Sunday, March 14, 2010

Price / LCR Divergence -- Pay Attention!

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Summary:  Read the content for yourself, but the yellow colorings are no mistake.  Caution is advised.

GGT Price Index:  New Highs on solid volume --> Bullish
GGT Price Rates of Change:  Deceleration all week, but still positive in magnitude.  Possible topping indicator.
GGT Long-Cash Ratio: Decreased on Friday, which is a warning sign.  Possible pausing or topping indicator.
GGT LCR Change Timer (fast):  Transitioned from Long (+1) to Long-Cash (0) on Friday; if the market drops on Monday this timer will transition to Cash (-1).
GGT LCR Change Timer (confirmation):  Still indicating Long (+1) status.
GGT Strength: @ 0.82 (bullish), but down 18% from last Friday's peak of 1.0

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GGT Price Index

The GGT Price index moved higher Friday, reaching an all-time high of $24.73, a change of +$0.02 over Thursday's value and about 1.38% higher than last Friday's value of $24.39.  Volume continues to beat the 50d MA volume, with 2.1M shares indicated on Friday, 12% higher than the 50d MA of 1.9M.  Note that we have had 46 consecutive days of volume beating average volume, which is unprecedented in GGT history since September 2008.  If we look purely at price and volume these are bullish, and we certainly should be long in the market as viewed solely by these two indicators.  Here is the chart; as with all my charts, right-mouse-click on the image to open in an adjacent window and ENSURE you can see the right-most side of the graph, as this is where the relevant data resides.


I've drawn an artificial channel on the GGT pricing data; you can see that we are well-extended above this upper channel line.  You can also see that we are experiencing more average volume than we were compared to any time in the past since January 2009.

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GGT Price EMA ROCs

The Price EMA rates of change (ROCs) are a telling indicator because as they decrease, even while being positive, they can give us a good idea of topping or bottoming formations.



The graph above is the ROCs plotted against GGT Price and date.  You can see for yourself that this week was one of DECREASE in acceleration, a.k.a. deceleration.  This is a warning sign and we need to pay heed.  Next, the ROC values are still above $0.00, so GGT prices are still moving upward, but are doing so at a slower clip.  Until the ROC values drop below $0.00 (into the pink zone) we are still in an intermediate-term up leg, but it is being threatened.  Hence, because of the deceleration but positive value, we need to be cautious here.  Entering a zillion long positions at this stage in the market is not advised.

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GGT Long-Cash Ratio

The LCR, which is a direct measure of the number of stocks in the database with a Long recommendation compared to those with a Cash recommendation, DECREASED on Friday.  Presently it is indicating that 2495 stocks are long and 696 stocks are in cash status.  This indicator has risen day-over-day since 2/24, which is an amazing run.  Take a look at the following graph:



I posted this graph last week; this week it is updated and I've added the red circles so that you can see some correlation with the past.  The yellow sections are the number of stocks with JUST the LONG recommendation -- Affirmed Longs and New Longs are not included in the yellow data.  What is important to realize is that we are nearing (or have hit) historical levels where we have reversed.  Also note the area that I ovaled -- we have history that shows that we can remain at these lofty levels for some time, so a reversal duration is not necessarily indicated.  While there are 696 stocks that can move into a long status of some sort, history does not favor the entire database being all long and no cash, so we need to be careful here.

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GGT LCR Change Timers

I've created a confirmation signal for the GGT LCR Change Timer, which is a slower EMA than the fast EMA used on the LCR Changes.  WE ARE IN A TRANSITORY PERIOD.  The fast LCR Change Timer has indicated a move to LONG-CASH (0), which means that IF MONDAY IS DOWN, this timer will flip to CASH (-1).   Watch the FinViz home page here and pay attention to the area in the upper left corner, which will tell you ADV/DEC for all markets:



Note the specific area just above this text that states 3089 issues Advancing and 2992 issues Declining, or a ratio of 47%/45.5%.  If you see more declining than advancing, typically a ratio of 1:2 (ADV:DEC) throughout the day then you can have assurance that the fast LCR Change Timer is moving to cash.

No matter what happens Monday, we will NOT see confirmation of the LCR Change Timer until Tuesday's market, simply because the slower LCR Change Timer signal is still Long @ +1.  Whether you wait for the confirmation signal or not is entirely up to you.  If you got in to the market when we signaled long back in early February then you probably can afford to wait; if your trades are more recent and gains are lower then it would be prudent to protect profits on the newer positions.

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GGT Strength

GGT Strength peaked a week ago at a value of 1.0 -- this was an all-time high, and I suggested that you protect profits and consider contra positions that were showing strength.  Since last Friday's peak, GGT strength has fallen 18% on the long side.  Had you followed my advice on Monday you're probably pissed at me, but hang in there, I think you'll be rewarded:



If you moved into -1x contras (not that showed strength mind you, just the primary market contras), you're down about -1% to -2% for the week in those positions.  The good news is that if you've held onto your long positions you're in a great hedge position, and if the market does reverse, you've got a great foundation.  This is the situation that I am presently in, and I'm quite content to be here.  I've done this with 2x leveraged contras, and here is their 1-week performance graph (which obviously is worse ...):



Seriously folks, don't worry about the -4% loss over the week ... simply ensure you have your stop losses set in case the market rallies from here.

Note, the market can certainly hang around at these strength levels.  Historically, when we have peaked at a new high, we've ALWAYS corrected.  Always.  It's not necessarily immediate, but it has always occurred.  Here's another graph showing the strength with the GGT Price Index:




Because of the falling-below the less-than-scientific level of ~0.9 I'm going to put us in a cautionary yellow zone on this indicator.

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Strength of Various Indexes

When we take the constituent stocks of the major indexes and calculate the individual GGT strengths of each, then average these per index and scale to 0-1, with 0 being completely oversold and 1 being completely overbought, we get the following:




The figure above shows the indicated indices and the GGT LCR Change Timer, as a reference.  Note that this is the CONFIRMED LCR Change Timer, to make it clearer (some folks have difficulty interpreting the 0-state of the faster timer, as it transitions from +1 -> 0 -> -1 -> 0 -> +1.  The confirmed timer only moves between 0 and 1).  This graph is showing us that we are in historically overbought areas , and while there is no guarantee that we will reverse, historically, when we have reversed, everything moves with generally tight correlation.  This is good  :o).

Get your contra shopping lists ready.  I have this list next to my PC:



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GGT Trading Performance for the week of March 8 - March 12, 2010:

For the past week the entire GGT Portfolio is up 3.3%. The largest realized gain was in BEE, which was closed early when it hit a 8% profit target.  This stock was found in the Turtle strategy, which purchases new 20-day highs, with the list sorted (1000 / (Range * Closing Price)) Descending.  Under the Turtle rules this should not have been sold until it closed below the trailing 10-day low, but I misclassified the stock so it got channeled into a different money management strategy.  Too many pokers in the fire.

I'm presently holding 3.81% in total unrealized gains in 23 equities, most of which are on the long side since 2/12 or so.  The largest unrealized gain is MPG @ 32.79%, and the worse performing unrealized loss is QID, which is underwater by -6.85%.  I've been protecting gains which generally takes 75% of the position off the table, leaving the 25% riding for a confirmation signal, profit target, or stop loss.  72% of my portfolio is in cash, and I see this decreasing significantly if we get a move downward.
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Remember, YOU are responsible for your own trading decisions, not me.  Do your diligence.

Regards,

pgd