Wednesday, October 13, 2010

Divergence and Potential Topping

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Greetings again from Spokane.  This is a wonderful place of the country.  I'm headed to Michigan later today, back to the area I grew up a few moons ago.

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The dashboard:


Today's data is on the bottom line.

GGT price moved upward on Tuesday by +0.35% to $25.91 (column 2).  Volume was barely above the 50d MA average by +3%, which is in the normal noise (column 3).  Rising prices on solid volume is bullish and we should believe in the trend.

The GGT Long-Cash Ratio (LCR), which is one of the most important indicators of the database, moved upward 6% to end the day at 3.522 (columns 4-5).  This is a lofty amount but certainly shows that price and volume of the constituent stocks is moving upward.  We now have 2268 stocks in some form of long and 644 stocks in some form of cash.  The LCR trend is decidedly bullish.

I'm a firm believer in following the trend but I also want to show you something that was eye opening for me:



Simply look at the peaks above -- the light blue is the raw LCR value and the black line is a simple 4d moving average.  We are very close to historical peaks.  Certainly, we can go higher, but I think the likelihood of doubling from here is very poor.

The graph below also should put the present market in context of our past over the last 2 years:


Here, we see that exponential moving averages (EMAs) on the LCR are clearly in an uptrend AND that we are hitting lofty levels.  While we certainly could move up from here, I think we have to be watchful of a rapid breakdown. 

Column 6 in the dashboard is the database strength index. The strength moved from 0.81 to 0.86, again showing strength in price, volume, and rate of change, which clearly is bullish. Again, we certainly can remain at these lofty levels, but the likelihood is increasing that this will reset.


There was also a divergence within the database that I must point out.  This is a bit technical, but the gist of it is that I calculate TWO strengths -- one is the strength of the database (column 6), and one is the strength of the database without volume.  This latter one, the one which omits volume, DECREASED in value on Tuesday.  THIS IS INCREDIBLY IMPORTANT ... it is telling us that stocks are not necessarily increasing in strength because of price, but are doing so because the volume number is above their historical optimized levels.  Please stop and think about this -- prices aren't advancing, but volume *is* advancing.  This is the classic definition of churning and I think it indicates that we are topping.

Given the action yesterday, and given where we are at in general on the markets, we are clearly in a bull leg and we should be aligned accordingly.  I continue to purchase stocks and ETFs long, and will continue to play this side of the market.  Note though that we must be aware of a potential reverse in the overall markets and be prepared to exit our longs at the first sign of weakness.

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Short-Term LCR Change Timer

The Short-Term LCR Change Timer is still sitting at CASH-LONG (0), and if today is an up day as far as the LCR is concerned, will transition to LONG with the close of the markets.  The VTI and UWM look attractive; QLD not so much in terms of momentum.

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Intermediate-Term Elder Force Index Timer

The raw FI(13) is positive (column 12).  The slope of the 13d EMA of price is above the slope of the 34d EMA of price.  These three indicators certainly tell us that we are long and in my opinion, anybody who shorts for anything longer than a day trade is simply throwing money away.

My holdings are doing ok, but underperformed yesterday, which I take as a warning.  Here's the chart:


The strengths are
  • Bull power is very positive
  • Bear power is positive
  • Both the EMA and SMA calculations of FI(13) are very positive
  • The FI(2) is very positive
  • The MACD and MACD Signal lines are properly oriented and very linear/uptrending to the right (positive histogram)
  • 13d and 34d slopes are positive and positively trending
The weakness is that the price performance did not clear Monday's action, although volume was upward relative to Monday.

Possible Elder entries are

ATI
AGN
AMX
AVY
ABX
CII
CELL
C
CLF
GLO
CNSL
DVN
DWA
DSW
ETM
EVEP
EXM
XCO
FDX
FRG
FTO
GNK
GFIG
GRZ
IMO
IEO
EWH
GSG
LH
LNC
MERC
MFLX
NM
NAT
NOG
NUE
OIS
OSUR
PKY
DGP
RRD
RSTI
SWN
GLD
GXC
TAL
TGH
BX
EGY
WERN
WPRT

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Remember, you are responsible for your own trading decisions, not me.  Please do your diligence and please take ownership for your executions.

Regards,

pgd