Monday, December 7, 2009

Monday Morning Addendum ...

When I posted last night I had not given any real attention to the HSI software -- there are a few golden nuggets to watch for in the next few days.

First of all, for all the contra ETFs, it's just a matter of time before we see the reversal of the market.  I say this because of the chart below; click on the image for a larger view.

The top pane of the above graphic is something you've probably never seen or paid that much attention to in standard analysis packages ... it's the slope of the 65d EMA of price.  The faster curve (the one that moves more -- red) is fitted with a 5-day fit (corresponding to a week), meaning it looks at the change in the 65d EMA over the last 5 days, the blue curve is fitted to a 21d fit (corresponding to a month) and the slower one (orange) looks at the change in the EMA over the last 34 days (corresponding to ~7 weeks).  The selection of 5/21/34 is somewhat arbitrary.  The image shows an index that I've constructed of all the ProShares 2x Contra ETFs -- the ones that go down when the market goes up and visa versa.

The middle pane shows the price action super-imposed with the 65d EMA (purple), 34d EMA (orange), 21d EMA (blue), and 13d EMA (green).  Note that for the most part these are all trending down.

The two thin strips across the viewing window are Elder's 13d Force Index and 2d Force Index.  We like it when we see a simultaneous change of red to green in both of these.

What you're seeing is the following:
  1. The change in slope of the 65d EMA, measured across the last 34 days (orange curve), is in an up trend.  The scale on the right in the top pane is somewhat arbitrary but note that it is negative (-); this upward trending slope means that the change in 65d EMA is becoming less negative. So while the overall 65d EMA is still pointing downward, it is getting closer to an inflection point where it will flatten out, then turn up.  When it turns up the change in slope indicators will be positive, and we'd better be in contras for the longer-term.
  2. The 5d and 21d change in slopes of the 65d EMA typically stay above the 34d EMA.  While these move around a bit more, they oscillate as the markets move, and they too are oscillating higher between the lower 34d fitted boundary and some less-negative value.  This too means that they are in an up trend, even though the respective EMAs are still pointing downward.
  3. The 2d FI and 13d FI of this index have are still sitting in RED, which is bearish for contras on Monday.  Note that this is a lagging indicator ... the best-case scenario is to catch this on the day when it transitions from simultaneous red to green.
Hence, my read on the market over the short/intermediate (week/month) is this:  it's still too early to become fully invested in Contra positions.  Until we see evidence of these change in slope values crossing into the positive region, we're fighting an up-stream current, and need to be surgical.  Over the long-term (month/quarter), it's simply a matter of time if the change in slope of the 65d EMA continues to move in a less-negative/positive direction.


Take a look at SMN, which is the Proshares UltraShort Basic Materials ETF.  Elder just moved green on both the 2d and 13d Fore Index.  The aforementioned change in slopes of the 65d EMA are all pointing upward, so this may be a good entry.

SCO is the UltraShort Crude Oil ETF and has been bouncing around in terms of price.  It is very close to moving positive on the 65d change-in-slope metric. with the 5/21/34 @ -0.03/-0.05/-0.07 respectively.  Note that Elder is green on both FI indicators -- it may be a bit late to get into this.

DUG is the UltraShort Oil & Gas ETF and it appears to have cleared a resistance at $13 on Friday.  All of the 65d change in slope lines are upward, which is bullish for this ETF.  The specific numbers are -0.03/-0.05/-0.05 for the 5/21/34 fits.  Again, Elder is green on both FI indicators, so it may be a bit late.

SDS is the UltraShort S&P500 and it appears to have had a big day on Friday.  Again, all of the 65d change in slope lines are now recently trending upward, again bullish.  Specific numbers are -0.12/-0.14/-0.13, so while more negative than the others, they are pointing in the right direction.  Elder is RED on both indicators, so may be a candidate if the markets weaken.

EEV is the UltraShort Emerging Markets ETF and finished at all-time lows on Friday.  Two of the three 65d change in slope lines are moving upward, with the 5d pointing downward.  All numbers are -0.07; Elder is red on both indicators, so give this one a watch.

MZZ, the MidCap UltraShort, is nearing support and had a Doji on Friday.  The chart looks the same as EEV above, so give this one a watch too.

FXP, the UltraShort China, looks the same as EEV and MZZ, so give it a watch.

Good luck today.  Remember, you are responsible for your own trading decisions.