The ULTRA Timer Report

We had hoped to get some type of minor dip as a buying opportunity but it just didn't happen. People often ask me why I use mechanical strategies if I think I can time the market with Technical Analysis. I've always said that some years my mechanical strategies perform better and some years my discretionary timing is better. I think this is normal for a timer. Diversification of Strategy is the key. Mechanical strategies don't wait for dips if they are too cautious about seasonal tendencies. They just buy when a signal fires. Obviously in Sep/Oct that was the right move. Luckily our mechanical strategies have been doing very well.

The last two trading days of October and first three trading days of November is historically the most bullish seasonal period that exists.

Historically since 1942 trading the SPX there have been:

Since this was released in ULTRA's SEAS2 system in 1994 trading the SPX there have been:

Winners: 100% (12 consecutive)
Annualized Return while Invested (CARWI): +261.67%

Even though the market is sorely due for a correction, 10/27/06 is our drop-dead buy date and therefore we will go 100% long SPX related funds with our accounts not controlled by mechanical methods at Friday's close.

We will hold that position until the close at the third trading day of November. After that day, we'll stay invested as long as the uptrend line S2 continues to support the SPX. If S2 obviously fails, we'll sell to 100% cash as long as the drop on that day doesn't go down to near S1. We'll define "near S1" as below 1360.

We do expect a new all-time high in the SPX to occur sometime in 2007. However, we are concerned that the bullish end-of-year run may have backed up a couple months with the market very near a correction.

We said in previous issues that we thought a crashing oil market would be part of the trigger for a huge stock market rally into year-end and in 2007. WROC is a mechanical stock market timing system based on the price of oil (WTI=West Texas Intermediate Crude Spot price) that plays a significant role in our proprietary strategies.

Basically WROC, a weekly system, generates a buy signal if the WTI has gained less than 0.5% compared to the WTI value 6 weeks prior. Once on a buy signal, WROC is looking for a WTI gain of over 2.5% compared to 6 weeks prior. If that occurs a sell signal is generated. WROC is a weekly system so it only checks for buy/sell signals after the Friday data has been downloaded. It trades infrequently enough that Next-day trading is recommended allowing you to run the system over the weekend and make the trade any time on Monday before the close of the fund's trading cutoff or the market.

As you can see its recent history has been tremendous. In the last two years there have been 83% winning trades with the SPX appreciating at a 24% annual rate while WROC is invested. The maximum drawdown has only been 4.2%.

The HSB we've been talking about for a couple months has now run it's course. R1 represents the early 2006 highs and is an obvious place for the NDX to pause. If that occurs and the correction takes out S1, we'd expect a drop to S2. This could be setting up another much larger HSB with R1 as the neckline.

We feel that buying the NDX near R1 is very risky but we would be huge NDX buyers if the NDX were to drop to S2. We strongly believe that the market is going much higher in 2007. If the NDX does form a large HSB, the minimum move upward it would imply is 300 points (17%).

As we've said many times in the past, the NDX-RS had broken out above R2 which was a bullish sign for the NDX and the general market. Now the NDX has formed a well-defined uptrend line S2 and dropped slightly below it. At this point we believe this is a minor problem for the NDX but does indicate a loss of strength.

(The chart above can be produced with ULTRA via the "Graphs" menu item with NDX in the "Database Item or EDF Name:" field and SPX in the "Divided by:" field).

RUT Technical Price Analysis

RUT Descending Right Triangle (DRT) (No Change)

The upside objective of the DRT bound by R1/S1 has now been fulfilled. The RUT is very near its early 2006 highs R2 and due for a correction.

RUT Relative Strength (RUT-RS = RUT/SPX)

RUT-RS has formed a horizontal line of support S2. A drop below that line would be a very bearish sign for the RUT.

(The chart above can be produced with ULTRA via the "Graphs" menu item with RUT in the "Database Item or EDF Name:" field and SPX in the "Divided by:" field).

Stock Market Summary

For our funds not controlled by mechanical methods, we're currently 100% cash. As we've said many time, we are very bullish for the long-term. As policy, we go 100% long for the October end-of-month bullish seasonality. Honestly, with the NDX and RUT near important resistance, we don't feel great about this move. But even if the market does correct in early November it could set up a fantastic buying opportunity where we could take riskier NDX positions. As we said above we will buy the NDX at 1650 (S2) if that level is reached during a correction in the near future.

On 04/26/06 with the XAU at 157.65 we predicted a drop to 135. Soon after that we predicted a further drop to 120 but stated that level would hold. We started buying at 125 stating we'd average down as the XAU dropped further to 120 which it did.

The 120 level is the top of a horizontal channel that had been in effect for a couple years after the huge Head-and-Shoulders Bottom that caused us to predict the XAU move to over 160 back in 2003. Now 120 has supported the XAU four times in the last year. That is rock-sold support. We expect the XAU to move back up to R1 (over 150) supported by S2. We will sell our gold positions near R1.

US 5-year Treasury Note Yield (TN)

TN has now obviously dropped out of the R1/S1 channel and retested that break. We expect a drop in rates equal to the width of channel giving an eventual downside object of around 3.60 (O1). That level also corresponds with first top in the channel and the late 2001 low which adds to the importance of that level.

How could rates drop that low in the face of a bull market? Further drops in oil down as low as 40, and a little fed support for the housing market which just put in its biggest median price drop in 35 years..

ULTRA Recommended Strategy Risk (No Change)

As we've said most of the year, we believe that the stock market is going to put in double-digit gains in 2006 and that aggressive strategies designed to capture and improve upon those gains should be utilized by investors willing to take on risk. We believe that 2007 will put in gains approaching 20%.

We continue to believe that as your annual return goals increase, your odds of high drawdowns increase, and your overall odds of attaining those goals decrease. Investors should use great caution when following strategies that seek to return 30% (or more) annually. And NEVER risk all your money on ANY single system or strategy EVER.

ULTRA URS STRATEGIES

Our URS STRATEGIES are now still slightly below their benchmarks so far in 2006 and have reduced drawdowns to only -3.6% compared to -12%. These strategies are currently 62% invested. As we've said before, these strategies are examples of extremely conservative strategies. We believe most investors should be more aggressive considering the bullish long-term chart patterns that are dictating this market.

URS Strategy Descriptions are HERE.

ULTRA EASY STRATEGIES

Our EASY STRATEGIES are currently 33% invested and performing well up +7.3% for the year. The SPX has moved ahead at +10.7%. However, our maximum drawdown has been only -1.7% compared to -7.7% for the SPX.

EASY Strategy Descriptions are HERE.

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