Tuesday, December 22, 2009

Notables from December 18th Weekend

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The Dollar

As discussed at our weekend meeting on the 12th, UUP, an ETF that tracks the U.S. Dollar Index, had signaled entry conditions and was ripe for a core position. I trust that many of you took a look at this and hopefully paid heed; if you had used Elder's methods to get into this equity you would not have done so until the open on the 15th, simply because the action on the 14th was lower than the close on the 11th. If you would have purchased at the open on the 15th @ $22.76, with Friday's close you would be sitting at $23.01, or a gain of $0.25 per share, just over 1%. A few of you who know Elder to the letter would have seen that the FI(2) was positive, blocking entry. This is true, so either you're sitting with a 1% gain or no gain in the account, depending upon your view of how to enter. Here's the graph:

























Is the run over in UUP?  No.  Here's Why:


While the use of exponential moving averages (EMAs) is a trend-following system, application of intermediate-term moving averages to VectorVest's Relative Timing (RT) value can give us some insight as to what the longer-termed trends are doing.  If you don't have VectorVest, then simply plot the 65 DEMA of price and smooth it using a 2 DEMA.


The RT of an equity is related to the 65 DEMA of the slope of the curve formed by price action of that particular equity. 65 days is 13-weeks worth of price information, and when presented as slope information, allows us to see whether the equity is in an uptrend or not. When this "slope" curve is smoothed, using another EMA, the slope of THAT line tells us the rate of change for the price action we are observing. Hence, application of a 21 DEMA to the RT line for a particular equity will tell us, relative to the past month, how fast the long-term slope of the price is changing.

In the case of UUP, we can plot three EMAs of RT on the graph simultaneously. When we do so, we get the graph below:






















What the graph above shows us is that we've plotted 3 DEMAs on the RT signal: 13, 21, and 34. First, note how they are all pointing upward. This tells us that they are accelerating to the upside, even though the individual trends may still be downward.  This is necessary for price action to turn to the upside -- you want some indicator of slowing losses, which is what you have, starting back in late October.   When the RT or any of the DEMAs on the RT cross 1.0 that particular trend line of price has moved from trending downward to trending horizontally. The fact that the 13DEMA  has broken above 1.0 and continues to point upward indicates that the slope of the 13-day trend is clearly upward, e.g., prices are appreciating at a faster rate, day over day. The next EMA, the 21, is just clearing the 1.0 threshold, indicating that slope of price action for the last 21 days, weighted heavier the closer to present we are, is just beginning to turn up. When this 21 DEMA clears 1.0 we know that we are in an early-intermediate term uptrend for the particular equity. Finally, observe the 34 DEMA of RT as indicated above. Note that it is still below 1.0. This is telling us that on a longer-term basis the equity is still in a down trend, but because of the upward pointing direction of the 34 DEMA of RT, it is moving more positive with each day. All three of these indicators are bullish for UUP, and I'm a buyer of UUP the next time Elder's Force Index resets below 0 and then moves upward.


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GGT Price Action

GGT Price Action has continued to new, all-time highs, closing yesterday (Monday, December 21st) at $20.30, down from the quadruple-witching Friday value of $20.41.  Volume increased all last week -- whether due to the 4W-Friday or just good demand is unknown -- but at the end of the week we had experienced the highest volume since the beginning of the month. Note that overall volume is very poor relative to the last 6 months.  The "so what" about this is that this isn't a normal market -- lackluster volume usually would put the brakes on anything substantial in the market, but it obviously keeps chugging higher. 
Note that I don't expect high volume from here on out for the remainder of 2009.    Here's the chart:


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GGT Price EMAs

I've been getting asked by several what I think is going to happen in the next few weeks, and all I can say is that from GGT's perspective, which is a trend-following system, everything is looking very good.  One way to judge this is to look at the underlying strength of the EMAs that comprise the GGT price, and they're all pointing up.  Here's the chart:



Note how the 13 DEMA, 21 DEMA, 34 DEMA, and 55 DEMA are all parallel and pointing upward.  Just like in the UUP discussion above, when we see this type of behavior, we MUST be on the long side of the market, or else we're going to give up gains.  While we certainly can change on a dime, take a look at the following graph, which plots (are you ready for this) the change in slope of the 65 DEMA of GGT Price:



Notice on the graph above how the line is pointing upward.  The database, as a whole, is appreciating in value.  We're still in a bull market, according to the change in slope of the 65 DEMA.

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Elder's Force Index of the GGT Price/Volume

One thing that is giving me pause is Elder's Force Index when applied to the GGT.  Take a look at the graph below:



Note that over the latter part of the summer, whenever we had a spike downward in the FI(2), we had a launch to the upside.  This is indicative of being in a bull market, smart money sitting on the sidelines, seeing the major pull-back, then jumping onto the bandwagon.  Clearly, had you watched this indicator and had you jumped onto a broad-market index, selling when the FI(2) spiked over 300K or so, you would be up nearly 21%.  Nice indicator, eh?  Too bad it's not working now.

Note that Friday's action, largely due to the quadruple-witching (4W) date, caused the spike in the FI(2) to approach 400K. We've always had a pull-back within a few days of this occurring in the past, at least with respect to the market as we know it since July.  If anything, it may be time to take some profits off the table and simply be happy with what we have locked in.  If you don't take profits, at least adjust your stops upward (mental or actual) so that you know when you're going to get out.


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GGT Long-Cash Ratio (LCR)

Of particular interest is that with Monday's close (December 21st), the GGT Long-Cash Ratio is unchanged to three (3) decimal places.  What negates a call of churning is that GGT volume was -17% below the average value, so if we were churning, we're not doing it with respect to the big boys being indecisive.  While I'm coloring this as a "pause" color, we're clearly in the middle of many traders being on vacation and simply not participating with their portfolios -- why mess with bonuses and other benefits before year's end?

Here's the LCR graph, plotted with GGT Price:



With respect to the graph above, note the upward march in LCR with respect to the period from mid-October.   The trend is certainly upward; looking for an inflection point in the LCR at this time simply is impossible, especially with poor volume.  Hence, I think that we simply need to watch the LCR value, and keep track on the direction it marches with respect to time.

LCR Change Timer

If I put any doubt in your mind above concerning the actual LCR value, let it more or less vaporize when you look at the next graph.



We know we've been range bound for almost 6 weeks, and the graph above suggests that behavior.  What you're looking at is the GGT LCR Change timer superimposed with the LCR.  We haven't been on the negative side of this timer too much since early November, which indicates that overall the timer has been calling the trend in a fairly reliable manner.  Furthermore, the bouncing between +1 and 0 is simply indicative the choppiness that we've been experiencing -- the best time to enter the market long is when this timer is transitioning from a 0 to +1, as it did again with this past Monday's (12/21) action.  Note that due to the choppiness of the market, if you followed this timer, you'd actually be down in equity since it peaked in October 2009 and would be quite frustrated with me ... hence the problem with any trend-following indicator.  All I can say is stay the course ... if you invested in the GGT index (I know, impossible, so use the VTI) the timer is up 80.1% since the beginning of September 2008.

If you would like to start using this timer let me know and I'll make a special effort to post the daily readings of the timer.

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GGT Strength

GGT Strength has been strong, well above our less-than-scientific threshold of 0.6, indicating that somehow, somewhere, this database is still very strong.  Given this, I'm still a believer that since we're still range bound, it pays to buy when this indicator is in the low part of the range and think of contra positions when we enter the high part of the range.  Note though that every one of my contra positions has not done overly well as a whole since mid-October....  Here's the graph of the LCR with the Strength Index.





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Ever Get that Sinking Feeling?  No?  Then Take a Look at the BRICs

The BRIC stocks -- Brazil, Russia, India, and China -- are getting hammered.  Just because they're low in strength is not a compelling reason to enter.  Take a look at the following graph:



What should be obvious is the lower highs and lower lows in terms of strength of the individual stocks -- they're getting tired.  The fact that they cannot make it up above their previous peak gives me pause, and the fact that they're hitting bottom (e.g., look just prior to 12/13 marker) shows that people are bailing.  While I do think it possible to ride these upward if they rebound, my gut is telling me (as well as my position in ERJ, a Brazilian stock) that now is not the time to play these stocks.  By far China is the strongest, but over the last week the contra side has been doing very well.  You can confirm this quickly by looking at the relative performance of FXI / FXP, which are the 1x Long/ -2x Contra ETFs for China Xinhua 25.  Here's the graph of FXI/FXP:


Note that FXP, the -2x Contra ETF, is outperforming.  Click on the graph for a larger view.

Hence, my original assertion continues:  I'm staying away from the BRICs.

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GGT ETF Overview

I promise I’ll get better about loading the ETFs on the Yahoo! site on a nightly basis.  Life simply has been busy, and I’ve been spending a considerable amount of time on the west coast.  If you’re not a member of the GGT Yahoo! group then you need to send a note to:

NoVAVectorVest-subscribe@yahoogroups.com

It is the only location to download GGT files.

I always start with the dashboard view of the GGT ETF or stock file.  Here I list numerous pairs of ETFs, and if you’re interested in playing the pairs, it should be your one-stop shopping location.

ERX/ERY is the 3x Energy pair from Direxion.  ERX, the bull side of Energy, is holding firm with a cash recommendation but a strength of +3 – all it needs is volume, and ERY just signaled New Cash.  The lack of a simultaneous New Long from ERX simply means that volume is not there.  Keep an eye on ERX, as any further strength in Energy could move this into the green side.

MWJ/MWN is the 3x MidCap pair from Direxion.  MWJ just signaled New Long, showing that MidCaps are now trading above their historic optimum thresholds.  Of particular interest with this pair is that MWN, the bear side of this pair, is-and-has-been in cash for some time, so for MWJ to finally indicate the New Long is a positive sign for MidCaps.  Also note the following: 
  • VectorVest’s RT / 65 DEMA slope just finished above 1.0 for the 2nd day straight as of December 21st.  I take this as a bullish sign.
  • All three DEMAs (13/21/34) of VectorVest’s RT (or 65 DEMA slope) just turned positive.  This means that the slope of the 65 DEMA of MWJ’s price just inflected to the upside, which is bullish.
Gold, as measured by the DGL / UGL / DGP ETFs, is getting hammered on the long side.  On the flip side, GLL, the -2x contra of gold, and DZZ, a -1x contra of gold with more volume than it’s brother DGZ, are doing quite well.  Things to note: 
  • DGZ traded Monday (12/21) just shy of 100K shares and has signaled a New Long.  This is obviously bullish.
  • DGZ’s 13 DEMA is just crossing the 21 DEMA from below, a bullish sign.  If you enter DGZ, I would only do it with a 25% position until the 21 DEMA crosses the 34 DEMA from below (all in at this point).
  • DGZ’s VectorVest RT is still less than 1.0, so caution is advised.
  • DGZ’s DEMAs (13/21/34) on the VectorVest RT signal have turned to a positive slope, although all the DEMA values are less than 1.0, indicating that they are still in a downtrend.  The fact that they have a positive slope is important to note:  they are losing money less fast.  If the trend holds they will continue upward, and finally, price will reverse and trend upward.  Watchlist DGZ if it doesn’t meet your volume requirements, else this one is looking interesting.
  • GLL traded 12/21 just over 824K shares and signaled a New Long on Friday, 12/18.
  • GLL’s 13 DEMA is just crossing the 21 DEMA from below, a bullish sign.  .  If you enter GLL, I would only do it with a 25% position until the 21 DEMA crosses the 34 DEMA from below (all in at this point).
  • GLL’s VectorVest RT is still less than 1.0 at 0.86, but is in an uptrend, and if it crosses 1.0, we’ll be in a full uptrend.  Until then, caution is advised.
  • GLL’s DEMAs (13/21/34) on the VectorVest RT signal have turned to a positive slope, although all the DEMA values are less than 1.0, indicating that they are still in a downtrend. 
  • DZZ traded 12/21 just over 590K shares and has been long for over 2 weeks.
  • DZZ’s 13 DEMA may just cross the 21 DEMA from below on Tuesday, Decemeber 22nd.  This will be a bullish sign.  As above, if this crossing occurs, I would only commit 25% of the position, waiting for the 13x34 from below (another 25%), and finally, the 21x34 from below (100% all in).
  • DZZ’s DEMAs (13/21/34) on the VectorVest RT signal have turned to a positive slope, although all are less than 1.0.  It could be early to enter, especially without the > 1.0 confirmation.
Contra Gold looks very interesting.

If you download the GGT ETFs from the Yahoo! site, you may have noticed that EWT, which is the Taiwanese ETF, has just signaled “New Long”.  From a pricing perspective this has been in a longer-term uptrend, as indicated by the VectorVest RT value > 1.0 (it closed at 1.09 on 12/21).  While this is good, a plot of the RT DEMAs (13/21/34) show that each is falling, indicating that EWT is decelerating, not accelerating, and hence, we should pass.

I’ll leave whether SLX ,another higher-volume GGT ETF,  is a candidate for entry or not to you.  Ditto IGE.
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Remember, you are responsible for your own investment decisions.

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