Sunday, November 21, 2010

November 20th Weekend Update

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Pull up a comfortable chair and relax for an hour ... I'm in a writing mood ...

Summary
  • From the perspective of the 40d/160d EMA chart, we have a new bullish pattern emerging according to the slopes, but the levels of the price index, the 40d EMA, and the 160d EMA suggest that we are in historical reversal land, so caution is advised.
  • All the LCR EMAs are inverted, through the 55d EMA.  This is bearish overall.
  • All the slopes of the LCR EMAs are pointing downward.  The database is shrinking day-over-day in terms of available LONG stocks to choose from, and this is bearish.
  • Although the slopes of the LCR EMAs are pointing down, the ROCs of these LCR EMA slopes are actually becoming less negative day-over-day.  This is the first step in reversing the contraction of the database recommendations, and is a ray of bull-light in an otherwise dark bear-cave.
  • The pricing EMAs are all properly oriented for a continuation of a bull-run.  
  • The corresponding internal slopes of the pricing EMAs are all pointing upward, which is bullish.
  • Friday was an upside reversal day in terms of bull behavior, which is bullish.
  • My Short-Term LCR Change Timer has signaled a move LONG.  It is okay to purchase the VTI(150), IWM(150), QLD(200), TNA(200), UYG(185), UWM(200), where the number in the parenthesis is the days for the EMA threshold value (e.g, don't trade the VTI if the price is below that level determined by the 150d EMA).
  • My version of the Elder Force Index timer, which is an intermediate timing system, is in CASH.  I do not intend to move aggressively into long positions while this is the case.
  • Palladium looks compelling for a limited-position entry.
  • Heating oil has avoid written all over it for numerous reasons.
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HGSI's view of the GGT Universe

There obviously are a number of sites out there telling us that we have confirmed a down-leg in the markets and that we should avoid purchases of long stocks.  The question for me is whether I concur with all of these recommendations.

Let's start with my macro view of the universe, with a simple 40d and 160d EMA view.  Although I'm using the November 15th data file the implications are insignificant -- the universe does not change by more than 30 stocks or so on a week-to-week basis, which is about 1% of the total stocks evaluated.





What we see in the pricing window above is
  1. that prices are well above the 40d EMA, 
  2. the 40d EMA line is well above the 160d EMA line, and that the slopes of these two primary EMAs are positive in value;
  3. that the "slope of the slopes" are both pointing upward, letting us know that over the duration that these are moving upward that the database is accelerating upward in price, not just appreciating in price, and
  4. that the 40d slope has just crossed the 160d slope from below, which is typically a bullish indicator.
What is a bit more subtle is the amount that we are above the 160d EMA level.  If you look at the bottom of the figure you see a text bar; on the very right we see a value of -9.6%.  We are presently about 10% above the 160d level, and in the recent past when we've been at this level, it was not uncommon to see a downturn (e.g., on 5/4/10 we closed at the 40d and the level to the 160d EMA from the close was -9.1%, on 1/201/10 we closed at the 40d and the level to the 160d EMA from the close was -8.2%).  While the past does not predict the future we clearly are in the same zone as the past so we have to be vigilant.

So, from the perspective of the 40d/160d EMA chart, we have a new bullish pattern emerging according to the slopes, but the levels of the price index, the 40d EMA, and the 160d EMA suggest that we are in historical reversal land.

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The LCR

So let's look at things with respect to some GGT tools.  Starting with the macro view of the LCR:







































The LCR moved up on Friday by +12% to 0.768, indicating that 1267 stocks are in some form of LONG status, and 1649 are in some form of CASH status.  Put another way, 43% of the database is bullish, 57% is bearish.

The LCR EMAs are all "inverted".  This means that the 5d < 8d, the 8d < 13d, the 13d < 21d, the 21d < 34d, and the 34d < 55d.  This is bad for a bull run -- period.

The LCR EMAs have no hope of realignment unless the slopes are pointing upward, so take a gander at the right side of the figure above.  Specifically, note that ALL the slopes -- 5d, 8d, 13d, 21d, 34d, 55d, and 65d are all pointing downward.  This means that day-over-day, the database of stocks with a LONG recommendation is getting smaller and smaller, and by inference, prices are going down in general within the database (remember that the movement from LONG to New Cash only requires a breakdown in prices, with no regard to volume).  More important is that until these slopes start pointing upward (turning green), we cannot have any hope of the LCR moving upward any significant amount.  This is dangerous for long positions.

This next graph is one of my favorite views:




























This chart plots the daily rate of change (ROC) for 3 EMAs of the long-cash ratio (LCR).  When the lines are in the upper half, the LCR is advancing upward (from any level), and when the lines are in the lower half (pink zone), the LCR is declining (from any level).  We are clearly in the lower half (losing ground) portion, which certainly confirms that the slopes of the EMAs on the LCR are all showing negative in the previous graph.

There is a subtlety though:  the three ROCs on the EMAs shown have reversed.  This is why I love this graph, or any type of slope analysis view of the GGT universe.  This is telling us the rate at which we are losing stocks to the CASH side of the universe is actually slowing, e.g., yes, we are still losing ground day-over-day, but the trend is slowing down.  The analogy (thanks to GGT, LLC member Ken Phillips) is that the "car is driving backwards and is slowing because your foot is on the brake".  When the car stops, the line will be crossing from the pink zone to the white area.

Now that you've seen the ROC chart, let's look again at a chart view that expands the normal LCR presentation:
























The right side of the chart above is new -- this is a presentation of the "slope of the slope" (SoS) of the EMAs on the LCR.  You can verify the SoS presentation with the ROC graph above -- we see that the 13/21/34 lines have been trending up for 3 days, and the ROC chart just presented.

The SoS data above shows us that the ice was thawing as early as Monday of this past week -- the 5d and 8d SOS values headed upward.  Tuesday saw them reverse, but on Wednesday the 5d-34d turned upward.  On Thursday the 55d and 65d also joined the party, and Friday confirmed the movement across the board.

You can see that in this market climate that the SoS LCR indicator is ultra sensitive to the market changes, so the longest streak of either all being bullish or all being bearish is about 6 or 7 days.

So the question becomes "So what?  So what that the LCR ROC is moving upward for multiple EMAs while being in the negative zone?  So what that the tabular SoS values are all green?"   Essentially, being in the pink zone tells us to be careful here, that as a whole, the database is losing stocks that have a LONG recommendation on a day-over day basis. The all-red nature of the LCR ROC chart tells us that ALL of the EMAs are pointing downward -- not a good thing for the bulls.  The green in the SoS table tells us that the rate that we're losing LONG stocks is decreasing -- which is good.  Eventually, the ROC of the LCR will become positive (green) -- the database will start expanding in terms of LONGS -- and we'll definitely be in a bull leg.

The ultimate question, as traders, is whether we should jump into the market right now.  The answer for me is "NO".  The LCR ROCs are all red, and this means the selection of good stocks at this point is really challenging because the pool of available GGT LONGS is shrinking.  This suggests that my ability to pick good stocks has to be perfect, and frankly, it is not.  I'm content to sit on the sidelines until we see some thawing in the LCR ROC presentation.

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Friday's Behavior  - An Obvious Intra-day Reversal

Take a look at the following graph:



























I draw your eyes to the middle and lower plots.  The middle plot is the performance of the average of 10 long, 2x ETFs that span a good portion of the sectors of the market compared to their close 1 bar ago (in this case, 5-minute bars).  The bottom plot is the performance of the average of 10 contra 2x ETFs that span the same market space, e.g., the opposing side of the middle graph, which compares it's performance to the close 1 bar ago.

The middle graph shows that we opened weaker on the long side Friday morning, but that the contras were not correspondingly of the same magnitude in their opening strength.  This caused me some concern but the first 15 minutes of trading is generally a mess so I ignored it.

I've placed a blue arrow at the 9:55 a.m. point -- this is the peak weakness of the 2x longs, and the peak strength of the 2x contras.  What we have from here to the vertical line at about 12:55 p.m. is a battle that was eventually won by the bulls.  Once the afternoon session started the bulls came back in force, and this was a signal for me to close any contra positions that I opened in the previous two days -- EUO and FXP.  Well, I didn't see this behavior because I wasn't at my computer, hence I ran into the market close holding these two, which are presently underwater.  Is it any wonder?

So, new rule:  when opening new positions in the direction of market behavior, and the market reverses on the same day, so too should the new positions.

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Everything Else GGT

Here's the balance of the GGT Dashboard:

































The GGT price index rose +0.8% on volume that was -14% lower than the 50d MA.  Considering that this was options expiration day, it is very odd that volume was so low.  Previously, options expiration days are very active.  Furthermore, three days of higher prices on lower volume is not a resounding "jump back into the long side of the market" signal.  Caution is advised.

Of particular interest is that the Slopes of the Pricing EMAs have all reversed and are now pointing upward.  This movement was of such magnitude that it caused all of the Pricing EMAs to resume their upward fan-pattern (8d > 13d, 13d > 21d, 21d > 34d and 34d > 55d).  This is inherently bullish and ultimately, since we put prices in our bank accounts, we have to pay attention to this.

Database strength increased from 0.604 to 0.634.  This means that internals on stocks improved, and this is short-term bullish.

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20d Money Flow

This next section comes from http://www.effectivevolume.eu, run by Pascal Willain.  I'm a subscriber, and frankly, you should be too, because the content is spot-on and reinforces the genesis of GGT because of his treatment of volume and how it plays in the markets.

This is the present view of his system with respect to money flow (MF):





















Pascal observes that markets expand when the 20d MF is above the 0 line and markets contract when the 20d MF falls below the 0 line.  The behavior is consistent with GGT LCR behavior, which is another way to view money flow (if the GGT LCR is falling, stock prices are falling, hence demand is decreasing, e.g., money is being removed from equities).

The presentation shows that overall, money is flowing into the markets as a whole.  You'll need to subscribe to his web site in order to view which sectors.  The point here is that with the 20d MF now above the 0% line, we have a reasonable expectation of increasing prices within the markets.  This correlates well with the aforementioned GGT prices, pricing EMAs, and slopes of the pricing EMAs, so it is quite possible we could move up from here.

Overall, the markets have a bullish bias to them.  Despite this, we are and we have dove deep into bear territory, and I expect that due to the Thanksgiving week we will see range-bound behavior on lower volume.  Given the present condition of the LCR slopes (all negative) and the pricing slopes (all positive), I think that we are in a situation of cross currents so I'm content to sit on the side lines with the majority of my cash. 

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Short-Term LCR Change Timer

The LCR Change Timer moved LONG with Friday's action, signalling that it is okay to move long into any/all of the following equities, provided they are above their moving average length (MA) as indicated in parenthesis:

  • VTI(150), 
  • IWM(150), 
  • QLD(200), 
  • TNA(200), 
  • UYG(185), 
  • UWM(200)
All are significantly above their MAs except UYG, which *just* finished closing above the 185d MA.

To play this timer, I'll enter positions early Monday morning.  We have four trading days this week, and historically, exiting into strength prior to the end of the week seems to be a good method to play the market.

For review, remember that small gains held over short periods of time give big annualized results if you are consistent in your performance.  Here's a table for your review:











I plan on setting an intra-day profit target consistent with my risk profile, and I'll be happy with any type of gain if it materializes.   

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Intermediate-Term Elder Force Index Timer

Here's HGSI's view of the GGT Universe, using my Elder chart:




























Here's the argument for being bullish in terms of Elder's indicators:
  1. Bull Power is positive at 4.41
  2. Although Bear Power is negative at -2.58, the magnitude of this is smaller than Bull Power, giving the edge to the bulls
  3. The MACD histogram is moving in a positive direction
  4. The slope of the 13d EMA just moved positive at $0.038/day
  5. The slope of the 34d EMA is positive at $0.32/day
  6. Prices just closed above the highest EMA (close:  $279.24, 8d EMA = $277.07)
The argument for waiting to jump in to the markets (all the previous discussion not withstanding):
  1. Bear Power is negative.  This is not a resounding bull.  When Bear Power goes positive the bulls are firmly in control -- this is not the present case.
  2. The MACD and MACD signal lines are in the upper half of the chart.  This means we've already run a good distance, and are now in the process of pulling back.  Any bulls from this point are most likely short-lived and are not consistent with an intermediate-length timer.
  3. The slope of the 13d EMA is below the slope of the 34d EMA.  Until the 13d crosses the 34d from below, we are early.  Period.
Furthermore, GGT's method of calculating the 13d Force Index has the raw value of the FI(13) as negative by 21,000.  This is so close to the 0-line that the ambiguity suggests that I play it safe as far as longer-termed holdings.  Hence, I'm content to sit on the sidelines with the majority of my intermediate-term cash.

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GGT Top 25 Stock Portfolio

This is a new portfolio that I am forward testing in real-time that is always invested between 65% and 100%.  Because the LCR slopes are all pointing down the portfolio is presently 31% cash.  Stocks are updated every Thursday morning and depend upon their ranking within the GGT universe as of the close of the markets on Wednesday.  Stocks are ranked by a combination of their 65-day performance (65 days = 13 weeks = 1 quarter), the consistency of this performance (high performance but high variance is NOT rewarded well, high performance and low variance is rewarded quite well), and the status of their GGT recommendation as of the close of markets Wednesday night (only New Long, Affirmed Long, or Long positions are eligible).  Right now the portfolio can hold up to 25 positions, although I am doing some testing to determine whether holding a number less than 25 improves the Calmar Ratio, Mathematical Expectation, and Pessimistic Return Ratio.   I'm also starting the same process in an ETF portfolio using the same methodologies, but because of the availability of contra ETFs, we may see a better or worse performance.  Time will tell.

For the prior week the portfolio increased +0.59%, and from inception on 10/28/10 the portfolio is down -0.63%.  I will continue to manage this portfolio in real-time and after we get 30+ trades or so we'll see where we lie, e.g., whether this should play a core role within our GGT, LLC "put our money where our mouth is" portfolio, which started trading November 5th, 2010.

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Palladium

The only ETF that I can find that involves palladium is PALL, which is an ETF that holds physical palladium.  The chart is compelling:





























Reasons that I am considering a position in palladium at this time:
  1. Bull power is very positive
  2. Bear power is positive, which is bad for the bears
  3. The magnitude of bull power exceeds the magnitude of bear power, so the balance is clearly in the direction of the bulls
  4. Elder's 13d Force Index (both EMA and SMA methods) are clearly positive
  5. The MACD histogram is moving more positive
  6. The slopes of the 13d and 34d pricing EMAs are clearly positive
  7. The slopes of the slopes of the 13d and 34d pricing EMAs are pointing upward (accelerating upward)
  8. The closing price on Friday was above the strongest price EMA
  9. The ETF is fairly liquid at $24M*share levels
Reasons to back off on a 100% position in PALL are:
  1. The MACD and MACD signal line are in the upper half of the MACD chart, and they are falling (reduce position 50%)
  2. The MACD histogram is negative in value (reduce position another 25%)
  3. The slope of the 13d EMA is below the slope of the 34d EMA, but they are closing with any strength
Given this, I'm going to wait for the 2d Force Index value to move negative, then I will enter PALL with a 25% position provided that the day of entry is on strength.  Monday is not the day, simply because the 2d Force Index is clearly positive.

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Heating Oil

In general, the $*Volume level of the UHN ETF (the only heating oil ETF that I can find) is very low at $227K*shares, which is far below my $1M*share threshold and far below other's $3M*share levels.  While I'll not present the chart, here's the rationale for avoiding this ETF:
  1. Bull Power is negative
  2. Bear Power is negative, and more so than bull power.  The bears are firmly in control.
  3. Elder's FI(13), both methods, are both below 0.
  4. The MACD histogram is heading more negative day-over-day
  5. The slopes of the 13d and 34d EMAs are both 0 and pointing downward
  6. Prices closed below the 40d EMA

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

Regards,

pgd