Saturday, October 3, 2009


October 3rd Weekend Update



[**** CLICK ON ANY CHART TO ZOOM IN *****]

This has been a pivotal week according to the Gods: warning signs from the timers, prices lower on higher volume, and EMA lines going from a positive slope to a negative slope. Let's see if we can glean what it all means....

In last week's commentary I noted that for the week ending the 26th, we peaked in price at $19.28 on average volume, which was disappointing. This week we finished at $18.39 on average volume of 1.5M shares, a full 3.6% down from our peak on Monday of $19.08. I also said that I thought that we'd start climbing because prices were falling on weaker volume -- I am going to change that view into my crystal ball for a couple of reasons.

On Monday, 9/28, we spiked upwards 1.9% in price on volume that was 25% lower than average --> this is bearish.

On Tuesday, 9/29, we changed price by only -$0.01, yet volume was about normal. This is my definition of "churning" -- stationary price on normal or higher volume. This is a bearish sign.

Volume popped to 18% above average with Wednesday's action, but we had a decrease of only 0.4% in price. This is further evidence of churning, and is bearish.

Thursday was a big signal day. We saw a large jump downward in prices on Thursday of -2.66% on volume that was 12% higher than average.

Friday, we saw decreasing prices of another 0.5% on normal volume --> bearish.

**** On price and volume action alone (falling prices on higher volume), we have very bearish indicators when looking at the short term. ****




So what about the short, medium, and long terms?

The 5d EMA of price has crossed below the 8d as well as the 13d, and is just hovering above the 22d. The 8d EMA has crossed below the 13d, and this should be considered short-term bearish.

A move of the 13d below the 22d would signal nailing the coffin shut -- we'll have to wait and see just how bad things get going forward. The 22 and the 34 are intermediate-term timers, and they are marginally bearish/bullish. With the 22d and 34d in a new down-trend, which started this past week, I'd have to color the intermediate term as bearish.

The 55d and 89d EMAs are still in uptrends.

Hence, short term, we're not in very good shape, medium-term, things are falling and getting worse, but over the long term, we're still in an up trend.

===============

In last week's commentary I discussed a divergence between price, which peaked mid week that week, but we saw a continued drop in the Long-Cash Ratio (LCR), which is the ratio of stocks with a LONG recommendation compared to those with a CASH recommendation. It appears that when combined with the price/volume information that we had a very, very good setup for this drop from our peak prices.

For this week, the LCR has fallen to 0.628, indicating that 2105 stocks are LONG and 3352 are CASH. This is a huge change from last week's value of 1.584, and being below 1.0, is a solid precursor to being intermediate-term bearish. Note that the value is below 1.0 -- if we hold here this week, get out your hammer and nails ... :) This being said, when we hit this level on 9/3 (0.698), we rebounded nicely within a few days and it lasted the entire month of September, so there is some precedence that a bounce could be around the corner. Note I said a possibility, as in non-zero probability, but not necessarily likely....





In addition to the Price/LCR data above in the graph, I've notated something interesting... several "W" patterns. Another idea supporting this potential for a bounce is that:

1) we are at some historical levels in the LCR where we have reversed, and
2) the market seems to like these "W" patterns as of late

So, if we do bounce this coming week and next, I doubt that it will be a full-run upwards with the LCR in the 2.x or 3.x range. Of course, I could be wrong, but I don't see anything that will propel us upward at this time.

===============

Our short-term LCR Change timer started the week with a transition from -1 (cash) to 0 (cash/long), but by Wednesday was back at (-1) cash and hasn't budged from that position. I've been reporting that the gain of this timer has been 54%; due to a clerical error the actual gain using this timer and the GGT change in prices is 51% on the long side and 28% on the contra side. Here's the timer since March 1st:



The way to trade this timer is straight forward:

1) Determine whether you are in an up-trending market or down-trending market. You have several tools available to determine this:

  • a) look at the 65d EMA price of the broader market indexes. Are they in an upward slope? As of the close of 10/2 the answer is yes
  • b) look at the 10w EMA price of the broader market indexes. Are they in an upward slope? As of the close of 10/2 the answer is yes
Since we are in an uptrend, then we have a green light to pursue LONG-sided equities:

1) when the timer transitions from a CASH (-1) to a CASH/LONG (0), look for long equities that have been beaten into the ground. Call this Day #1.
2) when the timer transitions on Day #2 from the CASH/LONG (0) value to the LONG (+1) value, jump into the market, either on Day #2 (anticipating the transition), or on Day #3.

I like to jump into the market ON THE DAY of the transition from 0 --> +1. One way to do this, that generally works, is to watch the ADV/DEC on the various indexes. Here's a rip from the web site: http://finance.yahoo.com/advances using the close information on 10/2:




NYSEAMEXNASDAQBB
Advancing Issues1,211 (32%) 250 (32%) 959 (34%) 484 (35%)
Declining Issues2,487 (65%) 485 (62%) 1,740 (62%) 548 (40%)
Unchanged Issues122 (3%) 50 (6%) 111 (4%) 350 (25%)
Total Issues3,8207852,8101,382
New Highs1102334130
New Lows38821372
Up Volume2,393,431,427 (107%) 299,804,561 (28%) 763,956,486 (31%) 750,485,914 (33%)
Down Volume4,092,235,140 (184%) 772,497,022 (71%) 1,691,920,477 (68%) 690,739,264 (30%)
Unchanged Volume37,889,205 (2%) 12,694,707 (1%) 28,760,732 (1%) 845,944,003 (37%)
Total Volume2,228,588,47611,084,996,29012,484,637,69512,287,169,1811
1 = Total volume calculations include volume from pre-market and regional exchanges.

Take a look at the NYSE column, and let's pretend that it's 10:30 a.m. on Day #2. We're looking for a high probability of a transition to +1. What I like to see is that the ratio of ADV to DEC is up greater than 1.8. For the NYSE we have 1211/2487 = 0.48, which is far less than 1.8, so we know with great likelihood that we probably will not be transitioning to +1. Because of this, go play golf or participate in your favorite past time, because the market is not moving in the long direction. SURE, it can reverse during the day, at at night we can double check the values, but on average, when the markets indicate a good upside by 10:30, they tend to stick.

So for this coming Monday, 10/5, we're at a value of -1 (CASH), so unless we're up on Monday, it's not likely that we'll be doing anything with this timer before Tuesday, 10:30.

What about contras? What about picking up contras when we transition from a +1 (LONG) to a 0 (LONG/CASH)? Again, it depends on the underlying trend of the market. What I've found is that in up trends, LONG positions work better; in down trends, Contra positions work better. There are other ways to play the contras at this time....

==============




The graphic above is the GGT Bull Strength index compared to the GGT LCR. I *really* like the bull-strength indicator because it shows that while we may continue to hit higher highs in GGT LCR (and subsequently, price), it gives me a GREAT indicator of whether momentum is fading. Take a look at the peaks in Bull Strength, then take a look at the peaks in LCR. I'd be interested in hearing your interpretations.

Note that the GGT Bull Strength reading is at 0.08, the lowest level since 8/17. Putting this in to stock terms, we had 232 stocks in the database flash "buy me", while we had 2872 flash "sell me". That should give you pause on what you should be looking at on Monday. There certainly is precedence to stay down here for a while, but there is also precedence to bounce. I suggest waiting until the LCR timer moves to the +1 side ...

================



The graphic above is interesting in that GGT strength has slipped below the visual boundary of 0.4. There's nothing magic about 0.4, but the eye shows that we seem to have a bit of support around the 0.3-ish level in strength. If we fall below this level market sentiment will be very bearish and there is no telling just how far it could drop (look at February/March). I would consider the recent attempt at crosing above 0.7-ish as a failed bull attempt, so stocks are becoming weaker, not more powerful.

===============

Last week I presented TMF, a 3x leveraged ETF that had signaled "New Long" on 9/25. The closing price on 9/25 was $45.74, and the opening on Monday was $46.13. I indicated that I was setting a 3% gain on this one as my target, which is around $47.50 from the 9/25 close. Through a calamity of errors and not paying attention this ETF, it has run all week, and closed on Friday at $47.85, or a weekly gain of 3.0%. If you got into this one I'd like to hear about it; if you're not in on this one it's too late -- don't chase it.

UUP is the only "New Long" ETF from Friday. This is the PowerShares DB US Dollar Index Bullish Fund, which is based on the Deutsche Bank Long US Dollar Index (USDX). The USDX futures contract is designed to replicate the performance of being long the US Dollar against the following currencies: Euro, Japanese Yen, British Pound, Canadian Dollar, Swedish Krona, and the Swiss Franc.

UUP is not overly volatile, nor is it a barn-burner. I am going to enter on Monday with a core position if we trade higher than $22.92, the high from Friday. The 22d EMA is just starting to break upwards, and the 13d EMA has a positive, upward slope. My "core" positions are typically 5% of my tradeable monies. Note that UDN, which is the contra to UUP, has a downward 13d EMA and the 22d EMA is just beginning to point down. I like that these two are out of sync by 180 degrees.

On Thursday the Direxion 3x LargeCap pair BGU/BGZ flipped to Cash/Long respectively, and flashed the "Affirmed" flag on Friday. The 8d EMA of BGZ crossed the 13d EMA from below, a bullish sign. I will move into BGZ on Monday with a 25% position if it continues higher than $23.80. The recent Average True Range (ATR) of BGZ is $1.09, or nearly 5%, so this is a volatile equity and is NOT for the meek or conservative. My target is 5% above my entry, somewhere around $24.39 or so.

On Thursday the Direxion 3x MidCap pair MWJ/MWN flipped to Cash/Long respectively, and both flashed the "Affirmed" flag on Friday. The 8d EMA of MWN crossed the 13d EMA from below, a bullish sign. I will move into MWN on Monday with a 25% position if it continues higher than $$35.96. The recent ATR of MWN is $1.91, or over 5%, so this is NOT a conservative equity. My target is 6% above my entry, or somewhere around $37.54.

The TSP-tracking ETFs EFA, SPY, and VXF, all signaled "New Cash" this week. Correspondingly, I moved my wife's TSP funds (I-Fund, C-Fund, S-Fund respectively) to cash (rebalanced AGG/F-Fund at 8%) as of the close of Friday (it takes a day or two to process within the TSP system).

============

Something "New"

One of the powerful aspects of GGT is that I can determine the strength of a given index, sector, whatever. As many of you know, Geoff Cox recently expanded some of my capabilities and gave me a "dashboard" view, allowing me to watch (e.g.) the DJ30, the NASDAQ-100, and the BRIC stocks. I'm only limited by however I want to group the stocks.

I can normalize the strength value for a group between 0 and 1, so we can compare strengths across different groups.

I only have data since 8/24, so it's too early to make a judgment on how to best use this capability. Let me present some initial ideas:

1) The DJ30 hit a strength of 0.9412 on 8/25. If you would have purchased DOG, the -1x ETF at the open on 8/26 @ $58.26, then held until the strength bottomed on 9/2 (selling at the open on 9/3 @ $59.62), you would have made a gain of 2.3% in 6 days with virtually no drawdown.

2) Using the strength dates above, if you would have purchased DXD, the -2x ETF at the open on 8/26 @ $36.85, then held until the strength bottomed on 9/2 (selling at the open on 9/3 @ $38.35), you would have made a gain of 3.8% in 6 days with virtually no drawdown.

3) Let's assume that you wanted to pick up DJ30 stocks on 9/3 (strength bottomed on 9/2). Let's further assume that you would hold until 9/17, which is when the DJ30 strength had peaked and had started to head downwards. You sold at the open on the morning of 9/18.

a) Selecting stocks from the DJ30 that had the worse VectorVest VST performance (they had been beaten down hard up to 9/3), would have resulted in a gain of 8%, or an annualized gain of nearly 218%.

b) Selecting stocks from the DJ30 that had the worse VectorVest RT performance, would have resulted in a gain of 6% with an annualized gain of nearly 150%

c) While I don't publish the stock data daily, I do have the GGT stocks from 9/2, and more importantly, I know which stocks were at the top and bottom of the GGT DJ30 list. Picking the top 10 GGT DJ30 stocks as of the 9/2 close, and holding until the morning of the 18th would have netted you 6% and an annualized gain of about 150%.

d) Picking the worse GGT stocks from 9/2 and holding until the morning of the 18th would have netted you 6% and an annualized gain of about 150%.

Sooooooo, three different methods of picking DJ30 stocks results in about the same performance over the same period of evaluation. I like that. I like that ALOT.

4) So let's assume you bought the -1x contra ETF at the open on 9/18, and you're still holding. You would have bought DOG at $56.34, and with a close on Friday at $58.37, you would have an unrealized gain of 3.6%.

You get the idea of where this is going.

Here's the normalized strengths if you want to play:



When you look at the table above, you'll see that the DJ30 column is at a very low number. It would be prudent to seriously consider purchasing stocks in the DJ30, based on past tests. I urge you all to paper trade this until we get more history. If nothing else, take a close look at DIA as well as DDM, which are the 1x and 2x ETFs for the DJ30.

When you look at the table above, you'll also see that the NASDAQ-100 is near a bottom, also indicating that we should consider purchasing stocks in the NASDAQ-100 or at least the long ETFs, which are QQQQ and QLD.

When you look at the table above, you'll see that Brazil is bouncing around. I'm sure that the Olympics caused Friday's bounce ... I'm not aware of any contra ETFs in Brazil so we'll have to wait until this one bottoms.

Russia is hard to judge -- only 5 stocks comprise this "strength index", causing me some pause. Nevertheless, the value is on the negative side, which *could* present some opportunity to purchase once we start turning upward.

India is mid-scale at 0.4 -- hold off on India.

China has been falling lately, and although we could play the FXP, the contra Xinhua FTSE 25, according to the strength of the China index, we may be too late. Ideally, I'd like to get into FXP when the strength index is near 1.0, not at 0.13.

Also note that FXP signaled "New Long" on Thursday. I wanted to wait until the EMAs all crossed from below, which they did on Friday (recall that I was burned on this one a few weeks ago). The 8d > 13d, and the 13d > 22d --> go for throttle up, but because of the China strength index, I'd expect some sort of pause here. Based on these two conflicting indicators I will purchase a 25% position in FXP on Monday if the price continues higher than $10.68, and I'll add on strength as long as the trend lines remain positive. The recent ATR on this is $0.43, or about 4%. My target on this one is $11.32 or about 8% over entry.

==========

Enough for now. Lots to think about.

Remember, you're responsible for your own investment decisions.

Regards,

pgd