Bollinger: A Technical Outlook

06/23/2006 12:00 am EST

Focus:

John Bollinger

President and Founder, Bollinger Capital Management

When it comes to explaining the complexities of technical analysis and market forecasting, there are few advisors as concise, clear, and understandable as John Bollinger. And while best known for his technical work, he combines a solid fundamental overview with his studies.

"In the space of a few weeks a sharp correction in the markets erased the gains earned this year. This damage suggests to me that normal expectations for the year will fail to match reality. So, we will shift some of our emphasis from seasonals to actual market conditions going forward. We've found that when seasonals work, it is good to heed them, but when the market is listening to another tune it is best to pay attention to what the market is actually doing rather than hoping it will do what it has historically done.

"The GroupPower industry group structure is a great tool for examining the dynamics of groups and sectors and for facilitating rotation recognition. It has other, lesser known, attributes as well. For example, it generates some very interesting market-timing information. We calculate group advances and declines, up and down volume, various Arms indices, the High Low Logic Index and the High Low Index and the percents of stocks above their 10-, 50-, and 200-day moving averages. To focus on just one for a moment, the percent of groups over their 50-day moving averages is a superb intermediate-term market-timing tool.

"It doesn't signal often, but when it does it is important. This tool doesn't pick every low, and it is often a bit early, but the ones it picks are generally pretty important and very tradable. In the current sequence the initial low came on May 23 followed by a low in price the next day and a short rally. The current low was made on June 13th and we are expecting a rally.

"Another indicator that has been very helpful in this sequence is the ISE Sentiment Index. This is an option sentiment index that is formed from the volume of opening options transactions on the ISE, an all-electronic options exchange. The unique part of this index is that it only measures opening transactions, new bets on prices rising or falling. The recent numbers are very bullish.

"The third example of an indicator that suggests a bottom is Jim Alphier's Urgent Selling. This concept was first presented in Barron's on 26 February 1979. Like many robust technical analysis indicators this one is quite simple; for a given period, 15 days for Urgent Selling, one counts the number of up days and down days and subtracts the down number from the up number.

"The signal level is -4. So if we have 10 up days and 5 down days the US number is 5. If we have the reverse, 5 up days and 10 down days the US number is -5 and we have an Urgent Selling signal. Jim went on to develop a number of rules about groupings of signals and so on, but we like to think of Urgent Selling signals as markers of extreme downside momentum. The most recent signal occurred on May 23rd, which, in our view, was one day before the momentum low for the market.

" In the interest of keeping it simple, we have combined these three indicators- looking at the % of groups over their 50-day averages, a momentum indicator; Urgent Selling; and a sentiment indicator, the ISE Index. Together they argue eloquently for an intermediate-term market bottom and that's our call."

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