Sunday, October 11, 2009

October 9th Weekend Update

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With Friday's close GGT has hit an all-time high in price of $19.36, $0.08 higher than the previous high set on 9/22. Volume on Friday was in the toilet, 1.14M shares, which is 24% lower than the normal average level of 1.50M shares. This past week has been poor for volume -- -15%/-3%/-21%/-3%/-24% -- and when I see this I get really, really nervous.

Looking back, the period starting May 11 - July 27 was characterized by successive periods of low volume, and the period June 2nd through June 25th saw continuously below average volume every day. Note too that this same 6/2 - 6/25 period saw range-bound prices: we closed 6/2 with a price at $16.54 and we ended 6/25 at a price of $16.04, with a high during this time of $16.63 and a low of $15.49, a 7.4% range.

The close on 6/1 at $16.48 on only 1% above average volume was a new high for GGT, relative to that date. The next day (6/2), prices finished higher again at $16.58, another new high, on -2% below average volume. On Thursday, 6/4, we closed at $16.58 again, on volume -8% below average, and this established $16.58 as a resistance level. On Friday, 6/5, we tried again, closing at $16.57, on volume -11% below average. On Tuesday, 6/9, we closed at $16.56 on volume -22% below average -- we demonstrated the inability to break through resistance. On Thursday, 6/11, we closed at $16.63 on -5% below average volume, a new high for GGT relative to that date, and we never revisited that value until 7/20.

My point here is that there are many parallels between then and now. We are just hitting a new high in GGT, but are doing so on weak volume. If the past is any indicator, we will continue to push upward in price, but do so on lower volume, not higher volume. I have no idea where the top will be, but a channel line formed with the top on 5/8 ($15.83) and 9/22 ($19.28) (94 trading days) indicates that we could see a GGT upper bound around $19.76, or another 1.9% higher than where we are today. This increases at a rate of about $0.037 per day, so by this time next week we could see an upper channel line around $19.91 or so. We'll see...

On the support side, we can take the line formed from the 5/13 low ($14.90) and the 10/2 low ($18.39, 99 days), and establish that we are about 4.5% above this support line value of $18.53. I draw channel lines relatively parallel and look for 3 or more points where the line intersects, in case you're wondering (support slope is $0.035 per day). A pullback to this area but a refusal to drop below it would be a bullish indicator to move in with new entries.


The GGT Long-Cash Ratio (LCR) FELL on Friday, just a bit, from 1.369 to 1.350, and is now indicating that 2857 stocks are long in the database and 2116 are in cash. This change to the negative side is almost in the noise floor, so I wouldn't read too much into it, but generally, when we get higher prices, yet we have GGT falling, we end up with some form of profit taking and a drop in prices. This may be too close to call so we'll just have to watch. Bottom line, even though it dropped, it didn't drop much, so regardless, there was not tremendous conviction in the market as a whole.

GGT Bull Strength, which is a ratio of the number of (New Long + Affirmed Long) : (New Cash + Affirmed Cash) positions fell on Friday to 1.13, down from 2.00 on Thursday. This indicator was sitting at 0.08 last Friday (strong move to cash) and although it did bounce up to 2.00 by Thursday, it's had a hard time breaking out. This indicator is most meaningful when the LCR is opposing the direction of bull-strength, but this week saw both increasing/decreasing in sync. The reason these two are important together, it's not consistent for LCR to increase (more Long positions than Cash) but have the number of New Cash/Affirmed Cash positions grow faster than the New Longs/Aff. Longs. Keep watching for a divergence -- until then, the trend is intact (except for the light volume warning indicator).

The GGT change timer moved from Long (+1) to Long/Cash (0) on Friday, caused by the drop in LCR. Since the drop in LCR is so slight, I would not read too much into this -- it could whipsaw if we have a strong Monday. Conversely, this could be a perfect setup if LCR continues to drop ... a truly good "first indicator" for moving to the cash side. On the long side this timer is up 54% since 9/11/08 and on the contra side is up 26%.

The way I trade this timer with the "0" status is watch the ADV/DEC line today around 10-11 a.m. You can watch it here: If the Declining Issues to Advancing Issues Ratio is better than 1.8 (note that this is reversed of the move to the long side), then there is a reasonable expectation that we'll continue to the downside, for the day. At this time I look at the best performing Contras and generally place a limited position (25% or so of my normal per-equity position, but not less than $1,000) on the best performers at this time. Note that PST and TBT are the only leveraged contras that seem to be performing with any recent strength ...

GGT Long Strength and GGT LCR are in sync ... both fell on Friday on higher prices. This is a clear warning sign that the underlying database of ~ 5000 stocks is weakening. This does not mean that Monday will be a down day, but it certainly is not a sustainable condition. Either we'll need to see strength increase in the database to support higher prices, or we'll have to see price pressure relax, resulting in synchronization between a falling LCR/strength and prices.


Individual index strength is all over the map. Here's the most recent rundown from Friday's close:

DJ30: 0.74, down from Thursday peak of 0.81
NDX100: 0.67, down from Thursday peak of 0.76
Brazil: 0.85, down from Tuesday peak of 0.95
India: 0.38, down from Tuesday peak of 0.79
China: 0.84, down from Thursday peak of 0.90
S&P500: 0.94, down from Thursday peak of 1.00
S&P400: 0.89, down from Thursday peak of 1.00
S&P600: 1.00
Russell 2000: 1.00

Based on these values alone, we can draw some conclusions:

Russell 2000: TWM, the -2x leveraged inverse of the Russell 2000, is a great candidate for entry if we see any strength above $28.10. RWM is the -1x inverse and we'd want to see some action above $46.45 before entry.

S&P600: SBB is the -1x inverse of this small-cap index but is thinly traded, with only 16K shares average volume over the last few days. The SDD is the -2x leveraged inverse of the S&P600 and while it is a bit more liquid, it still is not a barn burner. We would want to see some action above $29.90, but since this is so close to the psychological level of $30.00, I'd say let's make sure we have action well above $30.30 or so before considering this one.

S&P400: MYY is the -1x inverse of the mid-cap index and is thinly traded, so I'm going to ignore this one. MZZ is the -2x leveraged inverse of the S&P400 and is more liquid, with a 10d average volume of 230K shares. I want to see action above $24.96, but again, since this is very close to the psychological level of $25.00, let's look for action well above $25.25 before giving broad consideration.

S&P500: SH is the -1x inverse of the large-cap index and is very liquid, around 2.8M shares 10d average volume. I want action above $55.80 before considering this one for entry. SDS is the -2x leveraged of the S&P500, and we want action above $39.70. Given that is is very close to the psychological level of $40.00, look for a threshold today above $40.40 before consideration.

China: FXP is the -2x inverse of the Xinhua 25 FTSE index. This is a very liquid ETF, and movement above $8.91 would be bullish.

NASDAQ-100: PSQ is the -1x inverse of this index, and it is very liquid at 275K shares 10d average volume. Look for movement above $48.00 before entry. QID is the -2x leveraged inverse of this index, and I want to see movement above $23.10 before entry.

Finally, DOG is the DJ30 -1x inverse, and is very liquid with 466K shares volume average for the last 10 days. I want to see prices above $56.60 before entry here. DXD is the -2x leveraged inverse of the DJ30, and again, I want to see trading above $34.60 before entry.

*** In all of these positions, just because they may hit their entry target today, it does not mean that I'll jump in with both feet. I intend to jump in only with 25% positions, and can always add later.


For Monday, 10/12: I'm not expecting a tremendous amount of volume on Monday -- the Columbus Day holiday will certainly put pressure on heavy participation. Prices could go either way, but given where we are in the channel lines, we have a few % that we could go before we hit historical resistance levels.