PMO Sell Signal Clusters

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(This is an excerpt from Monday's blog for Decision Point subscribers.)

QUESTION FROM MEMBER: First of all as a long time subscriber I want to thank you for the incredible service. The wealth of information on your site has been an invaluable resource for me. I especially am gratified that you instituted your daily blogs. Your latest missive about letting the market tell you what to do not telling the market what you think it should be doing is right on. I cant tell yo how many times I have been bearish "fundamentally" and 100% invested and visa versa because that was the message of the market.

I would like to make an observation and would like your feedback if you have time. My investment vehicle of choice are ETF's, and every day I access your ETF Tracker. I pay particular attention to the daily PMO cross overs and have found them to be very helpful as it relates to short term change in trends when clusters of buy and sell signals are triggered over a broad range of asset classes including the large indexes ( SP 500, NDX, etc). For instance in the last 3 days (1/19, 1/20 and 1/21) you show 28 sell signals on your daily ETF Tracker all coming at levels relatively far away from the zero line. This tells me that the odds for a change in trend is increasing yet I don't ever remember you talking about this as a tool to spot changes in trend. Am I reading to much in to this or am I on to something? I of course recognize that these buy or sell clusters can tell us nothing about the long term or intermediate trend but I have found them helpful and as we know all long term trend changes start with a short term change in trend.

ANSWER: Thank you for your comments. In each of our Tracker reports we include a section summarizing PMO Crossover Signal status. The issues are sorted into buy and sell groups, and then by the number of days the signal has been open, beginning with the most recent. Below is a picture of the report from 1/21/2011. (The lines on the actual report are links that will generate a chart of the ETF listed on that line, so you can quickly evaluate the viability of the signal. Signals are information flags, not action flags.)

Chart

You are correct that clusters of sell signals should attract your attention and cause you to consult other indicators. An important thing to remember is that the PMO oscillates around a zero line, which acts as a magnet. A reduction in price acceleration can cause the PMO to reverse course even as price moves higher. The following chart clearly demonstrates the concept.

This is a PMO Analysis chart for the 100 Dow Jones US Sectors, which is an excellent sample of a broad range of asset classes. Note that I have bracketed two time frames that show a gradual deterioration of the Percentage of PMO Crossover Buy Signals, each having a rapid decline in PMO buy signals at the end of the period -- meaning there would have been a large cluster of sell signals over a period of several days. Note that prices continued higher during those periods.

Chart

I think the Percentage of PMO Crossover Buy Signals Index is best used in conjunction with the PMO for the price index, in this case the Wilshire 5000. Currently it is overbought and moving sideways in a manner that often precedes price corrections.

Bottom Line: Clusters of PMO buy or sell signals identify climactic activity. Further investigation is needed to determine if the current price trend has been exhausted, or if a new trend has been initiated.

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Technical analysis is a windsock, not a crystal ball.

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