In Part 5 we examine various PMO configurations that will be encountered, and we suggest ways that they may be interpreted. Understanding the effects of Trend Bias will greatly facilitate the interpretation of any indicator, and we recommend that you review that article.

SIDEWAYS WIGGLE

The following chart illustrates a common PMO formation that emphasizes why all PMO crossover signals cannot be taken literally.

The area circled in red is typical of PMO movement during a steady rising price trend. There is little volatility in price movement, so the PMO moves sideways. The fact that the PMO remains above the zero line testifies to the strength of the price move; however, minor zigzags in price movement cause the PMO to whipsaw above and below its 10-EMA, generating many unprofitable crossover buy and sell signals.

The best PMO crossover signals result at the conclusion of long, straight, steady PMO moves into the overbought and oversold ends of its range. Because of Trend Bias PMO tops and crossover sell signals should be viewed as cautionary signs, but it is usually more practical to use price stops to decide when to exit long positions.

The next chart shows how sideways wiggle ultimately will end and how it can offer subtle clues that the end of the trend is near.

As we said above, it is often best to allow price stops to trigger exit from long positions. You should become more alert to the possibility of a breakdown as the angle of the price trend increases. Note how the final blowoff (circled) and reversal is accompanied by a PMO top that occurs below the 10-EMA, which happens the day before the trend line is broken. These two events provide a good exit signal.

BEAR KISS

The "bear kiss" is the final part of three distinct topping actions often displayed by the PMO. When we see this classic formation, it offers additional reassurance that a tradable top is in place. We start looking for this formation when the PMO has become relatively overbought and the price index has experienced a substantial move up. This formation doesn't always occur at tops, but, when it does, it helps build our confidence in the reliability of the signal.

The first action is a false PMO top. Major tops are always accompanied by an overbought PMO top, but all PMO tops do not signal major price tops. The false top alerts us that a price top is probably just a few weeks away.

Next we'll see a slightly higher PMO top followed by a crossover sell signal, which is generated when the PMO (blue line) crosses down through its 10-EMA (green line). When these signals occur at very overbought levels, they may tentatively be taken at face value, but, when they have been preceded by very strong price action, it is possible for prices to make yet another new high, which causes the PMO to begin rising again.

Finally, as prices roll over from the final top, the PMO turns down again, this time topping after just barely "kissing" the underside of the 10-EMA. Some refer to this as the "kiss of death," but this seems a tad dramatic to me and I call it the bear kiss. Besides, there is a reciprocal formation at important bottoms, and the term "bull kiss" seems more apt than "kiss of life."

Note that an important aspect of this analysis is that the price index has broken a rising trend line in conjunction with the bear kiss.

The chart above presents a more or less perfect example of the PMO topping action, but variations of this formation are just as reliable, and they can currently be seen in abundance if you take a run through our index and sector chart series.

BULL KISS

The "bull kiss" occurs shortly after a PMO crossover buy signal, and is the result of a price pullback after the initial up thrust that generates the crossover signal.

While the bull kiss and bear kiss are essentially equal but opposite formations, price behavior between the two is different. Normally, the bear kiss is a non-confirmation which coincides with the final price high in a rally; whereas, the bull kiss normally coincides with a higher price low in a new rally.

CLEAN SIGNALS

While the bull and bear kiss formations are quite common, it is also possible to have very clean PMO reversals and crossovers without any of the gyrations associated with blowoffs and retests because the change in price trend is relatively smooth.

The point is that reversals and crossover actions can cover a wide range of configurations. As you study the charts, you will get a feel for the kind of price action that begets a certain type of PMO behavior. And the PMO behavior will give us clues as to what kind of price behavior to expect.

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