Tuesday, November 2, 2010

Another Storm Cloud on the Horizon, Divergences Galore

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I've been writing the past few entries about the Long-Cash Ratio (LCR), specifically looking at EMAs (exponential moving averages) on the LCR and their respective slopes.  Yesterday's action hammered another nail in the bull coffin, so we're going to need some strong market action to overcome what I'm seeing. 















Note that the 13d EMA on the LCR has now crossed the 21d EMA from above.  We now have another bearish situation building, because:
  • 5d < 8d EMA
  • 8d < 13d EMA
  • 13d < 21d EMA
Further note that there has been no change in the LCR EMA slopes (right portion of figure), so nothing is leading us out of this situation at the present time.

We need to see the LCR EMA slopes (right side) start to move green (bullish) to pull the nose up on what is occuring in the broad markets.  Failure to see green here is screaming "caution caution caution".

I'm almost completely in cash at the present moment.

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The Dashboard:




The GGT price index increased on Monday by +0.27% on normal volume that was only -1% below the 50d MA.  This is normal market noise and by itself is unremarkable.

The LCR FELL on Monday by -5%, landing the day at 1.328.  Here again we have a divergence -- average price action increasing yet the underlying database telling us that stocks in general are weakening in terms of price.  This should cause you to pause -- how can the price index increase yet the LCR drop?

The LCR value is derived from the number of stocks that historically are above their optimized values for maximizing an equity curve over the last year.  When the LCR value drops, it is telling us that stocks are falling in price with respect to where they have been over the past year.  We can still have a price increase in the database, but because the LCR value is a sliding window of a lookback period, the threshold for remaining a LONG stock could actually be increasing faster than the price is rising, causing us to move into CASH for a given equity.  This is what is happening at the present time.  An equivalent analogy is that the relative strength of the database is falling, which obviously is problematic overall.

The short of this is that price action and LCR must align.  We cannot sustain increasing price movement but decreasing LCR -- eventually the prices will have to start dropping to align with the falling LCR, or the LCR will have to reverse and move upward.  I still maintain that this divergence has us at a crossroads and until we get significant movement either way, caution is advised.

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Strength Index

Column 6 contains our strength index.  I discussed derivation of the strength index yesterday; our artificial support line is intact so we can interpret this as somewhat bullish.  Of some concern is that the price index moved upward but the strength index moved down -- this divergence is like the LCR divergence and again, the two must align.

Crossroads indeed.

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Short-Term LCR Change Timer

With the LCR falling 12 of the last 13 trading days, it is no wonder that the LCR Change Timer has remained in CASH since 10/15.  The GGT price index on 10/15 was $26.07, and yesterday's close has it at $26.48, or an increase of +1.6%.  While it would be nice having this gain over 13 trading days, we've been all over the place ($25.67 on 10/19, a loss of -1.53% and $26.48 on 11/1) so I'm not overly concerned about the efficacy of this timer.

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Intermediate-Term Elder Force Index Timer

Columns 12-16 highlight the intermediate timer that I follow.  Bottom line is that Elder is still positive, so is indicating that we can purchase stocks long.

Cross-correlating GGT and my home-spun tools with the HGSI package should give us some additional insight:



The view above is my Elder screen, this time applied to all of the stocks in my GGT universe, as of the close last night.  You can click on the image (as you can with all my images) to see a larger view.

In this graphical view I calculate the Elder Force Index using two methods:  the top ribbon bar is via the EMA method (more weight to what happened yesterday than what happened 13 days ago), and the ribbon bar under it is via the SMA method (what happened 13 days ago is just as important as what happened yesterday).  Both methods have their merrits and detractors.

What we see is that the 13d SMA method has moved to CASH with yesterday's action, which is not a good sign.  Look at the numerical window in the lower portion of the figure -- the SMA method is clearly negative, and by a good amount.  Contrasting, the EMA method is clearly positive, so this indicates yet a further divergence and should have us pausing at any new long investments.

In the MACD window, we see that the MACD histogram is clearly negative, and you can see this raw value in the numerical window.  The MACD and MACD Signal Lines are clearly downtrending, and this too tells us to be prudent and to lock our profits.

Under the MACD window is my favorite slope window -- I watch the 13d and 34d EMA price slopes like a hawk.  While these are both clearly positive in value (look at the numerical window, the 13d is gaining price at $0.4299/day and the 34d @ $0.5527/day), the fact that the 13d is under the 34d slope is not a good sign (loss of momentum), and the fact that they are both pointing downward is further indication of loss of momentum ("the car is driving forward but is slowing"). 

Finally, I've added the artificial red box around the pricing series.  We see that we simply are not moving anywhere, and have not been for a number of days.

So while the GGT Elder system is telling us that we can buy stocks long, a further graphical analysis of the GGT Elder system says "Yes, but ...."  I certainly would not move anything more than a 20% position in anything that was looking attractive, especially given that the day is Election Day and that we have FOMC clouds looming.

For the daring:

GBG
ARUN
JBL
AVGO
FTE
CNW
TMK
ITC
CME
TWTC
GSI
ATVI
FCF
SXCI
WBSN
FLIR
CPA
VLTR
AMCC
DGIT

Ensure that you are entering on strength and appropriate volume for the time of day.

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

Today is voting day.  I gave 8 years active duty, 21 years total in the U.S. Navy so that you have the right to choose your leaders.  It is your obligation to vote, so please take the time an exercise your right and demonstrate to the world that a free nation is the strongest form of government.

Regards,

pgd