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Here now with a technical read on the markets is Lou Mendelsohn. He’s technical analyst and President and CEO at Market Technologies, based just outside of Tampa, Florida. Lou, welcome to the program.
Lou Mendelsohn: Thank you very much.
Before we talk about what your readings are telling you right now about the conditions of the market after this week’s rally mode, I want to get a little idea about your proprietary systems because you say you have a way of being able to predict through the moving averages several days in advance what they’re going to do.
Lou Mendelsohn: That’s right, yes. We use intermarket data that looks at the relations of ten markets to one another. Then we use a mathematical tool called neural networks that does pattern recognition on that data and through the use of the intermarket data we are able to make forecasts of moving averages so that we’re able to get an indication as to what the likely trend direction of the market is going to be over the next two to four days.
I do a lot of work with moving averages and that’s always been the tricky part is that they’re somewhat of a lagging indicator so this really kind of solves the problem that are inherent to moving averages.
Lou Mendelsohn: Moving averages have a lot of nice qualities to them because they are quantifiable, they are very precise, and you can really measure the market. But the unfortunate thing, the Achilles heel of them is that they lag the market. So over the last ten years I have been working on forecasting moving averages and by doing that you effectively eliminate the lag and they really become a powerful tool.
In addition to that, do you do sector work here as well?
Lou Mendelsohn: No, we look at the major stock indexes, we look at the Interest rate markets, the currencies, and the energy markets. Not within the stock market the different sectors, no.
Let’s take it one at a time. What are you now gleaning from your work on conditions in the market?
Lou Mendelsohn: We look at the Dow Jones Industrial average, the Dow Jones futures, the NASDAQ 100, and the NASDAQ composite, among a couple of other stock indexes. On the Dow we’ve had our 10-day predicted moving average be positive since March 27th and it’s been solidly positive since then. We also predict a 5-day moving average for 2 days in advance and that’s been a little bit less positive over the last couple of weeks then the 10-day. We have another indicator that we predict which is called the neural index, which tells whether the market is going to make a turn, whether it’s going to make a top or a bottom over the next 2 days. On the Dow, all three of them are positive as of Monday and Tuesday of this week and of course the 10-day prediction has been positive since March 27th. On the NASDAQ and the S&P and the NASDAQ 100 they all are positive as of Tuesday of this week, which is a day before the big rally that we had on Wednesday. So all four of those markets at this point are again solidly in positive territory. I’d like to see the 10-day predicted moving average on the Dow stay positive and get stronger. I’d like to see the spread on the predicted average versus the calculated 10-day average widen and that would show that we have more strength coming up.
Are you concerned at all that the market that it’s come very far, very fast?
Lou Mendelsohn: Well, again, we’re going by the numbers, we’re not concerned. We’ll update our models this evening and go by the numbers.
Sometimes when I look at the Dow and the S&P it looks like two entirely different markets and the Dow is solidly above its 200 day or 40 week moving average and looks poised to set new highs somewhere along the line here. The S&P 500 is well below its declining 40 week moving average. Is the Dow basically leading the way here or is this just a safety valve that people want to put their money?
Lou Mendelsohn: It’s probably a combination. Clearly a safety valve, a defensive posture for some parties, but again I think if the Dow will hold up on the 10-day prediction, if we can keep that moving average that’s predicted for the next 4 days positive I think that there’s enough money out there on the sidelines that it will feed itself into the market and extend over from the Dow into the S&P and of course other areas. We’re only looking four days ahead. We’re not making a prediction for a month from now, or two months from now. Things can change and that’s why we update it each day and we’ll see what happens after tonight’s update.
Lou Mendelsohn, thank you very much. Good luck with your work. Lou Mendelsohn is president and Chief Executive Office of Market Technologies, based just outside of Tampa, Florida.