Thursday, November 18, 2010

Bearish Price/Strength and Price/LCR Divergence

  • Rising prices but falling strength index does not point to a healthy bull market.  This is our current situation.
  • Because of rising prices, we see that the slope of the 55d EMA on price has turned up.  This is necessary for a bull run to resume, but note, all the EMAs below the 55d are still pointing downward.  This effectively will continue to kill the bull if these do not reverse.
  •  The LCR continues to fall despite the increase in prices, giving us another bearish divergence.  The synchronization of the LCR and the strength index presents a bearish bias to the market, futures up nearly 1% as I write this notwithstanding.
  • I'm going to let the divergences work themselves out before I commit substantial monies to the market.

Let's start with the dashboard:

As with all my images, right-click on the pictures to open in a different tab or window.

The GGT price index rose +0.43% on Wednesday on volume that was -11% below the 50d MA.  Rising prices on lower volume does not make for a raging bull, but -11% is within the standard deviation of being normal, so read into this what you may.  I don't think it is a great sign.

The pricing EMAs are intact, with only the 8d < 13d.  This means that the decline that we have experienced (nearly 10% in GGT prices) is still not enough to cause these EMAs to invert, which overall is bullish.

Wednesday saw a bit of recovery in the pricing slopes, with the 55d pricing slope turning upward.  Hence, although we are still pointing down on the 8d, 13d, 21d, and 34d, this drop over the last week or so has not been severe enough to persist when we have an up day.  I take this as a crack in the bear ice and we need to be ready to play the markets to the upside, should the indicators point us that way.

Despite the increase in prices, the underlying strength of the database fell -5.9% on Wednesday, which means that we have a divergence, and in this case, a bearish one.  Strength is a function of a number of things -- prices, volume, and rates of change -- whereas price is simply that.  A falling strength means that the underlying number of stocks in the database is not supportive of the increase in price, volume, and/or rate of change, and this generally is not a good thing.  Either 1) GGT prices must fall to align themselves with the falling strength, or 2) strength must improve in order to support the increase in prices.  Only time will tell.  This is a bad sign though, because the strength index is broad and deep, whereas price is simply broad.

Note that the strength index is at 0.249, which is the lowest value it has been at since July 2010.  This does suggest that we could see upside movement, as a number of stocks have "reset".

The Long-Cash Ratio (LCR) fell an additional -9% on Wednesday, aligning with the fall in the strength index, but giving us a bearish divergence against the rising price index.  The final value of 0.585 indicates that we have 1076 stocks that have some form of LONG status and 1838 stocks with some form of CASH status.  Put another way, 37% of the database is LONG.  The bearish divergence between the LCR and price cannot be sustained, much like the price/strength divergence.  Either we will see 1) GGT prices fall to align themselves with the falling LCR, or 2) the LCR must reverse and move upward to support the increase in price.  The fact that LCR and strength are working in synchronization tells me that we have a sustained bearish bias in the markets, futures being up nearly 1% notwithstanding.

Overall, the bias is downward, but with the GM IPO today, the govern't need to save face in view of the GM IPO (if the GM IPO fails Joe-Taxpayer will NEVER allow the government to bail out any company going forward, giving the market no reason to move up because a safety net will have been removed).  Hence, today is a sucker's rally, as there is too much news to play.  I will be content to sit on the sidelines and watch. I need these divergences to work themselves out before I commit substantial cash to the market.


Short-Term LCR Change Timer

The timer is now in it's 6th day of being in CASH.  The GGT index has fallen nearly -9.3% in this time, so I suppose that this is a good timer to watch.  I plan to stay the course for my short-term investments.


Intermediate-Term Elder Force Index Timer

This timer has been in CASH for the past 4 days, with two days confirming out of this 4, and is telling us that it is NOT prudent to play positions for the intermediate-term.  Hence, I'm not playing positions.

Nevertheless, I run an internal portfolio of Elder candidates that are showing strength in light of existing market conditions.  Here's the list of candidates going into Thursday's action:


Note that AIB is early, as the slope of the 34d EMA is negative but will cross into positive territory if the stock moves up.  Note that with all the noise about Europe and the PIIGS, you may want to avoid this equity.


Top 25

We've had a major rotation in the Top 25 since last Wednesday.  Here's the new list:


I launched this portfolio a couple of weeks ago (probably not a great time to launch a new concept), and we have fallen -2.7% since that time.  Note that CLW and MIDD are new additions to the Top 100 source list, as they were New Longs or Affirmed Longs within the last week and have maintained this status.  All other stocks have moved up in the leader's list, which I find interesting.  Under the rules of this test portfolio I will purchase equal-weighted positions with available cash, and will sell everything not on this list.

The Top 25 does not use any form of Elder criteria to enter/exit.  It is purely managed once per week.



In general, India's long stock market, as measured by the ETFs FNI, EPI, PIN, INDY, INR, INP, and ICN is moving downward:

  • Bull power is negative
  • Elder Force Index is negative, both methods
  • MACD histogram is negative and trending downward
  • The slopes of the 13d and 34d EMA on price are pointing downward and the 13d slope is below 0 (losing money day over day)
  • The 8d EMA on price just crossed the 13d EMA from above, which is bearish.
I see no compelling reason to do anything with India at the present time.

INDZ is the Direxion -2x leveraged contra ETF for India.  While it looks compelling for entry, the volume is very low -- 7300 shares on 50d MA of 4442 shares -- it simply isn't liquid enough for me.  But I'll keep checking it week over week...



Platimum has reversed off of it's peak on 11/9 and is plunging, preventing any form of long entry.  Here's the setup:

  • Bull power is negative
  • Elder Force Index is negative, both methods
  • MACD histogram is negative and trending downward
  • The slopes of the 13d and 34d EMA on price are pointing downward and both are below 0 (both are losing money day over day)
  • The 8d EMA on price just crossed the 13d EMA from above, which is bearish.
I'm avoiding any long position in platinum.

Although PTD is the -1x contra ETF for platinum, there is no volume to speak of.


Natural Gas

My NatGas index, formed with UNG, GAZ, FCG, and UNL, has just moved long.  Here's the composite chart:

The challenge here is that it's been long, moved to cash per Elder with Tuesday's action, and has just moved long again.  On the positive side it seems to beholding the 40d MA with the close Wednesday, so we may see it move up from here.  On the negative side Bull Power is barely positive, the MACD histogram just moved negative, and both the slopes of the 13d and 34d EMAs are negative and pointing down.

I plan to avoid NatGas for now.


The Yen

The Long Yen, as measured by the FXY and the JYF, continues to collapse, so there is no change here.  I plan to avoid the Yen.

The YCS is the -2x leveraged contra ETF of the Yen, and it looks interesting:

Of significance here is:

  • Bull power is positive
  • Both Elder Force Index methods are positive
  • MACD histogram is positive
  • %B is 0.78, suggesting more upside room exists
  • The slopes of the EMAs are positive and pointing upward.
  • 8d EMA of price just crossed above all the other EMAs, which is a very bullish indicator.
  • Volume looks good overall.
Here's what GGT has to say about YCS:

Correspondingly, I will pick up a position in YCS if it continues to show strength today.


Remember, you are responsible for your own investment choices, not I.  Please take ownership for your work.