Thursday, April 8, 2010

Price-LCR Divergence

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The GGT Price Index fell from the all-time peak of $25.87 to $25.73, a change of about -0.5%, on extremely high volume of 2.592M shares, where 2.09M is the average 50d MA on volume.  Although the price decline was not huge, a drop of this amount on volume that is nearly 24% higher than average volume is certainly a "heads up" alert.  I call this action "churning".

The Long-Cash Ratio, which is a measure of the number of stocks in the database with some form of long status (New Long, Affirmed Long, Long) ratioed against the number of stocks in the database with some form of cash status (New Cash, Affirmed Cash, Cash), moved higher on Wednesday to 3.092, which is bullish for the day and is the fourth consecutive day of increasing.  What is significant about this is that it is a divergence from the GGT Price Index action.  Let me explain the mechanics.

The GGT Price Index is a raw value -- no manupulation.  It is the simple average of all the stocks in the database.  GGT Price and GGT Volume are the purest indicators we have.

To get a LONG recommendation, if previously in CASH, you need both price and volume to move higher, relative to some optimized value that changes on a ~monthly basis.  Conversely, but different too, is that to get a CASH recommendation, if previously LONG, all you need is a fall in price.  Doing it this way creates a "check valve" so when we have stocks that are recommended LONG, we know both price and volume caused the stock to move up, e.g. accumulation.

For the LCR to move upward, more stocks are in LONG status than CASH, relative to yesterday.  This means that these stocks had both price appreciation AND higher volume.  Contrasting, the decline of the GGT Price Index shows that although the database, as a whole, moved upward in price and volume as determined by the LCR, THE PRICE DECLINE OF THE STOCKS THAT DID NOT EXPERIENCE SOME FORM OF LONG STATUS actually was quite severe.

It's rare to see the LCR move upward but price action drop.  In the nearly 400 trading days that GGT has been alive it has happened only 28 times.  What followed, especially in recent history, will surprise you:  The markets generally continued higher.  Here are the dates it occured in the past so you can judge for yourself:

10/21/2008


11/18/2008

11/24/2008

12/8/2008

12/15/2008

12/18/2008

2/27/2009

3/16/2009

3/19/2009

3/20/2009

3/24/2009

4/30/2009

5/5/2009

5/20/2009

7/17/2009

7/21/2009

9/17/2009

10/13/2009

11/4/2009

11/6/2009

11/10/2009

11/18/2009

11/25/2009

12/28/2009

2/3/2010

2/10/2010

2/26/2010

4/7/2010

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I'm staying the course today.  I sold a few losing positions yesterday, and I've set an intra-day stop loss on my positions which are above water, preventing them from losing my profits.  Futures are down, so my profits will be under pressure today.
 
Remember, you are responsible for your own trading decisions, not me.  Please do you homework.
 
See you Saturday, 10 a.m.
 
Regards,
 
pgd