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We keep hearing Abbey Joseph Cohen and most everyone on CNBC declaring bottoms. How do we know when we reached a bottom? Certainly not when Abbey says so seeing shes made many wrong calls recently. Professionals consider market sentiment indicators to be among their most valuable tools. Here are some good sentiment and short term indicators:
New High=New Low IndexSubtract New Lows from New Highs- NH-NL. You will get either a postive number, a neutral number or a negative number. Plot it out as a histogram. The NH-NL measures the balance of power between the leaders in strength and the leaders in weakness. When NH-NL rises above the centerline it shows bullish leadership is stronger. If the market rallys and NH-NL rises to a new peak, it shows bullish leadership is growing and the uptrend is likely to continue. If the market rallies and NH-NL shrinks the uptrend is in trouble. A new low in NH-NL shows that the downtrend is likely to persist. If stocks fall but NH-NL turns up, it shows the leaders are once again showing leadership. A trend that loses its leaders is likely to reverse.
short-term trading index aka TRIN
This evaluates buying and selling pressure. Specifically it measures the amount of volume going into advancing stocks versus the amount of volume going into declining issues. The formula is:
TRIN=(#of advancing issues/# of declining issues)
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(upside volume/downside volume)

A TRIN between .65 and .90 is a bullish sign for the short term. A reading below .65 is considered very bullish. A reading between .90 and 1.10 is considered neutral, any reading above 1.10 is bearish. TRIN can be used to help time your purchases. Example-if TRIN is bullish you might want to place your "ask" slightly above the "bid". If the TRIN is bearish you might wish to place market orders as it is unlikely you will receive a better price by waiting.
as of today, March 24 the TRIN is .55 for the NYSE and 1.46 for the NASDAQ.
TRIN works best when combined with the New High-New Low index. If TRIN becomes oversold while NH-NL reaches a new low it shows the bears are strong. If TRIN becomes overbought but NH-NL rises to a new high, it shows strong leadership in bulls and the uptrend is likely to continue.
The Tick Indicator is another good short-term barometer. It can be used intraday. Each stock whos last trade is completed at a higher price is an "uptick" and any trade completed at a lower price is counted as a "downtick". The Tick indicator equals all upticks minus all downticks. Any reading above +100 is considered bullish, anything between -100 and +100 is neutral and below -100 is bearish. The tick count used in conjunciton with the TRIN will give you a good feel for immediate market direction and help time your purchase and sales accordingly.
As of March 24, the TRIN for the NASDAQ is +232, it ranged on Friday from -691- 593. Once this year it was at -1299! Many people consider a tick count over -800 as a buying opportunity and over -1000 as downright panic and a prime buying opportunity. The NYSE tick cound was 444, it ranged on Friday from -520- 666.
Advanced/DeclineThis measures mass participation in rallies and declines. As Alexander Elder puts it: "The New Highs and New Lows are the officers, the Dow Jones Industrials are the generals and the A/D line shows if the soldiers are following their leaders." To use the A/D line as an indicator, subtract the number of declining stocks from the advancing stocks and plot. Keep an eye on peaks an valleys in the graph, broad based rallies and declines have great staying power. If stocks reach a new high but the A/D line increases too, it shows the rally has broad support. If new highs are mad but the A/D line decreases, the rally may be coming to an end. When the market falls to a new low but the A/D line traces a more shallow bottom than during the previous decline, it shows that the decline is narrowing down and the bear move is nearing an end. These signals usually precede reversals by weeks or months.
short interest ratio This is published monthly in Barrons and can also be viewed at http://www.viwes.com/invest/shorts/query.cgi
It is designed to spot when the public becomes overly pessimistic. Short interest ratio is calculated by dividing the total number of short sales outstanding on the composite by the average trading volume on the exchange that month. If the ratio is above 1.75 it is considered a bullish signal. A reading of 2.0 was reached in June of 1982, two months ahead of huge rally in August. 2.0 also registered in July 1970 which was the precursor to a bull rush. If the ratio drops below 1.0 it means over optimism, possibly bearish. Bearish calls are not as reliable as bullish calls, use short interest mainly as a buy signal.
odd lot purchases or short salesrefers to all transactions which involve less than 100 shares of stock. These numbers can be found in Investors Business Daily. To compute divide odd lot sales by total short sales each week. A moving average can then be used. The theory is that a trend toward increased odd-lot selling is bullish, a trend toward decreased odd-lot selling is bearish, a trend toward increased odd-lot buying is bearish, a trend toward decreased odd-lot buying is bullish. Odd-lots tend to panic and sell at the wrong times. The Odd-lot short sale ratio is not as accurate as it used to be do to the influx of oddlotter money in mutual funds and more and more puts.
VIXVIX is the volatility index. It can be found on this page http://quote.yahoo.com/q?s=%5Etic.o+^vix+^vxn+%5Etic.n+%5Esti.n+%5Esti.o&d=t It reached a high in December.

I hope this helps you KPers and hopefully some of these indicators will confirm a bottom for us soon enough. Good luck and be careful!

Fool On,
Peter


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