Thursday, October 21, 2010

LCR - Price/Strength Divergence, Bulls Resuming Control?

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Let's start with the facts ...


GGT Price increased on Wednesday by +1.13%, ending the day at $25.96.  Volume was up 15% over the 50d MA.  Rising prices on higher volume is bullish, as we all know.

The Long-Cash Ratio (LCR) FELL -2% despite the price and volume increase, which is a divergence.  Because volume is not considered in the move from LONG --> CASH this tells us that while the average price of the database increased +1.13%, the number of stocks that performed worse than their historical, optimized price levels increased.  It is possible to have a stock rise in price but not meet the optimized threshold level, thus moving it to a CASH recommendation.  This appears to be the case for numerous stocks, and points to a weak day.

The price/LCR divergence is problematic for a sustained, healthy bull, and while my crystal ball is only as good as yours, this needs to be rectified for us to continue higher.  Either we'll see LCR reverse and march lock-step with rising prices (bullish, healthy), or we'll see prices reverse and fall with a decreasing LCR.  I don't predict the future, I only watch that occurs, so stay tuned.

Despite the move upward yesterday in price, the slopes on the LCR EMAs did not move up.  Here's the status:




Note that the 8d EMA on the LCR is now below the 13d EMA.  This crossing from above is bearish for stocks on the long side and is a loud shot across the bow of USS InvestLong.  Furthermore, note that despite the large increase in prices on higher volume, that ALL of the slopes of the LCRs, from 5d to 55d are pointing downward.  OUCH.  While this may be a good entry point, it could also be a good jumping-off point.  Time will tell...

The GGT strength index moved upward from 0.528 to 0.636 on Wednesday.  This value is comprised of price, volume, and price rate of change, and the increase is in sync with prices, which I consider bullish and healthy.  The present value certainly suggests that we could move upward from here, as there is plenty of stocks to fuel a move higher, so while this is not a probability, it does say the odds are better than 50/50 that we'll move upward on a relatively short-term basis.


I haven't posted the above chart in some time -- it shows the GGT price series with the strength index.  As you can see, it's been some time since we've been below the 0.4 level, and failure of the markets to drop enough to cause this to occur suggests that there is still gas in the tank.

So, we have a divergence.  Price and strength went up on above-average volume, yet the venable LCR dropped.  We need the LCR to rejoin the direction of price/strength in order to have any confidence in the markets, so I'm still calling this a dead-cat bounce and we need to watch carefully before committing large sums of money to the long side.

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Short-Term LCR Change Timer

Yesterday saw the markets advance in the ADV/DEC line at http://www.finviz.com/ at a 4778/1473 ratio, which is very bullish.  The ST LCR change timer uses the LCR, not the ADV/DEC data, and despite the fall in LCR, transitioned from CASH (-1) to CASH-LONG (0).  It did this because the magnitude of the change in LCR was -2%, and coupled with an adaptive filter, it moved upward.

If today is an up day as far as the ADV/DEC line is concerned at 3:30-3:45-ish it could be prudent to move into a long position in VTI, QLD, or UWM.  Note though that with the divergence in LCR and price/strength this move is more risky, as these three need to work themselves out and synchronize.

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Intermediate-Term Elder Force Index Timer

FI(13) continues to be positive (column 12), which is bullish.  The slope of the FI(13) is upward, so it too is growing in magnitude away from the 0-crossing, which is bullish.  The slopes of the 13d and 34d price series are upward, which also is bullish.  Correspondingly, we have had a whipsaw in the Elder FI timer and we are fully long again.  While tempered by the aforementioned divergence and the fact that the LCR slopes are all pointing downward (database is not as healthy as we would like), we must believe our indicators and we must search for long positions to enter. 

67 securities meet the initial Elder screening criteria.  Here are the strongest ones:

DSW
EBS
TSI
UBSI

Not a very compelling list.

Here are a couple of special candidates with some commentary:

SKS -- interesting in that if it can continue upward above $10.70+, we could continue nicely.  Note that there is no engulfing pattern to the prior few days, so no apparent resistance.

LANC -- There is nothing preventing this one from moving upward as far as I can see, and it is building a nice right side to a base.

DSW, despite the double Doji the last two days we've seen some good consolidation.  I'm looking for volume higher than 700K and a positive change to enter.

RGR needs to clear $15.79 on solid volume, but watch for this one.

I'm watching PEET to move higher than $37.75 on solid volume... again, building a right side to a base.

XIDE above $5.70 on good volume looks interesting too.  The right side of the cup-and-handle is clearly visible and while we've not consolidated in the handle, we have been consolidating in terms of volume.

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The Contra Watch

With the close of TUEDAY's markets, contras signaled
  1. an early FI(13) EMA moving positive,
  2. a crossing of the slope of the 13d and 34d EMA lines from below,
  3. a new MACD histogram going positive, and
  4. a closure in the contra index price above the 13d EMA line. 
Wednesday's market action undid much of this.  Here's the chart:



This appears to be a false breakout:
  • Bull power has moved negative.  The contra bears (a.k.a long bulls) are regaining control
  • Both FI(13)'s are now negative
  • Index price closed below the 13d EMA, which is bearish for contras (bullish for longs)
I note though that the slope of the 13d EMA is above the slope of the 34d, so we are still bullish for contras.  The MAGNITUDE of these slopes is negative, which means we're losing money in contras day-over-day, but we're doing so less fast. 

I also note that the MACD histogram is still positive.

Contra positions should be avoided, but note, they are firmly establishing a floor.  Don't lose sight of this because once the floor is in, there is no place to go except upward, and I plan to make some coin on this as it unfolds.

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Trading Plan for Thursday

With respect to the short-term LCR Change Timer, I'll be watching the markets about 3:45 at FinViz.com and may enter VTI if we look strong in the last hour.

With respect to Elder, you see my candidates.  I'll be watching them throughout the day for price and volume entry thresholds.

I'm shying away from contras at the present moment.

I have a number of positions with 1% TSLs, GTC, that have been riding for the last two days.  I will most likely remove these TSLs.

Note, I have moved my wife's TSP funds (http://ggt-tsp.blogspot.com/) to cash, as we had some signals to do so.  While this may get reversed over the next day or two, it is prudent to protect the 6%/month gains that we've achieved.

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

Regards,

pgd