Sunday, February 28, 2010

GGT Recommendations -- Are they Valid in Changing Markets?

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Bill W. of our NoVA group asked whether GGT is having a hard time in view of these present market conditions.  This is a great question and allows me to show why the answer is a resounding "NO".  By design, GGT updates itself as market conditions change, which is the way I designed the process in the first place. 

Again, the only holy grail strategy that exists out there is that market is continually changing, hence your strategy better be constantly changing, or you'll only capture small portions of up periods, essentially proving that the same strategy over some period is a zero-sum game.

GGT has six classifications to a given equity:
  • New Long:  requires that the price AND volume of the equity be above historical optimized values for gain, AND that the trading day prior the equity was in some form of cash status (New Cash, Affirmed Cash, or Cash).
  • Affirmed Long:  requires that the price AND volume of the equity  be above historical optimized values for gain, AND that the trading day prior the equity was in some form of long status (New Long, Affirmed Long, or Long).
  • Long:  requires that the price of the equity be above historical optimzied values for gain, AND that the trading day prior the equity was in some form of long status (New Long, Affirmed Long, or Long).
  • Cash: requires that the volume of the equity be BELOW historical optimized values for volume resulting in good gain and that the trading day prior the equity was in some form of cash status (New Cash, Affirmed Cash, or Cash).  Note that price may be above the optimum level for past gains, but without volume confirming, the equity will be locked with this status.
  • Affirmed Cash: requires that the price of the equity be BELOW historical optimized values for gain and that the trading day prior the equity was in some form of cash status (New Cash, Affirmed Cash, or Cash).
  • New Cash: requires that the price of the equity be BELOW historical optimized values for gain and that the trading day prior the equity was in some form of long status (New Long, Affirmed Long, or Long). 
The beauty here is that for an equity to move from a cash recommendation to a long recommendation, we must have price and volume, whereas to move from long to cash, we only need a drop in price.

If we take the six recommendations above for stocks that closed on Friday, February 26th, and look at them in terms of pricing EMAs, VectorVest's Relative Timing (RT) EMAs (RT is roughly the slope of the 65d price EMA of the equity, scaled between 0 and 2), and 13-day Elder's Force Index, we'll see some interesting confirmations of whether we should be in individual equities.

Let's start with New Longs, which means that these stocks were all in some form of cash status (New Cash, Affirmed Cash, or Cash) on Thursday, February 25th.  As with all my graphs, click the image to see a larger view, and right-mouse click and open in a new window if you want to read and view at the same time.  Note that the most relevant data is contained on the right side of these graphs, so if your monitor or web browser does not display the full picture, please use or another window to view the graphic files full-screen:



Here's how to read this graph:
  1. The 13d/21d/34d are all newly in an uptrend, with initial crossing of the 13d EMA of the 21d EMA from below just beginning to occur.  As many of you know, this is my 1st criteria for entry into an individual equity, at a 25% of full-position level.  This crossing from below is bullish.
  2. The average price of this basket of stocks is trading above the EMAs, which is bullish.
  3. The instantaneous RT value, which is roughly the slope of the 65d EMA of the average price of this basket of stocks, is above 1.0, which means that the slope is now pointing upward.  This is an indication of intermediate-term uptrending.
  4. The instantanous RT value of this basket of stocks has been above 1.0 for two consecutive days.  As many of you know, this is my criteria for considering any strategy -- I want to see that the strategy is returning stocks that are in an uptrend.
  5. Note the average volume of this basket:  3.22M shares.  We'll use this below.
From this graph we can conclude that GGT New Longs are just that -- newly meeting the conditions of being in an uptrend.  Hence New Longs are returning stocks that are breaking out.

Let's look at the New Long RT EMAs:



The EMA periods that I use in the RT graphs are shorter than the pricing EMAs:  here I use 8/13/21.  Note the following from the graph above:
  1. There are no RR-track patterns of RT EMAs at this point. This makes investing in this basket of stocks more risky, because we could certainly fail from this point.
  2. RT EMAs are just crossing above 1.0, showing sustained intermediate-term uptrend. I like stronger EMA lines, but by design, all of these stocks had a cash recommendation on Thursday, which is why they are just starting to show upside momentum.
From the RT EMA graph above, we can conclude that New Long stocks are just poised to break out, that as a whole, they are just entering an intermediate-term uptrend.

I think Elder's 13d Force Index is an important indicator.  Let's look at this from VectorVest's perspective:



The first thing to realize is that this basket of New Longs has just transitioned from a negative value of FI(13), which means do-not-enter, to a positive value.  As you move from right to left on the graph data becomes less relevant (Why? this is an extra-credit question -- leave the answer in the comments block below), it clearly shows that this basket of New Long stocks is giving a green-light for entry, and is doing so relative to a recent time frame.  I view this as very important.

Finally, let's look at the New Longs using the HGSI tools, as I know many of you do not have VectorVest:


I find this graph incredibly revealing.
  1. The 4th ribbon from the top is Elder's 13d Force Index.  Note that it is showing that it just transitioned to green (positive) with Thursday's action.
  2. The white area is where I plot the 65d Slope EMAs on price.  The 2d EMA is shown in red, and this is roughly the same shape an relative magnitude changes as the RT value shown in the first graph of this blog, e.g., this is a very good proxy for the VectorVest RT instantaneous value.  If you look closely, this 2d EMA value has been above 0 (which equates to 1.0 in VectorVest-land) for three days, very close to the VectorVest RT value.  The upward movement of this 2d EMA is bullish for this basket of stocks.
  3. The 8d EMA value of the 65d slope of price is newly positive, but appears to be topping in a short-term pattern.  We expect this, because by definition, New Long stocks have both price and volume acceleration to the upside, which moved them from their Cash status.  A slight pull-back here of individual equities, while not required, would not be unexpected.
  4. ALL the 65d slope EMAs are in an uptrend.  This is bullish, and tilts the tables in our favor.
  5. Unique to HGSI is the blue bar at the bottom of the graph -- this is called a Little Kahuna, and you see that it occurred for this basket of stocks on Friday.  Here, we're seeing at least a 24% movement in the Bollinger %B reading, which is generally bullish.  Again, we expect something along these lines, since by definition, New Long stocks have both price AND volume appreciation on the day of the recommendation.
From the above graph we can conclude that New Long stocks are newly trending upward, on a short-term basis, and overall, they are showing indications of having intermediate-term strength. 

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GGT Affirmed Longs

Let's repeat the process for the GGT Affirmed Longs.  Starting with the pricing EMAs, we have:

































This is a beautiful chart pattern.  Here are the takeaways:
  1. The pricing EMAs (13d/21d/34d) are in an up-trend and are not showing any weakness.
  2. The pricing EMAs are showing our characteristic RR-track pattern to the upside -- this is a powerful showing of momentum.
  3. The average price of this basket of stocks is trading above the EMAs -- this is bullish.
  4. The instantaneous value of RT is well above 1.0 and is moving upward.  This too is bullish.
  5. Although as we get further from the right side of the graph, towards the left, the data becomes less relevant (why?), we do see that we had significant crossings of EMAs of this basket of stocks right around 2/17, essentially confirming that we are in a new up leg from the perspective of this sort. 
  6. Note the average volume of this basket:  2.98M shares.  While lower than the 3.2M of the "New Longs" basket, this is a very strong number.  Remember these two values, as we'll use them below.
From the above graph we can conclude that GGT Affirmed Longs are in a short-term uptrend, as evidenced by the RR-track pattern of the pricing EMAs, and that we're in an intermediate-term uptrend, as evidenced by the greater-than-1.0 value of RT AND that it is moving positively to the upside.

Let's take a look at the RT EMAs for the Affirmed Longs:



The RT EMAs for the Affirmed Longs show much the same behavior as the pricing EMAs, which is very bullish for this basket of stocks:
  1. RT EMAs (8/13/21) are all above 1.0, indicating a sustained intermediate-term up trend
  2. RT EMAs are in a classic upward-pointing RR-track pattern, which is very bullish and the angle shows considerable strength
  3. The relative crossing of the RT EMAs back on 2/16 - 2/17 correleates very well with the pricing EMAs and gives us confidence of a sustained intermediate-term uptrend for this basket of stocks.
Correspondingly, from the RT EMA graph above, we see that the GGT Affirmed Long basket has short-term momentum (via the RR-track pattern), and intermediate-term price appreciation (RT values strongly above 1.0).

Let's look at the 13d Elder Force Index for the GGT Affirmed Long basket:



As we can see above, the FI(13) is very positive, showing massive price and volume appreciation for this basket of stocks.  This makes sense:  the GGT Affirmed Long basket is constructed by classifiying all stocks with BOTH volume and price appreciation above their historical optimized levels for gains, on a given day.  The Elder trend lines above (13d/34d) both being upward, combined with the FI(13) being positive, shows that we can enter this basket of stocks since there is a bias to the upside.

Finally, let's look at what HGSI has to say about the GGT Affirmed Longs:



The HGSI graph reveals a considerable amount of data for us:
  1. EVERY 65d slope EMA (2/8/13/21) is in a powerful uptrend, with every value well above 0.  This indicates that this basket of stocks is very bullish in terms of trend.
  2. The 3rd ribbon from the top is % Accumulation / Distribution.  The dark green level here shows that this basket of stocks has seen significant accumulation over the past couple of weeks.
  3. The pricing area is clearly evident.  Within this area, the 50d MA is shown in blue, and the 200d MA is shown in red.  We see that both of these lines are trending upward, and this is very bullish for this basket of stocks.
  4. The bottom two graphs primarily show volume.  The upper graph of the two shows a 50d MA on volume, and the bottom one shows a 21d MA on volume.  We see that on 2/26 that both of these were above their averages.  This is to be expected -- Affirmed Long recommendations are provided to stocks that have BOTH price appreciation AND volume above their optimized levels.
From the above graph we can conclude that the Affirmed Long basket of stocks has the greatest strength in terms of aggregate price and volume appreciation, relative to the recent past, and is certainly worthy of our further consideration for new stock picks.

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GGT Longs

Let's look at GGT Longs, which can have lower volume than historical optimized levels, but not price, e.g., they are light-volume candidates that are still showing pricing power.



I find a couple of things interesting about this basket of GGT Longs:
  1. The pricing EMAs are in an uptrend, which is bullish for this basket of stocks.
  2. The pricing EMAs are showing the characteristic RR-track pattern upward, which indicates that this basket of stocks has momentum
  3. The instantaneous RT value for the GGT Long basket is well above 1.0, which means that the 65d EMA of price is in a intermediate-term uptrend
  4. The slight decrease in instantaneous RT value shows less momentum for this basket of stocks relative to the "New Longs" or the "Affirmed Longs".  This loss of momentum is a precursor to dropping out of the "long" classification all-together, so stocks in this basket are showing more weakness.
  5. Average volume of this basket of stocks is 2.01M shares, which is considerably less than the 2.9M for the Affirmed Longs and moreso than the 3.22M shares of the New Longs.  This is by design -- Long-rated stocks can have a volume reduction, but not price reduction, relative to their historical optimized values, and yet can still maintain their classification.  I've found that some of these can be attractive for entry, e.g., a light-volume pullback.
Correspondingly, I conclude from the above graph that GGT Long-recommended stocks are attractive in that they have price appreciation and momentum (as shown by the upward RR-track pattern), but have less upward momentum than the Affirmed Longs (as shown by a lower instantaneous RT value).

Let's show what HGSI says about this basket:



Like the other two HGSI graphs, I simply love the richness of content of this screen.  Let's look at the key areas:
  1. The third ribbon from the top is the % Accumulation / Distribution level.  Dark green means that this basket of stocks has been under heavy accumulation -- we expect this, since by definition, the basket is comprised of "Long"-recommended stocks, and these typically see accumulation when their prices go up.  The fact that we see such a long period of %A/D being dark green shows that this basket *may* be a bit long in the tooth in terms of appreciation.
  2. The fourth ribbon from the top is Elder's 13d Force Index, and we see that it has been green for some time.  This certainly means that this basket of stocks is worthy of entry, e.g., we can cherry pick from this basket, because the 13d average of the (daily change in price multiplied by the volume of each day) is positive. 
  3. I've not talked about the sixth ribbon from the top but this is %B and Bollinger bandwidth.  We see that when this is very high in value that the ribbon is dark red -- we've appreciated a considerable amount so caution is advised, and right now, we've recently transitioned from dark red (heavy appreciation) to lighter red (less appreciation), hence there may be some upside room in this basket.
  4. The white window shows the EMAs on the slope of the 65d EMA of price.  As I said above, the red line represents a 2d EMA and is a close proxy for the instantaneous VectorVest RT value.  Just as on the prior RT graph for GGT Longs we see that this value is positive but is showing a lower value than the recent peak, e.g. a slight loss of momentum.
  5. ALL the 65d slope EMAs are well above 0 -- indicating that this basket of stocks is still in an intermediate-term uptrend.  This is bullish.
  6. The 8d EMA of the 65d slope EMA is peaking and starting to trend down.  This is cautionary for this basket of stocks -- we're seeing weakness.  Again, this is by design.
  7. Observing the pricing and two volume windows, we see that Friday's price action resulted in a Doji on lower volume.  Doji's sometimes mark a change in sentiment, so we need to be vigilant.  Because this basket specifically excludes stocks that are above their historical price AND volume, and only reflects stocks that are above their historical price, this basket has a tendency to reveal early weakness in the underlying market.
  8. This basket of stocks is still well above the 50d MA and 200d MA, which is bullish.
Correspondingly, we can conclude from the HGSI graph that stocks in the GGT Long basket could be topping and may be poised for drop, or may just be experiencing a period of consolidation above their historical optimized levels.  Scanning this basket for stocks that have dropped in price on lower volume but are in industries that are moving upward is a favorite scan of mine ....

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GGT Cash

GGT Cash recommendations are generally made to any stock that may have a price above the historical optimum, but does not have volume.  This will keep us out of low-volume stocks that are falsely appreciating in price, e.g., sucker's rally stocks.

I'll continue the analysis with HGSI charts:



Let's analyze the chart above:
  1. The third ribbon from the top is the % Accumulation / Distribution gage.  We've been transitioning from green to now yellow, e.g., these stocks in this basket are being sold overall.  This is bearish.
  2. The fourth ribbon from the top is Elder's 13d Force Index.  Note that it is RED, which means that it is below 0 and this is bearish.  In general these stocks should be avoided unless you are cherry picking specifics.
  3. The 7th ribbon from the top, just above the white chart area, is the %B and Bollinger Bandwidth.  We see that it is yellow, which isn't bad, but coupled with the other bearish indicators, gives great pause at investing in these stocks.
  4. The white window plots the slope EMAs.  We see that EVERY EMA is below 0, e.g., overall, the stocks in this basket are LOSING MONEY on an intermediate-term basis. 
  5. Furthermore, in the slope EMA window, we see that the 2d (red) and 8d (green) EMAs are struggling, e.g., they are pointing downward.  Stocks in this group are in the process of losing momentum to the point that the intermediate-term EMAs are now pointing downward.  This is bearish.
  6. In the pricing window, which has a slight yellow background, we see that the 50d EMA (blue) is trending downward.  We also see that the index price for this group is below the 50d, which I tend to consider bearish.
  7. Finally, the bottom two indicators show volume (bars) and average volume (lines).  The upper indicator is the 50d MA, and the lower indicator is the 21d MA.  We see that volume on Friday was below both the average values.
Correspondingly, from the chart above, we can conclude that on the whole, stocks in the Cash basket are losing momentum, have short and intermediate-term bearish stances, and represent relatively poor volume plays relative to the Long groups.  Playing in this pool of stocks is very risky (although there are many that could reverse to long status ... more on that later in a separate blog where I cover the topic of strength/intensity).

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GGT Affirmed Cash

GGT Affirmed Cash stocks are basically stocks that are underperforming in price, relative to their optimized values.  These stocks were already in a cash status (New Cash, Affirmed Cash, or Cash), and essentially represent those that "are having their coffins nailed shut".

Let's see what HGSI has to say about this group:



Since we know the drill, here are the terse comments:

  1. 3rd Ribbon:  % Accumulation / Distribution is clearly in full distribution as a pink value.  This is bearish.
  2. 4th Ribbon: Elder's 13d Force Index is clearly RED, which is less than 0 and is bearish.
  3. %B and Bandwidth are dark green -- the stocks in this group are oversold and are at the bottom of their Bollinger Bands.  This can be construed as bullish, but you have to be laser-precise on cherry picking.
  4. The white window is the EMA slope window, and shows that the 2d (red), 8d (green), and 13d (blue) are all in a downtrend.  The stocks in this group are losing momentum very quickly, and it is systemic into the intermediate-term time frames.
  5. The slope EMAs are well below 0, indicating that we are losing anywhere between -$0.17 and -$0.36 cents per day on an index of ~$190.  May not seem like alot but this is not a trend line you want to invest within.
  6. The pricing window shows the 50d (blue) in a clear downtrend.  This is bearish.
  7. The pricing window shows the index of this group bouncing off the 200d.  Piercing this would be incredibly bearish.
  8. The bottom two volume windows both show that stocks in this basket lost value on Friday (red) and that they are are both with volumes higher than the 50d or 21d MA.  This is bearish and is considered distribution for this basket of stocks.
From the above graphic, we can conclude that GGT Affirmed Cash stocks are in a clear downtrend, are losing momentum, and are doing so on highe volume, which is considered distribution.  I personally avoid Affirmed Cash stocks at all times.

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GGT New Cash

GGT New Cash stocks were previously in some form of long status the prior trading day (New Long, Affirmed Long, or Long), but due to a severe price hit, have dropped below the optimum level relative to the recent past.  New Cash equities can certainly whipsaw back to a long status, but they need BOTH price appreciation and high volume to do so.  Note that volume is ignored to take a stock from a long status into a New Cash recommendation.

Here's what HGSI has to say about New Cash:



Here are the comments:
  1. These stocks have been in some form of long status the day prior, hence have been under accumulation.  Note that the 3rd ribbon from the top has moved from dark green (heavy accumulation) to light green (less than dark but still noteworthy).  This shows a trend change and the beginning of distribution, which is bearish.
  2. The Elder Force Index (13d) has just turned RED (4th ribbon).  This is bearish.
  3. The white area shows that the slope EMAs are mixed.  The 2d (red) is clearly in a downtrend, as is the 8d (green).  The 13d (blue) is peaking and slowing, as is the 21d (purple).   This is bearish for the shorter length EMAs but still bullish for the longer term EMAs.
  4. The slope EMAs are all above 0, so the intermediate-term is in an uptrend.  Note that the 2d looks to be the first to cross 0 from above, which will be bearish for the intermediate-term trend.  We expect this -- these stocks are all falling in price, knocking the trend of the basket downward.
  5. The pricing window shows that we had significant price drop on Friday, as evidenced by the red candle. 
  6. The pricing window shows that this basket of stocks has been losing steam, even when the market is showing upside growth (as previously shown).  New Cash stocks should be avoided, and if long positions are held and then they turn to New Cash, they should be sold.
  7. The pricing window shows that prices are right at the 50d EMA (blue).  I typically view any prices below the 50d level as bearish, and we just closed at this new bearish level.
  8. The bottom two windows show volume, the top one being 50d MA with volume, and the lower one with 21d MA with volume.  Both are higher than their MAs, which is bearish because it shows distribution by the big boys, AND more importantly, having stocks in this classification show falling prices on higher volume is NOT a requirement -- it's simply a tell of the market. 
This final graph tells us a tremendous amount about stocks that were holding up:  New Cash stocks were under accumulation but are now starting to be sold (% A/D), Elder 13d FI turning negative (change * volume is less than 0, showing distribution), and the slope EMAs are beginnng to point downward, showing loss of momentum.  I typically sell ANY equity that shows a New Cash recommendation without much hesitation.

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I hope that this helps you understand the six different GGT classifications.  Stock and ETF classifications can be found in the Yahoo GGT web site files section (for which you have to be a member) at

http://finance.groups.yahoo.com/group/GreekGodTrading/

If you are not a member, you can send a request with a short statement on why you want to join to:

GreekGodTrading-subscribe@yahoogroups.com

Sometime in the near future I'll discuss the concept of intensity/strength of a given stock, which can give us further insight on which ones have upside room to move.

I'm traveling the following week (March 1-5), so postings will be as I have time.

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Remember, you are responsible for your own trading decisions, not me.  Do your homework.

Leave a note below in the comments field if so desired.

Regards,

pgd