The Strongest Market Signal

The two approaches to market timing—predictive and confirming—almost always give conflicting signals when analyzing movements of the same time domain. That is okay because they are used for different purposes and have different goals. If contrary opinion says that the market has reached bottom over the intermediate term, the other approach—trending indicators for the intermediate term—almost always indicates that the trend is still down. This is normal. Why? Because it is normal that investors become very bearish (furnishing us with buy signals using contrary opinion)as prices are plummeting and at their low. The large price drop makes the trend indicators point down, but the predictive indicators are showing that the end of the decline has been reached, and higher prices are ahead. However, there are times when the two approaches do not give conflicting signals, and these are very important to note. When predictive indicators such as contrary opinion strongly indicate higher prices, and the confirming indicators have already confirmed the start of a slight uptrend, that is the strongest buy signal there is. There is nothing more reliable or important than when this unusual situation happens. Why is this so? It is expected that, as prices move up, more and more investors will become bullish. When, however, the bearish sentiment stays high or even moves higher than prices also move higher, that is not expected, and so it is the sign of a very strong stock market. At these moments, what is happening is that no one believes the upward price movement is real or that it will last. This skepticism is the fuel needed to keep the movement going, usually for some time. The same holds true when both categories of indicators are confirming that prices are declining. If contrary opinion is extremely bullish and stock prices have already started down, so much so that trend-following indicators are confirming the downtrend, there is no more reliable or important sell indicator.