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We have developed a system for evaluating the short-term strength or weakness of a stock/fund/index by monitoring and rating the condition of certain indicators, and then assigning the stock/fund/index to one of six Hot/Cold groups.

The first, and most important element is the relationship of the Price Momentum Oscillator (PMO) to  its 10-day exponential moving average (EMA). This tells us instantly whether price action is strong (PMO is above its 10-day EMA) or weak (PMO is below its 10-day EMA). Placement in the top three Hot/Cold groups requires that the PMO be above its 10-day EMA.

The next element relating directly to price is the relation of the closing price to its 20-day exponential moving average (20-DMA). We assume the issue is stronger if price is above the 20-DMA.

The next element is internal strength as measured by the PMO direction and relationshop to the zero line. When the PMO is rising, it shows that internal strength is improving, and when the PMO is above zero, it indicates a persistence of positive price movement.

While price can move in an oscillating fashion, it can trend in one direction for extended periods of time. Oscillators, on the other hand, must oscillate regardless of the direction price is trending. For example, early in a rising price trend the PMO should also move up, but eventually it will top out and cross below its 10-DMA, even as price continues to move up. While this topping action warns us that internal and relative strength may be waning and that a momentum peak has been reached, there is no reason to close the position as long as price continues to appreciate. The reverse is true for price down trends.

Important to remember is that the PMO is short-term sensitive, and it will top and bottom frequently as it zigzags higher or lower. Our custom charts display the PMO so you can determine the general trend and its relationship to its 10-DMA.

The Hot/Cold list ranks securities/indexes into six (6) groups ranging from 1 (Hot) to 6 (Cold) according to the strength/weakness of price movement and internal strength (PMO). We can quickly assess the condition of these elements by the group number and "blinker" fields. The blinkers are a series of five plus (+) or minus (-) symbols we can use as a quick reference for what is going on with the indicators we are monitoring.

Here is an example of how they are displayed in one of our reports:

******************** MARKET INDEXES RANKED BY STRENGTH **********************
 
                    |-RankChg-| |---- % Price Change ----|  Hot/Cold
                PMO    5    15      On     5    15           Group &
Index          Rank  Day   Day   07/24   Day   Day    YTD   Blinkers
-------------- ---- ----  ----  ------ ----- ----- ------ |---------|
Biotech Index     1    0     0   -2.5%   -4%   +6%   +73%  4 -+ -+ +
Networking Ind    2    0     0   -0.8%   -6%   +5%   +45%  4 -+ -+ +
Brokerage Indx    3   +1    +4   +0.1%   +1%  +15%   +33%  1 ++ ++ +
Health Payer      4   -1     0   -1.2%   -6%   +5%   +46%  4 -+ -+ +
Internet Index    5   +4   +15   -4.2%   -7%   +3%   -15%  3 +- -+ +
Airline Index     6    0    +4   +0.9%   -3%   +8%   +11%  4 -+ -+ +
NASDAQ Comp       7    0    +6   -2.8%   -7%    0%    -2%  5 -- -+  
Comp Hardware     8   +2    +7   -4.3%   -4%   +2%    +8%  3 +- -+ +
NASDAQ 100        9   -1    +3   -3.0%   -7%   +1%    +2%  5 -- -+  
Semiconductor    10   -5    -7   -0.7%  -15%   -6%   +51%  5 -- -+ +
Comp/Tech Indx   11   +4    +3   -2.3%   -5%   -1%    +6%  5 -- -+ +
Retail Index     12   +6   +28   -2.5%   -4%   +3%   -10%  3 +- -+ +
Technology Ind   13   -1    -2   -1.6%   -8%   -2%    +9%  5 -- -+ +
Russ 2000        14    0    +4   -1.6%   -6%   -1%    +2%  5 -- -+  
S&P Midcap 400   15   +1    +6   -1.1%   -4%   +3%   +14%  5 -- -+ +
Healthcare Ind   16   -5   -10   +2.4%   -1%   -4%   +19%  4 -+ -+ +
Value Line Ari   17   +5   +11   -0.9%   -3%   +3%    +2%  3 +- -+ +
Gaming Index     18   -1    -2   +0.3%   -1%   +3%   +19%  4 -+ -+ +
Insurance Indx   19   +1     0   +0.9%   -1%   +4%    +9%  4 -+ -+ +
Wilshire 5000    20   +3    +5   -1.4%   -4%   +1%     0%  5 -- -+ +
Dow Trans        21   +4   +17   +0.4%   -3%   +7%    -5%  3 ++ -+ +
S&P 100          22   +2    +2   -1.1%   -3%   +1%     0%  5 -- -+ -
 
 

Moving from left to right: The first blinker tells us if the PMO is above (+) or below (-) its 10-day exponential moving average (EMA). The second blinker indicates if the closing price is above (+) or below (-) its 20-DMA. The third and fourth blinkers tell us if the PMO is rising (+) or falling (-), and if it is above (+) or below (-) zero. The fifth blinker tells us if the 5-day relative strength rank change is positive (+), negative (-), or no change ( ).

The Hot/Cold groups descriptions and qualifiers are as follows:

GROUP 1: Hot. Security/index is showing strength in all areas. PMO is above its 10-day EMA, price is above its 20-DMA, the PMO is rising and above zero, and 5-day PMO rank change is positive.

GROUP 2: Moving Up/Emerging or Topping. Security/index may be just beginning an extended up move, or losing strength while an up move is in progress. PMO is above its 10-day EMA,  price is above its 20-DMA, and the PMO  is rising, and the 5- day PMO rank change may be positive, negative, or no change.

GROUP 3: Mixed - Showing Strength. Securities/indexes in this group can be displaying a wide range of strength or weakness. The price is strong enough for the PMO to be above its 10-day EMA, which is the only qualifier for this group.

GROUP 4: Mixed - Showing Weakness. Securities/indexes in this group can be displaying a wide range of strength or weakness. Price is weak enough  for the PMO to be below its 10-day EMA, which is the only qualifier for this group.

GROUP 5: Moving Down/Fading or Bottoming. Security/index may be just beginning an extended down move, or decelerating during a decline. PMO is below its 10-day EMA, price is below its 20-DMA, and the PMO is falling, The 5-day PMO rank change may be  negative, positive, or no change.

GROUP 6: Cold. Security/index is showing weakness in all areas. PMO is below its 10-day EMA, price is below its 20-DMA, the PMO is falling and below zero, and 5-day PMO rank change is negative.

Generally speaking, securities/indexes in groups 1, 2, or 3 may be considered for purchase. Securities/indexes in groups 4, 5, or 6 may be considered for sale. However, this rating system should not be looked upon as a "no-brainer". It is a quick at-a-glance screen that can help you zero in on securities that may meet the criteria for action you are contemplating. Always check the chart and other indicators before taking any action. NEVER take action based solely on these ratings.

There can be considerable rotation between groups, but strong securities/indexes generally rotate around in the top three groups and weak securities/indexes generally rotate around in the bottom three groups.

As I said, this system is meant to allow an instantaneous assessment of stocks, mutual funds, and market indexes. It is not meant to replace more thorough examination of charts and other information. It is also meant to give a short-term snapshot, so you can identify problems and opportunities sooner rather than later.

The Hot/Cold Group and Blinker system packs a lot of information into a very small space, and it provides a three-dimensional, dynamic view of a stock's technical condition, usually not possible to convey except on a chart. While it doesn't replace chart analysis, it save a lot of time by identifying a "short list" for further research, and lets you know at a glance if the security/index you are following may be getting into trouble.