SP500 (SPX) Technical Price Analysis

Is the SPX Going to Breakout?

The next significant move in the stock market will be determined by whichever direction the SPX breaks out of the trading range (R1/S1) that has been in effect for most of 2004. Until this break actually occurs it's really impossible to know beyond an educated guess which way the break will go. However, we believe that it has become likely that this break is going to be to the upside because many of our most trusted mechanical timing systems have moved to bullish positions.

Ten Years of Real-Time Success

:The PENTAD system was included in the original version of ULTRA released in 1994. We have been using it now successfully for ten years. We believe that PENTAD is the best price-trend-following stock market timing system that exists. PENTAD uses a series of moving averages of stock market indexes, breadth, and interest rates to ensure that it is invested during intermediate-term up trends in the stock market.

When we included PENTAD in ULTRA in 1994 it had historically produced the following results (01/02/42 to 12/31/94):

Trades per year: 0.54
Winners: 82.1%
Maximum Drawdown: -12.9% (SP500 was down -48.2% at its worst)
Annual Return: 10.1% (SP500 gained 7.3% annually)
Percent invested: 37.0%
Annual Return while Invested: 18.0%
Winning Years: 92% (SP500 had winning years 71% of the time.

Back in 1994 when most people believed that timing the market was impossible, PENTAD had significantly outperformed the SP500 with 1/4th the maximum drawdown. The fact that PENTAD was only invested 37% of the time and in risk-free cash the rest of the time, made it low-risk by nature.

Because of the low drawdowns of a system like PENTAD, investors can use leverage such as the Rydex Nova Fund (which returns 150% of the SP500 return) in order to increase their annual returns significantly. We use PENTAD as an important component to an overall timing strategy that considers many uncorrelated types of market analysis that has been historically successful.

In real-time usage from 01/02/95 to 11/11/04, PENTAD has performed even better.

Trades per year: 0.61
Winners: 83.3%
Maximum Drawdown: -10.8% (SP500 was down -49.5% at its worst)
Annual Return: 12.8% (SP500 gained 9.5% annually)
Percent invested: 47.9%
Annual Return while Invested: 23.2%
Winning Years: 90% (SP500 had winning years 70% of the time).

In 2000 the stock market experienced the worst crash since 1929 while PENTAD was safely on the sidelines. In the last ten years PENTAD has ended the year with a gain every year but one, 2000 when it lost just 1%.

The current PENTAD buy signal has gained 2.3%

Amazingly, most investors have still not learned their lesson and still buy into the lie that financial institutions feed them. That is, that investors can blindly throw money at the market and succeed without considering the "timing" of their investments or sales. Every investment or business opportunity that exists requires proper timing in order to succeed.

But unbelievably some stock market investors remain unconvinced...

Sincerely,
Steve Hunter, ULTRA Financial Systems Inc.