Friday, November 19, 2010

Contra China Looks Appealing, LCR Indicates Further Problems with Bull Picture

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Summary

  • Despite the advance of the markets on Thursday, the Elder Force Index timer is still in CASH.  This is bearish.
  • Through the magic of averages, ALL of the LCR EMAs are inverted with respect to their next higher-length EMA.  This is bearish.
  • All of the slopes of the EMAs on the LCR are negative, e.g., they are all pointing down.  Until these start pointing upward we're going to have fewer stocks to pick from.
  • As you would expect, the slopes of the pricing EMAs changed somewhat yesterday.  The 5d is pointing up, as is the 34d and 55d.  We need the 13d and the 34d to reverse too, and until they do, caution is advised.
  • Contra China is appealing.
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The Dashboard





















As with all my images, right-click on the figure to open it in another window or tab.

The GGT price index moved up +1.66% on Thursday on volume that was par with the 50d MA of volume.  Majorly rising prices on normal volume isn't a perfect situation -- I'll be looking for another rally day here by Wednesday of next week (Thanksgiving anybody?) to give us some view that we've bounced and are resuming some upward-march to nowhere.

The 8d/13d pricing EMAs are inverted; all the longer ones are still aligned for a bull.  This is tempered somewhat by the slopes of the pricing EMAs -- while the 8d started pointing upward on Thursday, the 13d and 21d are still stubbornly pointing downward, which isn't good for a bull leg.  We're not out of the woods yet.

The database strength moved upward from 0.249 to 0.604, indicating that a great number of internals gained steam on Thursday.  The strength calculation weights "rate of change" of price, and as many of you know, we saw a major jump upward in many stocks, resulting in the ROC flag.  We're in a fair-value zone now -- neither overbought nor oversold, so the database can go where it may with about equal probability.

The LCR system is decidedly bearish -- in fact, ALL of the LCR EMAs are now inverted, which hasn't occurred since August 20th.  This is a problem for a bull leg from here.  With respect to the LCR slopes, they are all still pointing downward, which is telling us that we are in a correction of some sort, and have been since  November 11th.  Trying to pick long stocks for the intermediate-term, until these start turning green (rightmost side of the figure above), is simply fool-hearty.

Futures are down as I write this, partially due to China raising the required reserve ratios to 18.5% for big banks, which incidently, is an all-time high.  This has the impact of slowing down the Chinese economy, which should reduce the chances of inflation within that nation.  It means demand goes down, which hurts our production output, reducing revenues but increasing idle capacity.

The other reason Futures are down is that Europe is bailing on holding stocks across the weekend, hardly a vote for a bull market.  Lots of uncertainty, and because of this, I am very light in my holdings.  In fact, I hold two stocks:  DYP, because they have the equivalent of $3 of cash on hand and the price right now is discounted to $2.78 due to a messed-up management team (a purely speculative play that Hsin talked me into), and EUO, because I feel that the euro is topped out and the downward motion of the currency is highly likely.

I'm not overly excited about jumping into the market right now, but the complete inversion of the LCR EMAs suggests that I need to position myself on the contra side of the world.  Perhaps.

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Short-Term LCR Change Timer

This timer remains in cash, and has been here since November 10th.  It did transition to CASH-LONG (0) with Thursday's action, and barring some weird internal bull run with the LCR today (watch the ADV/DEC line at FinViz), I anticipate it falling back to CASH (-1) with today's action.  This being said, it is quite possible that it will move long if the aforementioned ADV/DEC ratio significantly favors the ADV side of the equation, so pay heed near the end of the day and act accordingly.  Acting accordingly is simply purchasing a position in the VTI(150), IWM(150), QLD(200), TNA(200), UYG(185), UWM(200) if they are above their EMAs as indicated by the number following the symbol.  I'll leave it to you to do your homework in determining whether these positions are actually above or below the indicated EMA.

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Elder Intermediate-Term Force Index Timer

My GGT system is indicating that the raw Force Index for the GGT system is at +2,382.  Putting this in perspective, this value is normally in the x00,000 range, and there is no ambiguity.  Any weakness in volume OR prices today will cause this value to move back under water, keeping the raw Force Index below 0 and confirming the other Elder indicators.

Problematic here for the bulls is that the slope of the 13d EMA is pointing downward.  In my world this negates the Elder Timer, hence we are in CASH as far as Elder is concerned.  

The point here is that the Elder system is right on the edge of the cliff -- it's subjective in terms of interpretation as to whether we move into stocks long at this point or continue on the contra beat -- right now, the bias is down, hence contras win.

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GGT Top 25

As an exercise in forward testing, I'm testing the GGT Top 25 strategy in a walk-forward basis.  I started this strategy on 10/28/10, and in this time it has risen as high as +2.2% and has fallen as low as -3.2%.  Yesterday saw this portfolio rise 1.6% with a 65% investment level, but it is underwater by -1.0% since inception 3 weeks ago.

This is an always-long strategy, and the only variable that I can play with is the cash level on hand.  During times where the LCR 65d slope is pointing downward I can drop to as low as 65% invested, but when the LCR 65d slope points up I intend to be 100% invested. 

The stocks that are presently held were presented yesterday, and these will change every Thursday morning (with the close of the markets on Wednesday).  Right now I simply drop the stocks that are not in the top 25 list and purchase those stocks that are newly appearing.  Rotation within the top 25 is less than you think -- while a stock may move from the number 2 position to the number 14 position, it still is within the portfolio and is being held.

Selection of the top 25 is based on whether the stock is a GGT LONG, the overall strength of the stock, and how it has performed over the last 65 trading days.  If the upward-slope is good, the variance is small (e.g., not wildly volatile), and if it has some form of LONG status, then it goes into the top 100 list.  From here I look at historical GGT strengths and trends and pick those with the most consistent strength over the last 65 days.  "I do the work so you don't have to."

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China

My HGSI index of China stocks is challenged on the long side.  Bull power is negative, Elder's 13d Force Index is negative for several days, the MACD histogram is negative, and the slopes of the 13d and 34d EMAs are negative.  Furthermore, the 8d EMA is below the 13d EMA and both are pointing downward.  Going long on China is not advised.

On the contra-China side, I like to start with the Direxion -3x leveraged contra CZI.  Here's the chart:































Here's what I like about the -3x contra position on China:
  • Bull power is positive (bullish)
  • Bear power is positive (very bullish)
  • The magnitude of bull power is > magnitude of bear power (bullish)
  • Both Elder 13d Force Index methods (EMA, SMA) are both positive
  • The Elder 2d Force Index is negative.  This establishes entry today if we move up on strength.
  • The MACD histogram is positive
  • Both the MACD and the MACD signal line are in the lower half of the window, enabling a 100% position
  • %B is 0.62, suggesting considerable upside room
  • The slopes of the 13d EMA of price and the 34d EMA are both positive
  • The slope of the 34d EMA is pointing upward, so we are gaining profit on this time scale (acceleration)
  • The 8d EMA on price has closed above the 13d on price
  • Price has closed above the lowest price EMA (13d)
  • Volume is improving day-over-day
On the negative side, here is what I don't like about the -3x contra position on China:
  • All the EMAs are below the 160d EMA, which is early.  This suggests that we reduce a 100% position by at least 50%
  • We've only had 1 crossing of EMAs from below, the 8d and the 13d.  We need further confirmation, so this further confirms the 100% reduction to 50%.
  • Volume is very low.  @ 40K shares, the $*Vol level is only $697K-shares, which is far below the radar for the "whales".
Because of this latter point (the $*Vol level), I'll not consider the -3x, but will look at FXP, the -2x Contra ETF.

FXP has a $*Vol level of $15M-shares.  This is a good candidate for institutionals.  Here's the chart:































This chart closely resembles the -3x CZI chart that I presented above.  The methodology presented above for CZI applies here, and because the dollar-volume is significant, I think that this is worthy of my hard-earned dollars.

The high yesterday for FXP was $28.47.  Premarket is already trading at $28.90, so I will pick up a 50% position in FXP in premarket.

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Copper

Copper, as measured by the ETF CU and the ETN JJC, is underwater.  Perform the analysis above and the first person to post their rationale for avoiding copper (and is correct) wins my praise for the day.  :)

To my knowledge there is no way to play copper on the contra side in the US; if this is incorrect please let me know.


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The Pound

FXB is the only way that I know how to play the British Pound.  Presently, it's in quasi-bull/bear land, with a slightly positive bull power, a slight negative bear power, negative Elder 13d FIs, negative MACD histogram but a histogram that is improving, and slopes that are negative but are starting to trend up.  

Until we get a clear bull signal from FXB, I'm avoiding.

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

Regards,

pgd