Wednesday, October 20, 2010

@ Crossroads, Potential Buying Opportunity, Potential Dead Cat Bounce

.
The dashboard:


The GGT price index fell on Tuesday by -2.02% on volume that was 28% higher than the 50d MA.  Falling prices on higher volume is the definition of a distribution day, to steal from William O'Neil's dictionary.   Looking back down columns 2 and 3, you can see that 10/14 and 10/15 could be classified as distribution days, but not as severe.  Three of these days within a week or so is problematic for our current portfolio, although I can't call this bull leg dead yet.

This next graph shows a nail in the bull-leg coffin:



The graph above is created by taking the daily change in the pricing EMAs (13, 21, 34) and taking the difference from day to day.  This allows us to see the slope of the EMAs on different time scales.  When the result is in the white area -- above the pink zone -- then the EMAs are gaining day-over-day, which is good for our portfolio.  When they move to the pink zone our portfolio isn't doing so well if we're in the market.

As you can see, the 13d signal has just crossed into the pink zone.  This means that the 13d EMA of price is losing value day over day, so any stocks purchased within the last 13 days are probably under pressure if they behave like the GGT database as a whole.  This is problematic to the net worth of our holdings, and indicates that shorter-termed holdings should probably be dropped if the trend continues.

This next graph shows another nail in the coffin of the bull-leg:


This graph is created by taking the 65d EMA of the GGT price series, then taking the day-to-day difference of this EMA, then doing this one more time.  Confusing?  Could be if you're not used to thinking this way, but the 65d EMA is really the perfomance over 13 weeks or 1 quarter of time.  When we take the daily difference, we get the slope of this longer-term behavior, and the units become $/day.  Hence $/day tells us the slope of the change over a 13 week period.  When we take the daily difference of THAT series, we get the SLOPE OF THE SLOPE, or whether we are accelerating upward in price or downward on the timeframe used (in this case 65 days in length).

The analogy in the mechanical world is this:  if we equate dollars as distance, then a stock is to a car as the price of the stock is to the distance a car can travel.  It's a snapshot in time.  If we then take the dollars/day value of the stock (the change in price day over day, e.g. slope of the price series day over day), we also can relate this to miles per hour of the car (the change in distance per unit time, e.g. slope of how fast the car is going or speed of the car).   If we take the rate of change of dollars per day we have a metric that tells us how fast the price series is moving upward or downward in dollars/day/day -- and if we do this for a car we have acceleration or the result of pushing the accelerator pedal, often stated in miles/hour/second.

Hence, the graph above tells us that on a 65-day basis, the price of the GGT database is decelerating because it is in the pink zone, telling us that if this trend continues, we will be in trouble on an intermediate-term (13-week) basis.  Correspondingly, any stocks purchased in this time frame will be under significant pressure.

I do not like this line to be in the pink zone, and I especially do not like this line to be lower than the previous test of the pink zone.  We are losing steam as shown by lower highs and lower lows

==============

The LCR continues to fall, as shown in columns 4 & 5 of the dashboard.  The new value is 1.827 (there was an error and the value in the dashboard shown is incorrect -- this error has been fixed but the image has not been updated but will be in tomorrow's post), and tells us that we have 1887 stocks with some form of LONG status and 1033 stocks with some form of CASH status.  This is a huge drop in one day -- nearly 50% of the stocks in the database moved to CASH with yesterday's action.

Although out-of-order on the dashboard, I point your attention to the right-most area of the figure, which I've highlighted below:



The left columns show the status of the LCR EMAs relative to each other ... we're still in alignment in that the 8d > 13d > 21d > 34d > 55d -- the world is whole.

What we have as a problem is the right columns -- the slopes of every one of these EMAs are pointing downward.  This means that IF THIS TREND CONTINUES, then we'll have the left columns turning red because the shorter EMAs will start to intersect the longer EMAs from above, nailing the coffin shut one by one.  This is bad for long positions.

All we can do is watch.

So here is the conclusion to all of this:  if you have long positions that were purchased within the last 13 days of trading, you're probably close to being underwater.  If this trend continues then there is a good chance they will never recover and you'll sell at a loss.  Conversely, if the trend reverses on a short-term basis, e.g., dead-cat bounce, then you may be able to exit for a small profit.  If the trend reverses and moves up dramatically from here (very possible, as there is a bit of money on the sidelines), then holding these positions would be good.

I personally hate taking a loss on a position once it has shown gains.  I typically exit weaker positions when we get to markets such as we are in now -- I set my target to cover my round-trip commissions and get out on the weaker, shorter-termed holdings.  For the longer-termed holdings, I let Elder and other metrics tell me what to do.

As a fairly conservative investor, I am exiting many of my longs, as I've held them less than 34 trading days. It simply isn't worth letting them take a loss at this point in my performance.

===================

Short-Term LCR Change Timer

Yesterday's action continues to confirm this timer and it is in CASH.  'nuff said.

===================

Intermediate-Term LCR Change Timer

Given all of the above discussion, this is where it gets interesting.  Do we enter positions or not?

The short answer is that we need to take a close look at the Elder system.

The Elder FI(13) signal is postive for the database, indicating that overall, we are okay for holding long positions (column 12). 

This being said, the SLOPE of the FI(13) is down, so the magic transition level of 0 is within reach if the trend continues (column 13). FOUR DAYS of DOWNWARD ELDER FI(13) SLOPE is deadly, and we're in day 2.

The slope of the 13d EMA on price is pointing DOWN.  For conservative investors, this would block entry into new positions.  For aggressive investors, because this 13d EMA is above the 34d value, we could use this pullback as an entry point.  The choice is yours (not mine).

There are ALOT of candidates that meet Elder's FI criteria (positive 13d FI, negative 2d FI, 13d slope positive, 50d slope positive).  Here is a list of the stronger ones:

NBIX
AKRX
FIRE
AAPL
NWY
KFY
POM
DSW
FSLR
CNL
WEC
EQR
FINL
RGR
LO
VVC
HCP
POR
ICE
PGE
WRI
EIX
TPC
CRR
ARE
PLXS
FSP
ALE
RYN
WOR
GLT
TWC
STT
WSH
SWY
OFC
TASR
NDAQ
MANT
CSL
SUPG
MCY
NYX
SONE
AMTD
LPX
RBC
ONXX
OXPS
IBKC
RTN
PLCM
SF
WCBO
GVA
GFRE
USB
MET
HPQ
LYV
AEIS
KCG
PKY
PNX
DB
CPF
ERII
CVO
GXDX
UTA
NEE

Before you yell at me and say the list is too long, simply copy and paste the list into a watchlist that you can update in real time and watch for the stocks that are up on the day on good volume.  If you are aggressive, any stock breaking above yesterday's high could be a good candidate for entry for intermediate positions.

And to really confuse you, take a look at the contra ETF composite:



I note the following with respect to contra ETFs as a group:
  • Bull power just turned positive.  This is bullish for contra ETFs
  • The Elder FI(13) EMA signal just turned positive, but the Elder FI(13) SMA signal is still negative.  This is a mixed signal, but because of bull power, the bias is to the bullish side for contra ETFs.
  • The MACD histogram just moved positive.  This is very bullish for contra ETFs
  • The slope of the 13d EMA just crossed the slope of the 34d EMA from below.  Although both of these levels are negative (the car is driving backwards), the fact that they are pointing upward tells us the car is driving less fast day-over-day than a few days ago.  Yes, contras, as a group, are still losing money on the 13d and 34d time scales, but they are doing so less fast.
  • The price index of this contra basket has closed above the 13d EMA.  This is bullish for contras.
While we may see a dead-cat bounce today (Wednesday), contra ETFs are showing life.  The strongest ones can be determined from the GGT universe posted daily:



While many of these are thinly traded, you can see some powerhouses.  The base on these appears to be in so hedging your long positions may not be a bad strategy.

My leveraged / inverse ETF watchlist is as follows:

TMV - meets all of Elder's criteria
EDZ - early
ERY - early
FAZ - early
DTO
DZZ
TBF- meets all of Elder's criteria

DOG
SH
TBT - meets all of Elder's criteria

SMN - early
SCO - early
DXD - early
EUO
GLL
SKF - early
MZZ - early
BZQ - early
EEV
EPV - early
DUG - early
TWM - early
ZSL - early


==================

Trading Plan for Wednesday

With respect to the short-term timer, I am doing nothing as it is in cash.

With respect to Elder, I like many on the list I provided to the long side.  If they move aggressively upward today on substantial volume I may enter.

With respect to Contra ETFs, we are still very early as a group, but on an individual basis, many look very attractive.  I may add 20% positions of the strongest contra ETFs if they show any strength today.

=================

Remember, you are responsible for your trading decisions, not me.  Please do your homework and do not rely upon me.

Regards,

pgd