Tuesday, October 19, 2010

Head's Up: LCR Diverging from Price and Volume

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Let's start with the dashboard.



GGT Price rose +0.5% on Monday on volume that was +6% over the 50d MA.  Rising prices on solid volume is bullish, although we've only had 5 days of up volume.

The Long-Cash Ratio (LCR) moved against the price action, which is a divergence.  The LCR is the ratio of the number of stocks in the database with a LONG recommendation to those with a CASH recommendation.  A stock gets a LONG recommendation if the price AND volume are above a historical, optimized level for the individual stock.  A stock gets a CASH recommendation if the price falls below this historical, optimized level for the individual stock (I ignore volume for CASH recommendations).  Hence, the GGT database rose on price by +0.5%, but the LCR fell, indicating that while prices rose, that many of these stocks are right at threshhold.  This is a decreasing margin between the GGT price index and this magical threshhold level, and it's not good. 

When we have a divergence, one of two things MUST happen in relatively short order:

1) price action must follow the long-cash ratio.   Since the LCR is dropping, price must drop.
2) the long-cash ratio must follow price action.  Since the price action is moving up, LCR must reverse.

As sustained divergence simply isn't possible.  Obviously, if 1) is the path, then we'll need to close our long positions.

The GGT strength index fell from 0.796 to 0.771.  Not a great decline, but it does indicate that there is underlying "relaxation" or "resetting" of the stocks in terms of price, volume, and rate-of-change (ROC).  While we certainly could go up from here, the lack of the strength index being in sync with the price movement tells me that there is more validity in the strength and LCR directions than the database movement.  I think we need to be very prudent in our money management at this time.

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Short-Term LCR Change Timer.

The LCR dropped, confirming the movement of the short-term LCR Change Timer.  Correspondingly, we are in cash, and because investment in the VTI is linked to this timer, we are in cash.

I intend to do nothing with the short-term timer.

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Intermediate-Term Elder Force Index Timer.

The Elder FI(13) is positive (column 12).  The slope is upward (column 13).  The slopes of the 13d EMA and 34d EMAs are pointing upward.  According to this timer, we are LONG in the market (column 16). 

I consider the following risky trades, but they meet my Elder criteria so I feel obligated to post:

CNAM
STV
CREE
EMC
MCCC
UEPS
RDC
TEVA
TLR
ZEP

Out of 137 possible candidates, these are the only ones that have a positive-sloping 13d and 34d EMA.  This is a very low number.

It is important to note that the contra ETFs that I watch are continuing to show preliminary strength in terms of the "slowing of the bleeding".  Early, but certainly worth watching:



Note how the 13d and 34d slope lines have just crossed, which is an initial requirement for strength.  Prices are trading below the actual 13d and 34d EMAs, which is bearish, but overall "we're driving backwards but the car has just hit maximum reverse speed". 

Candidates here are:

SKF
DTO
SCO
FAZ
SH
DOG

TBF (meets Elder's criteria)
TMV (meets Elder's criteria)

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Trading Plan for Tuesday

I will continue to protect my gains and my holdings that are within 1-2% of break even will have a 1% TSL placed, GTC.

I intend to do nothing on a short-term basis, as this timer is in cash.

I intend to do nothing on the long-stock side with Elder, simply because of the price/LCR/strength divergence I wrote about above.  Too dangerous at this point.

I will set a stop-loss entry on the ETF positions above, so that if we move above yesterday's high I will enter a 20% position.

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Remember, you are responsible for your own trading decisions, not me.  Please take ownership for your work and decisions.

Regards,

pgd