Tuesday, January 25, 2011

Watching the Contra ETF space

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Summary
  • The slopes of the EMAs on the long-cash ratio are all pointing downward.  The database is contracting, which means the number of stocks that are favorable is getting fewer day over day.  This makes stock selection difficult, as you have to choose wisely.
  • The slopes of the EMAs on the pricing index have all turned up, effectively erasing the warnings in terms of prices that I wrote about this past weekend.  We have a sustained divergence -- prices moved upward, but fewer stocks are achieving these higher prices on higher volume, resulting in the dropping LCR values. 
  • The daily long-cash ratio rose a small amount on Monday, moving our short-term timer from Cash (-1) to Cash-Long (0).  If the markets are up today, according to the LCR and as viewed by a good difference in the ADV/DEC values on the indexes, the signal to move long into VTI and our other Short-Term LCR Change Timer ETFs will be triggered. 
  •  The Intermediate-Termed Elder Force Index timer, which simply calculates the Force Index on the GGT price/volume series, is long according to both the simple moving average as well as exponential moving average methods.  This is telling us that we should be looking at the long side, and investing in contra ETFs or shorting should be avoided.
  • Contra ETFs are still early as a group.  All of the slopes of various EMAs through the 65d are negative in value (losing money on those time frames), BUT, the "slopes of the slopes" are all pointing upward, and now, we have the slopes of the 8d > 13d > 21d > 34d > 65d, which is an early - stage bullish signal.
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The Contra ETF Watch

Here's a chart for your review:



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

The chart shows my contra index, which is comprised of most of the liquid ETFs that are considered -1x, -2x, or -3x instruments.  If you don't know what this means simply ask by posting a note.

The bottom pane shows the 160d EMA (blue) and the 40d EMA (red), along with the index price.  You can see that as a group, we have been in a downward move for a considerable amount of time.

The top pane plots the various slopes of several EMAs of this index.  Think about this:  take the EMA of the price series, then take the slope of that EMA and plot it.  What the top pane plots is the 2d, 8d, 13d, 21d and 34d.  The scale on the right of the top pane is $/day, and as you can see, most of these slopes are indicating a loss in value/day of between -$0.10 to -$0.14/day, on an index price of about $49.

What is important to see in this group is that it is becoming LESS NEGATIVE, or put another way, more positive that it was yesterday.  Of particular importance is the relative alignment of the slopes of the EMAs -- the 2d > 8d > 13d > 21d > 34d.  This is a necessary and sufficient condition for the group to cross above 0, indicating that contra ETFs are solid trading vehicle.  In fact, for the most aggressive, careful selection of contra ETFs at this point, with limited position sizes, could be rewarded.  I typically require that the specific ETF price be above the 17d EMA before I move into the specific equity.

At this point I like DTO, which is a double short of oil.  The price of DTO closed solidly above the 17d MA yesterday, and all of the slope EMAs are properly aligned, albeit all are negative.  Here's the chart:



As you can see in the chart above, we have a favorable setup for entry on DTO if you review the earlier criteria.  I do consider this early, to be sure, but compelling.

If we look at effective volume, unfortunately, Pascal's website does not have data for DTO, but he has informed me that DTO will be added tomorrow.  As an alternative, I use the site at www.monest.net/charts to get a quick view.  I remind my readers that one of my members of my group has noted discrepancies between the Monest site and Pascal's site in terms of EV, and since Pascal is the creator and author of Effective Volume, we must place his results above all others.

Here is the chart from the Monest site; note that it confirms my TradeStation analysis:



I note with significant interest in the accumulation of this ETF prior to the rise in price.  For me, this is a lower-risked purchase.

DTO meets Elder strategy requirements, so if we see a pullback today, entry on the reversal of the pullback could be expected in the GGT, LLC account, as well as my personal accounts.

I'm also keeping an eye on ZSL and EEV, which also are setting up the same as DTO.

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Trading Plan for Tuesday

My strategy overall is the following:

I am predominately in cash.  Last month I have moved 100% of my wife's Thrift Savings Plan (TSP) into cash and it is very happy there.  All of my retirement IRAs are presently in cash, as I sold the last of my positions into strength yesterday for a small gain.  The GGT, LLC account is about 30% invested, and I'll move these positions to cash as their individual systems indicate (one is an Elder trade that is hanging in there, the other is a Connors TPS trade).

Today, I'll most likely move into VTI near the end of the business day if the LCR appears that it will move upward.  I'll use the ADV/DEC values at www.finviz.com to make that determination.

I also plan to closely watch the contra ETFs listed, as these are setting up nicely.

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

Regards,

pgd