Friday, January 1, 2010

New Year 2010 Weekend Update

Summary:  Incredibly low volume on Thursday more or less negates the falling prices concern.  Despite this, the velocity of price change continues to be upward, but the rate of change is slowing, which if it continues, will indicate a more ominous market but present an opportunity for contra ETFs.  Although the price of the GGT index is above the 50DMA, the slope of the 50DMA is almost horizontal, which is intermediate-term cautionary. The Long-Cash Ratio trend upward is slowing, showing fewer stocks have been moving to the long side, which supports the nearly-horizontal price action that we saw this past week.  The LCR Change Timer has transitioned from a +1 to a 0-state; any continued weakness on Monday would signal this timer to a CASH recommendation, potentially closing our longs.  Strength values of various indexes and the BRICs dropped by a significant amount Thursday, but not enough to warrant new long positions in ETFs -- in fact, contra positions could still work for a few indexes.


GGT Price Index (and Derived Indicators)

The GGT price index, which is comprised of 4339 stocks with:
  1. prices above $1 (when originally added to the database), 
  2. 50d average volume > 5K shares (ongoing), and 
  3. only from the AmEx, NYSE, and NASDAQ exchanges
fell from Wednesday's value of $21.01 to $20.85, on extremely low volume of 754K shares.  Normally, falling prices on increasing volume is reason for concern; since we have the exact opposite situation I do not think we need to hit any panic buttons.  Here's the graph of GGT Price and Average Volume for 2009; as with all my graphs, click on the image for a larger view:

I believe that we can get a view of the market by looking at the GGT pricing exponential moving averages (EMAs).  Here is a graphic of primary EMAs:  13D, 21D, 34D, and 55D:

The above graphic indicates that from the perspective of our rear-view-mirror, that all primary EMAs are pointing upward, which is bullish.  You can see from past behavior that we'd expect the slope of the 13D to move horizontal if we were to see a change outlook, so this is something to keep on our radar concerning the overall market.

I've had a question this past week about the slope of an EMA -- specifically, what does it tell us?  When we see an EMA, and we mentally look at whether it is point upward or downward, we are looking at the slope -- the direction of the trend.  Slope is change, literally "rise over run", and in the case of the GGT Price EMAs, we're looking at "change in price day over day".  Obviously, the steeper this slope, the larger the price gain/loss on a day-for-day basis.  Because the markets do NOT rely on yesterday's action to behave today, just because an EMA is pointing upward does not mean that tomorrow will be an "up" day -- the markets could certainly reverse, causing the trend lines to move horiztonal, then point downward.  Hence, the risk here is that although all GGT EMAs are pointing upward, there is NO guarantee that Monday, January 4th, 2010 will be an up day.  Nevertheless, we can look at some other indicators to help us decide what has been going on within the internal market.

This next graph is the change of the various EMAs -- what the eye would interpret if it looked at the pricing EMAs and if the brain said they were pointing upward or downward:

The chart above is interesting to me because it tells me the velocity of price change:  how fast our pricing EMAs are changing on a day-for-day basis.  We hit a peak pricing change on 12/24/09 in the 13/21/34 EMAs.  Note the positive values of the the primary EMAs, they are all above $0.00/day.  This is important -- day-over-day, the EMAs are pointing upward, which is what we saw in the previous figure.  What this graphic gives us over the previous graphic is that now the eye can see the slope of the ROC, and what we see since 12/24 is that the daily rate of change values are falling, which is deceleration.  Remember though that the trend is up -- as indicated by the Thursday 12/31 value of ROC(13) = $0.044, but is simply slowing.

Look carefully at the peaks and valleys of the GGT Price, and correlate them with peaks and valleys of the GGT price EMAs.  There is no question that when we see levels like 12/24 that the market rarely starts a new bull leg, and there is no question in my mind that when we see ROC levels that are less than ($0.05) on the 13D EMA we typically start a new short-trend run upward.

What we're seeing now is indicative, but not necessarily predictive, of a market that is slowing down, but we have no indication that it is going to correct.  I think it rather unlikely that we'll see a new, sustained bull leg from here although we may see a launch upward the week of 1/4; more likely we're going to see some form of very short term bump up, then a period of consolidation.  Volume is the wildcard here -- we simply have not had any participation across the board, and this clouds my crystal ball.  Nevertheless, we simply need to be ready for this period of consolidation because that is when our contra ETFs can play an important role. 

The graphic above gives us the rate of change of the EMAs, and the slopes of those lines are indicative of acceleration when pointing upward or deceleration when pointing downward.  We obviously want these trend lines accelerating to the upside -- prices would be moving upward -- so as of right now although prices are advancing at a constant to slightly upward velocity, they are not doing so on a day-for-day basis.  This deceleration needs to be in our mindset going forward for the upcoming week.

If you don't want to rely upon me and if you have HGSI software, you can look at the moving average of a slope of any indicator.  Here's a chart that shows three different slopes -- 5/21/34 -- of the 65D EMA of price for the GGT index:

In the top pane I've plotted the smoothed slope of a moving average -- velocity or ROC -- of the 65D EMA of GGT Price.  The 5D EMA -- red -- is topping out and looks like it could fall.  The 21D EMA is still positive and trending upward -- the intermediate-term trend (1 mo) is still upward.  The 34D EMA is also positive in value and trending upward -- the longer-term trend (7-weeks) is still upward.  For now, we should stay the course on the long side, but we may be topping in the short term.

This next graph takes what I've done on the previous two slides and gives us the ROC of the ROC... or acceleration and "jerk" of price:

The important thing to realize from the graph is that acceleration is slowing -- deceleration -- and when this value drops below 0, prices are under corrective pressure.  Expand the graph above and look at price action every time that the acceleration dropped below 0 -- when this occurred, prices also dropped.

The downward slope in this value indicates that we need to vigilant for a reversal of the short-term trend.


GGT Volume

As I have indicated above, volume is poor.  How poor?  754K shares represents being -42% lower from the average of 1.3M +/- 265K shares.  Aside from Friday, 11/27, which was -50% lower than average, we've not seen levels this low since this time last year (1/2/09 was -51% lower).  Gently downward prices, such as Friday, on lower volume should not be a cause for concern, so I plan to stay the course.

Of particular note is the application of On Balance Volume concepts to GGT.  I've been watching a divergence lately, which although is still a test, suggests that the market is going to move higher for the New Long stocks.  Here's something to ponder:

Take a look at the right side of the OBV graph --  we see that prices have remained horizontal to having a slight upward bias over the last week, and with the OBV moving aggressively upward, we potentially have a setup for prices to move significantly to the upside.  In a ranging market a breakout of OBV to the upside signals a bullish divergence ...

As a counter-point to this potential upside move, please review the following OBV chart:

Here, I've plotted all of the GGT stocks and OBV.  What we see is that the database, as a whole, is topping out -- the multiple up-down-up-down transitions, combined with a less-than proportionate move to the upside, as with OBV, shows that we're tired.  Hence, while New Longs look strong (as they should), the database is tired overall.

Here are the OBV charts for the other classifications of GGT; note that the only relevant data is very close to the right side of the graph since these are all using GGT data dated/classified. 12/31/09.

  • Affirmed Long:

  • Long 

  •  Cash

  • Affirmed Cash

  • New Cash 


GGT Long-Cash Ratio (LCR)

The GGT LCR, which reports the number of stocks in the database that have a long recommendation (2676) compared to those with a cash recommendation (1663), has fallen from Wednesday's value of 1.885 to 1.609.  This is a 1-day change in trend ... we've been steadily climbing since 12/18.  Will the trend continue?  Who knows ... LCR is a lagging indicator.  What we do know is that this is a lofty value, relative to recent past, but there is nothing prevent it from going higher.  Here's the chart:

If you look at the right side of both series, you'll see I've added some parallel channel lines.  What is important to me is that
  1. the channel lines are pointing upward in a very steep pattern -- this typically cannot be sustained, and
  2. the distance separating the lines is very small, showing very low breadth in the advance.  
I'm concerned about these two things, but as you can see, we're at the bottom of the channel, so risk is very, very low relative to other locations.  Also note that we spanned the entire channel in one day as far as GGT LCR Change was concerned, so this is a very narrow channel indeed.  This appears to be a perfect time to enter a long trade, provided that suitable candidates can be found.  Simply keep in mind that if these channel lines are violated to the downside, then it's possible that we could see a change in the primary trend in the short-term future.


LCR Rate of Change

Much like what we see for pricing ROCs, we can apply to the LCR.  I missed this in my daily scan this past week, but the rate of change of the LCR has been slowing since 12/28.  Take a look at the following graph of the LCR Change and GGT pricing index:

As you can see, the LCR change is still positive, so overall, the LCR is moving higher -- the trend of stocks in the database is that more are becoming "long" on a day-over-day basis.  The fact that the EMAs of the LCR lines is pointing downward means that on a day-over-day basis, fewer new stocks are moving long.  In fact, this slowing ties very well to the advance or decline of the GGT price line ... when the LCR advances, GGT price advances, as we would expect.  I think what important to see here is that we are sitting just above 0.00-change in the LCR, and if this trend continues downward into the area I colored in rose, we'll see the price index begin to drop. 

Note that within the last week that GGT price peaked on 12/24 and the LCR change peaked on 12/28; now price has held steady but the number of stocks per day participating in a New Long + Affirmed Long + Long status is falling.  This divergence may present an opportunity for us in the upcoming week.


GGT Strength of Various Indexes

Of particular note was the significant change for all domestic indexes with Thursday's action.   The chart below captures the major indexes I track:

With Friday's change we're in no-man's land ... somewhere between sitting on contras as a hedge (I have positions in TWM and MZZ), and somewhere between holding our longs (which I have positions in ATHR, ERJ, MTRX, MYL , MAA, MNRO, MFLX, and BAS).  Here's what the graph above is indicating to me:

  1. The GGT LCR Change timer has transitioned from Long (+1) to Long-Cash (0).  If Monday is a down day as far as the database is concerned we will see this timer transition to Cash (-1).  The timer is right more than it is wrong as long as we're in a trending market, so I would follow the signal as long as volume picks up across the GGT database.
  2. The DJ30 fell from a strength of 0.611 to 0.233 in one day.  This is a significant hammer on large-cap stocks, and continued weakness here, e.g., a drop below a less-than-scientific-value of 0.2 could be cause for serious consideration of DDM, which is the 2x leveraged ETF of the DJ30.  Note that the DJ30 is now sitting in the middle of it's Bollinger Band channel. 
  3. The NASDAQ-100 fell in strength from 0.73 to 0.40, again a significant drop, and is still above the middle of the BB channel.  Watch for strength in QLD if we reverse to the upside.
  4. The SP500 fell from a strength of 0.629 to 0.263, and is still above the middle of the BB channel.  Continued weakness here could be an argument for SSO if we reverse to the upside.
  5. The SP400 Midcaps fell from a strength of 0.692 to 0.394, so it has a ways to go before I would consider MVV.  It is too late to jump onto MZZ.
  6. The SP600 SmallCaps fell a large amount, from 0.915 to 0.574.  Again, we need to fall a significant amount before considering entering the long side with SAA, as the volume is still low on SAA and it is still in the upper 25% of the BB channel.  Note too that using SDD could potentially have merit if we see any continued weakness in the market/strength in the contra side.
  7. The Russell 2000 SmallCaps fell 0.86 to 0.57, resulting in nearly the same situation as the SP600.  It's way too early to consider UWM, since we're in the upper BB channel, but TWM may still have some play, especially if we see any weakness in the markets.

GGT Strength of the BRICs

The BRICs represent an interesting opportunity, but the strength trend has been becoming weaker and weaker with these stocks.  Here is my BRIC strength chart:

Every one of these countries is struggling, more or less horizontal trending, and what is more important is that we've been seeing lower highs in strength for the last two months.  Nevertheless, here's my read:
  1. Brazil:  Fell from 0.53 to 0.42 -- in no-man's land.  TAM and GOL continue to be top performers, although TAM is a bit overbought and GOL is north of the channel center.  Proceed in Brazil with caution ...
  2. Russia: Fell from 0.22 to 0.05 -- extremely oversold reading, but as far as GGT is concerned, the strongest stock is WBD.  Unfortunately, WBD is at the top of it's BB channel, being propelled there with Thursday's action, so I consider this a risky trade. MTL is my pick in Russia if I have to pick a stock, but overall, Russia has been performing very poorly so this is a very risky country and I will not be entering until I see the group turn upwards.
  3. India:  Fell from 0.60 to 0.35 -- again, no-man's land.
  4. China:  Fell from 0.48 to 0.37; top performers continue to be TSL, VIMC, GRO, HMIN, and FMCN.  FXI has been having trouble as of late; FXP isn't faring much better, as is evidenced by the mid-scale strengths.  Wait until we get some solid movement here before entering.

Interesting GGT Stock and ETF changes from 12/31/09

  • TYO, the Direxion 3x inverse of the 10-year treasury, is solidly flashing Affirmed Long while TYD, it's other half, is solidly flashing Affirmed Cash.  Volume is low so be careful of the spread.
  • TMV, the Direxion 3x inverse of the 30-year treasury, is solidly flashing Affirmed Long while TMF, it's other half, is solidly flashing Affirmed Cash.  Volume is better with TMV.
  • EEM is flashing an Affirmed Long, while EUM and EEV, the contra 1x and 2x respectively, are flashing Affirmed Cash.  EEM is very liquid at 36M shares traded daily.
  • ZSL, the 2x contra of silver, is flashing an Affirmed Long, while AGQ, it's other half, is solidly flashing Affirmed Cash.  ZSL traded 624K shares this past Thursday.
  • EEB, the Claymore BRIC ETF, just reaffirmed a long call.  I'm wary of this, but it is what it is.


Remember, you are responsible for your own trading decisions -- not me.  Do your homework and communicate with others -- it's how you learn.