comparative pricing movement in relation to the overall market index. The Sector Timing Report then ranks sectors in descending order of SECTOR SCORE each month to sort the marketplace leaders to the top of a ranking list.

The highest ranked sectors are outperforming the rest of the stock market index, and this is where you will want to position your portfolio. As leadership of market sectors change, you will see new leading sectors rise to the top of the ranking list, while under performing sectors drop in ranks.

Click here to learn more on profiting from sector rotation and how to boost your portfolio results substantially overtime.

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The Hindenburg Omen — Omen-ous or Not?

Elliott Wave International Chief Market Analyst Steve Hochberg Sheds Light on a Feared Technical Indicator

On Aug. 12, volatile market action coincided with a technical signal called the Hindenburg Omen, whereby a relatively high number of new highs and lows in individual stocks occur at the same time.

This indicator instantly gained an enormous amount of media attention. So we sat down with Steve Hochberg, EWI’s chief market analyst and close colleague of Robert Prechter, to ask him about the now-infamous Hindenburg Omen.

EWI: Steve, recently a market indicator called the Hindenburg Omen has been in the news, what is going on?

Steve Hochberg: Discussion of this indicator certainly has been everywhere. Someone emailed us and said they even saw it mentioned on the front page of the Drudge Report! Look, headline-grabbing names grab headlines. Essentially it measures the fractured nature of market action. Over the years, we’ve discussed numerous times in our publications how a fractured market is oftentimes an unhealthy market. The multiple non-confirmations registered at the recent August 9 stock high, which we talked about in the Short Term Update, are another manifestation of this bearish behavior. The message is consistent with how we view the Elliott wave structure.

EWI: Why are people interested in this particular indicator?

SH: That’s a good question, and it speaks to a broader issue, viz., the “re-emergence” of technical analysis into the mainstream consciousness of market participants. In Prechter’s Perspective, Robert Prechter discusses the timing of the popularity of technical analysis, of which Elliott waves, or pattern recognition, is the highest form:

“In long term bull markets, no one really needs market timing because the market is always going up. This was true during the 1950s and 1960s, a period of market strength. And it has been mostly true since 1982. From 1966 to 1982, though, the market was very cyclic, so investors couldn’t sleep like babies with a buy-and-hold blanket like they do today.”

The S&P 500 has a negative return over at least the past 12 years, so investors are naturally questioning the “broadly diversified, buy and hold” stance advocated by 90%+ of investment advisors. EWI subscribers are way ahead of the mass of investors because as the bear market progresses, the media should show increased focus on technical analysis, including patterns such as head-and-shoulders as well as trendlines, moving averages and, yes, even Elliott waves, just as they did during the last great bear market from 1966 to 1982. It will be an exciting time for those with even a cursory knowledge of the technicals.

EWI: So, what are you seeing now?

SH: Obviously we cannot give away our analysis, but the wave structure is clear, the myriad indicators we keep offer compelling confirmation and the market is accommodating our forecast. If readers have any interest in what this means for not only the stock market, but also all other markets, please give us a read to see if our work might be useful in helping to formulate your investment portfolio. We think it will be a worthwhile endeavor.

Read some of the latest nuggets directly from Elliott Wave International President Robert Prechter’s desk — FREE.

Click here to download a free report packed with recent analysis and forecasts from Prechter’s Elliott Wave Theorist.

Click here for more Elliott Wave resources, education, forecasts, advisories, and trading software.

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Hey, in case you haven’t seen one of the bazillion emails, the Seven Summits Trader Debut is happening today

Click here to attend the free webinar.

But in all seriousness, I’ve seen a sneak preview of
the SST and I can definitely see how it would generate
some buzz.

To celebrate the Debut, Mark (the developer) has 2
live webinars planned today: the first at 12pm Noon
and the second at 6pm Eastern (New York Time) - so
check your schedule and see what time works best for
you.

I’ll be at the 6pm webinar - honestly, I’m kind of
axious to see what kind of ‘extras’ he’s giving away
for the big debut. (Mark is known for really bringing
the giveaways on release day). The bonuses go like
hotcakes but man, I love all those extras! If you’re
anything like me, make sure you pick a webinar and get
your logins ASAP:

Mark will be teaching a lesson on the new ‘Scale &
Trail’ system, finally shedding some light on what the
system comes with (prepare to be shocked) and host a
live Q&A call with live audience members. So if I were
you, I’d bring your tough, skeptical questions because
you’ll probably learn a thing or two.

But whatever you do, try to get your hands on those
giveaways! Many of them are only given out to live
webinar attendees so get your seat right now and maybe
I’ll see you later today?

Did you see the most recent SST results update on trading Google?

+31.85 on a 130 minute chart!

Click here for more information.

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By Investors Business Daily CANSLIM Stock Investing Method

Will Big Investors Tune In To TV Listing Firm Rovi?

Today we’re going to revisit a stock we last looked at a month ago. It’s Rovi (ROVI) and its products help people find and then connect to TV shows, movies and music on any capable device they own. That technology is used by consumer electronics makers.

Rovi also creates electronic program listings for cable TV firms and other carriers. It was featured in an August 16th IBD 100 article, which noted the company is expected to release its Total Guide TV listing product this fall with two big electronics makers.

Rather than just a listing of what’s playing on TV, it will also list other forms of entertainment like what’s available at Blockbuster video or other download sites.

The company has logged some nice earnings growth gains in recent quarters. Last quarter earnings rose 45%, that’s better than the 25% minimum growth often seen in market leaders.

Sales were a little less impressive, coming in at 13% last quarter.

For the full year, analysts see earning rising 36% this year, but predict growth will cool to 19% in 2011.

The stock has a B+ Accumulation/Distribution Rating. That means there’s more buying than selling going on among big, professional investors.

And it’s held up pretty well compared to the action in the broader market. By comparison, the Nasdaq has a D- Accumulation Distribution Rating.

Return on Equity is 10%. That’s below the 17% minimum historically seen in the many leading stocks. That ratio measures how efficient the company is with the money shareholders have invested.

Mutual funds own about 43% of the firm’s outstanding shares. And the number of funds owning the stock has risen in recent quarters, so that’s a plus.

Chart Analysis

You see on the weekly chart that last month, the stock broke out of a base (Point 1).

As many of you know, base patterns are important because studies have shown that historically, many of the market’s winning stocks formed these chart patterns, then went on to score big gains.

After its breakout, Rovi hit a new high (Point 2). But then as the action in the broader market became choppy earlier this month, it pulled back to its 10-week moving average line (Point 3).

Its pullback has been fairly orderly so far. Even last week, when the Nasdaq suffered a big drop, Rovi fell only slightly. And volume was below average (Point 4). So there weren’t a lot of sellers rushing for the exits.

It found support at its 10-week line and now seems to be trying to bounce up from that line (Point 5).

Professional investors sometimes step in to buy shares near the 10-week line. And their buying power can launch sometimes launch a new run up for the stock.

So far, volume hasn’t been very impressive. Watch to see if the stock continues to climb and the move happens in above-average volume.

If it does, the buying range would be between the 10-week moving average line (Point 6) and 5% above the peak in the pullback (Point 7).

Stock Checkup

Rovi’s Composite Rating, EPS Rating and Relative Strength Rating are among the best in its industry group.

It’s B+ Accumulation/Distribution Rating is also No. 1 in the group.

Click here for the Investors Business Daily Online and Print Editions

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Restructuring the Real Estate Market: What It Means for You

By D.R. Barton, Jr. of Van Tharp Institute

“This is like déjà vu all over again.” — Yogi Bera

I have spoken to folks who have recently started to speculate in real estate again. Frankly, the current real estate marketplace is one of the toughest areas to comment on. What happens in real estate is very important to the equity markets, though, so I think we need to dig in a bit and see where the data and analysis trail leads us.

One factor that makes commenting on real estate difficult (as well as commenting on other areas of the economy, by the way) is the 800 pound gorilla in the room throwing around its weight—the US federal government. Trying to discern where market forces might take prices and trends in any given sector is a difficult enough task. When the government, however, makes broad regulatory changes, implicitly and explicitly guarantees debt, and throws out unprecedented amounts of cash, well, they make it nearly impossible.

So with the caveat that any of these government intervention forms could override any credible analysis, let’s take a look at a couple of compelling factors affecting the real estate world. We’ll wrap up with why equities traders and investors need to pay attention to real estate.

Some Useful Data

In March of 2009, I wrote about how both the real estate and equities markets were buoyed by the first economic report of a month-to-month increase in new home sales in over a year. I have included the following chart (current through Feb 2009) to show how small this move up was in the big picture.

(To clarify an acronym, SAAR stands for “seasonally adjusted annual rate,” which means that they take the monthly numbers and project them to an annual number with some allowances for seasonal tendencies.)

In that article almost a year and a half ago, I opined that this was not a reason to get overly excited about the real estate market, since this was just the first sign of the market halting a drastic skid.

And while the real estate sector and its component stocks have improved since then, the argument could be made that the improvement is just the rising tide of the broader equities market lifting all ships. New home sales since that first move up have supported this view.

As the chart shows, there has only been a minor move off of the lows and now we are almost back down to the level of the bottom in February 2009. More telling is that the number of new home starts remains at slightly more than 40% of the relatively static rate of the mid-1990s, and at one-quarter the monthly rate of the unsustainable highs seen in early 2006. The outlook for a big move up isn’t that compelling.

Demographics Are Useful, but Take Them with a Grain of Salt

The Barron’s cover story from a couple of weeks ago was entitled “Renter Nation”. The most interesting data from the article centered on demographics. It’s no surprise that the number of households owning their own homes has dropped by almost 4 million since the peak from a few years ago. The interesting part came from the data about the shifting age demographic in the U.S.

While current overall home ownership stands at 67.2%, the number for households headed by someone under 35 years of age is just 38.9%. This is easy to understand—more folks will own homes as their income increases. The aging trend in America for the next five to six years, however, is toward younger households, with American Demographics magazine forecasting substantial growth in households headed by those under 35 and a decline in households headed by those in the prime house buying age bracket of 35 to 49 year olds.

Quite simply, there will be fewer eligible home buyers in the relatively near term. Add to this the tightening mortgage requirements and the outlook for real estate becomes strained. In fact, 2009 was the first year since the early 1990s when less than 10% of mortgages required less than 10% down. The high for this number was just 2 years ago when 29% of all mortgages were written with less than a 10% down payment.

So What?

Real estate speculation is not dead and certainly some there’s some interesting activity in several regions of the country. But those jumping back into that endeavor should do so with eyes wide open. I’m afraid that the days of real estate prices only going up are long behind us. A more likely scenario is another down leg in real estate prices before they can find a bottom and generate the conditions for a more sustained multi-year bull market.

For equities traders and investors, it would be very prudent to keep your eyes on what’s happening in real estate, especially at the national level. It’s a huge part of the economy; it interacts closely with the finance sector and there are big changes afoot. Pay attention to what happens at the meetings currently underway to overhaul what has become a nationalized mortgage financing systems. More on the outcome of that meeting when it concludes. Until then…

Great Trading, D. R.

About the Author: A passion for the systematic approach to the markets and lifelong love of teaching and learning have propelled D.R. Barton, Jr. to the top of the investment and trading arena. He is a regularly featured guest on both Report on Business TV, and WTOP News Radio in Washington, D.C., and has been a guest on Bloomberg Radio. His articles have appeared on SmartMoney.com and Financial Advisor magazine. You may contact D.R. at the Van Tharp Insitute

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Slicing the Neckline: A Classic Technical Pattern Agrees with the Elliott Wave Count

In the August issue of his Elliott Wave Theorist, market forecaster Robert Prechter alerted readers that the U.S. stock market was slicing the neckline of a classic head-and-shoulders pattern in technical analysis, and that this may send the market into critical condition.

Prechter said that when the Elliott wave count and a head-and-shoulders pattern are saying the same thing about the stock market, it’s best to pay attention.

Here’s how the August issue of the Elliott Wave Financial Forecast, the sister publication to Prechter’s Theorist, described the head and shoulders pattern unfolding in the stock market:

“The weekly Dow chart [below] shows the development of an intermediate-term, head-and-shoulders pattern from the January high at 10,729.90 to the present. The January high marks the left shoulder, the April 26 high at 11,258 is the head, and the right shoulder is now ending. The April [Theorist] discussed the pertinent characteristics that Edwards and Magee used to define this technical pattern … all apply to the current formation. Observe how weekly stock trading volume has contracted during the development of the right shoulder, a necessary trait of this pattern. The downward-sloping neckline — exactly as on the big ten year pattern — displays market weakness, which is consistent with our interpretation of the wave structure.”

This chart shows the head-and-shoulders pattern.

Here’s what Robert Prechter himself said in a recent Elliott Wave Theorist:

“Generally, when the neckline slopes downward, the right shoulder does not rise to the level of the left shoulder …”

Please look at the chart again — then re-read Prechter’s quote.

Click here to read some of the latest nuggets directly from Robert Prechter’s desk and download a free market forecast report free.

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