February 11th, 2008

Bear Market Possible:Today’s MTI Deconstructed

The question you must be asking is: If the MTI is now at 17105, which it has been for 4 trading days, what is the difference between MTI’s of 13684 and 21605, the two alternatives for it’s next move?

The answer is in the methodology of how the MTI is calculated. The MTI consists of two components, the rank order of four moving averages (60-, 90-, 180- and 300-day moving averages assigned values of 1,2,3 and 4) and where the index itself lies in relation to the 4 moving averages. The index could be above all the moving averages (value of 1) or below all four (value of 5) or between two of them.

Currently, the sequence of the moving averages from highest to lowest is 180-, 300-, 90- and 60-day, or translated as a sequence of 3421. The index itself is below all four of them, or translated as a value of 5. Therefore, the MTI is 5 x 3421, or 17105. This arrangement has occurred 19 times since March, 1964, or over the past 44 years. Twelve times, the arrangement morphed into the 13684, a situation where the ranking of the four moving averages weren’t change but the index itself moved up from below them all to just above the lowest.

But on 7 occasions it morphed into 21605. And what does 21605 represent? It’s when the 180-day moving average moves below the 300-day and the arrangement becomes 4321 …. and if the Index itself remains below all for (for a value of 5) then the MTI is 5 x 4321 or 21605.

What’s the relevance of all these statistics? The 300-day average today is 1463.46, the 180-day is 1476.54 and the Index today closed at 1339.13. Consider this a race. Which will occur first … the 180-day average moving below 1463 or will the Index itself run up above 1463.

The Index has declined so steeply in January, unless it recovers the ground it’s lost, over 9%, within the next 40-50 days, then the 180-day moving average could drop below the 300-day moving average and the MTI morphs into a 21605. The reason this is important is because an MTI of 21605 (and it can be preceded by several MTI’s other than 17105) is the essence of a bear market with significant declines!

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