Wednesday, July 28, 2010

Price and LCR Divergence ...


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The GGT Price Index moved down -0.65% to $25.94 on normal volume of 2.7M shares.  Standing alone, these two metrics are unremarkable.

Of interest is that the GGT Long-Cash Ratio (LCR), which is a ratio of the number of stocks with some form of LONG recommendation to those with a CASH recommendation, continued to grow in a dramatic fashion, jumping another 15% to 1.929.  We now have 1678 stocks that are LONG and 870 that are CASH, the highest level of this ratio since late April.  This continues to be very bullish.

The LCR is comprised of three components:
  • price action
  • volume action
  • rate of change of price
When price action, volume action, and rate of change all move to the upside faster than some "optimized" level of the past, we get some form of a LONG signal on a stock.  Failure of volume action, or rate of change of price, compared to historical levels, simply results in the individual security remaining with a CASH signal.

For the price index to drop, which means that the average price of the database is dropping, but for LCR to go up, we have had a couple of things happen.  First, think of the database as having some price/volume/ROC (P/V/R) level that causes stocks to move long.  Every day this level changes, because the lookback period marches forward one day at a time (e.g., I don't reference to January 1st of 200X, I simply look back in a sliding window fashion for a fixed 1 year or 2 year period).  If we were above this P/V/R level yesterday, and with today's action, even though prices may have fallen, we have a greater "distance" between where we are today and today's new P/V/R level, we can see that prices could have fallen but the LCR could have moved up, as more stocks will have crossed their threshold from CASH to LONG.  This is where we are today.

So what does this mean for our trading?

Prices falling but the LCR increasing cannot be sustained.  Either the LCR must also fall, because to get a CASH recommendation all we need is a breakdown in prices, or prices must resume a march upward, because ROC levels are being sustained.  It's impossible to predict, but for now, my feeling is that we can continue higher with some minor pullbacks.

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Short-Term LCR Change Timer

Back to the chart above.

The LCR Change Timer continues to indicate that we should be long on a short-term basis.  My positions in UWM and QLD are up, but are under tremendous pressure of losing ground.  Given that the LCR has moved aggressively upward I will continue to hold these positions.

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Intermediate-Term Elder Timer

The Elder 13d Force Index continues to sit firmly above 0, which is our primary gate for intermediate-term investing.  Somewhat worrisome is that we have had two consecutive days of the 13d FI pointing downward, which is mildly bearish.  Three consecutive days would be a warning shot across our LONG bow, so pay attention to today's action/tomorrow's blog.  The 2d Force Index is positive, which is indicating that the market is overbought.  We must be selective on our entries if we continue to move long into new positions.  Bullish for this leg are the slopes of the 13d and 34d EMA prices of the database -- they are both in an upward trend.  Further bullish is that the 13d > 34d EMA prices, which means we are clearly rising in overall value and this long call is quite valid.

My intermediate-term positions came under tremendous fire yesterday.  VLTR hit estimates, but because it did not blow them out of the water, the market rewarded them with a drop of nearly -13%.  I have placed a 1% TSL on the position simply to protect my downside, and because the 13d FI on VLTR moved negative.  My intermediate term portfolio went from being up +4% to being flat on the day, which certainly hurts.  Overall though, when looking at the group as a whole, the index chart pattern looks very strong:
































Note that in the figure above:
  • Bull-power is still very positive,
  • Bear-power is weaker than bull power, and is getting smaller,
  • The 13d Force Index ribbon is green, which means it is positive
  • The 2d Force Index has moved green (for this basket of stocks), which means that it is NEGATIVE.  Conceptually, if we wanted to add to my basket of stocks, if prices resume an upward march, today would be a good day to do so because of the status of the 2d FI,
  • The slopes of the 13d and 34d EMAs for this basket are very positive (bullish)
There is NOTHING in this basket of stocks that is telling me to dump them (except for the individual performance of VLTR).

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The pullback in prices has expanded the Elder list.  Here it is, sorted by strongest Relative Strength:


























I haven't screened these as far as chart patterns, so you'll need to do that work yourself.

In terms of velocity (change in relative strength), here are the strongest:































Definately some surprises in there.

Finally, here is the list of strongest accelerations (change in velocity)






I like how some of the same names keep coming up.

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Trading Plan for Wednesday

Futures are down, so I may lock in my gains in UWM and QLD before they go underwater.  If I see a classic "V" during intra-day I may repurchase these, or add to these.  My discretion.  Remember, this is with respect to the short-term LCR Change Timer.

With respect to the intermediate-term Elder timer, I'm watching to see if we have a breakdown in the primary Elder signal (13d FI < 0), but if any of the stocks show strength today, I'll most likely jump in.  Remember, I'm looking for price action above yesterday's high AND %volume greater than the 10d MA of volume.  Read back in my previous blogs for the scale.

Note that WE HAVE A DIVERGENCE in price and LCR.  This is a fork in the road.  Continued weakness will cause the LCR to reverse, and this could be dangerous for our gains.  Watch the ADV/DEC bar at http://www.finviz.com/ to see what the market is doing intraday.

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Remember, you are responsible for your own trading decisions, not me.  Please do your own work.

Regards,

pgd