Wednesday, January 5, 2011

A Crack in the Bull Ice? Not yet, but here's how I'm getting ready ...

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Summary
  • I'm in cash across the board. 
  • The LCR does not support the new highs in the market, so either we must rally strongly here or this is a dangerous, false top
  • Contra ETFs, while early, are starting to show some initial signs of life...
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Good morning from Ft. Worth.  Quite a change from Hawai'i ....

Wednesday starts with a few observations:
  1. The DOW finished at highs not seen since the summer of 2008 on higher volume.  This is bullish.  Contrasting, the market advance/decline ratio was 1981/4278 according to FinViz (http://www.finviz.com/), so the markets were not firing on all cylinders while the DJ30 was.  Troubling.  It will be absolutely crucial for the broad markets to follow within the next few days.
  2. The Long-Cash Ratio, which is a measure of the number of stocks in the GGT universe with a LONG recommendation to those with a CASH recommendation, continues to fall, again in the face of the DJ30 being at a new high.  In fact, out of the last 8 trading days, the LCR has dropped 6 of these periods.  This means that the universe of stocks that we can choose from that have increasing prices is getting smaller and smaller, so our skills must improve in order to pick winners.
  3. The Elder 13d Force Index value, which is determined by exponentially averaging Volume * Price Change of the GGT database, gave up 1/2 of it's value on Tuesday.  Yowza!  While still positive (bullish), this this a huge drop in this indicator, and lack of follow through in the markets will continue to erode this indicator.
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Across the board, I'm in cash, and for today, I intend to remain in cash.

Given that the markets are diverging, and given that there have been some signs of life in the Contra ETFs, my attention swings to those opportunities.  Contra ETFs are compelling for a couple of reasons:
  • with little exception, the MACD (Moving Average Convergence/Divergence) lines are all in the lower half of the window.  Interpretation:  Contra ETFs have been getting slammed for some time, driving their prices lower and lower.  If the markets reverse to the lower side, these contra ETFs will explode upward, which is where we will make money.
  • Contra ETFs are fully "reset" in the context of my slope analysis.  Most of these have slopes that are still negative on the 13d and 34d EMA time-scales, so we are quite early.  The most risky and aggressive amongst you can start to dip your toe in when the slopes of the 13d and 34d start moving upward, even with a negative value of slope.  More on this in a bit.
  • We've already seen a couple of Contra ETFs move to the "LONG" side, telling us that from a historical perspective, they are starting to perform.  We MUST keep our eye here...
All of this being said, let's look at a few critical charts.




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

From a macro perspective, contra ETFs are an AVOID.  Here's why:
  • Bull Power, which is a measure of the distance between the high of the price on a daily basis and the 13d exponential moving average, is NEGATIVE.  This means that the highs are below the 13d EMA, and this is not good for making money.
  • Bear Power, which is a measure of the distance between the LOW of the price and the 13d EMA, is negative.  The bears are in control of Contra ETFs.  Period.
If this isn't compelling enough for you, then here are other reasons to sit pat for now:
  • The 13d Force Index for this group is RED --> less than 0.  This is a clear avoid for this group.
  • The MACD histogram is slightly negative.  This is bearish.
  • The "slope of the slopes" of the 13d EMA and 34d EMAs are pointing downward, which means that Monday's action was more powerful than we wanted, driving prices of the contra group solidly lower on these time scales.  Ouch.
  • ALL the presented EMAs -- 8d, 13d, 34d, 40d, and 160d are all pointing downward.  The group is losing money across the board.
So, if contras are a solid avoid, then why am I spending time on them?

Because there are signs of life.  From a Relative Strength Index (RSI) perspective, take a look at the following:


This is the HGSI relative ranking tool, and what is interesting to me, when viewed through a 2-week RSI lens, is that we have a number of Conra ETFs that are newly emerging and performing well.  If you recall, short bonds (TMV, TBT, etc.) have been strong for several weeks while the markets rallied (look down at lines 35 and 36).  These are starting to relax in performance, and a new rotation is appearing.  Take a look at the "green" in the 1/5/11 column -- we're seeing relative emergence in contra-oil as well as contra-small caps.  Note that this table can be misleading -- this relative emergence is in context of the universe of contra equities, and as I showed above in the contra-index figure, we are still early.  Nevertheless, it's important to keep an eye on these "leaders" in the contra universe.

From an effective volume (EV) perspective (http://www.effectivevolume.eu/), SCO, the #1 contra ETF on the list, has seen some very mild large EV (LEV) accumulation over the last two days, but over the last 8 days, has been in a slight distribution mode.  You can research the remaining ETFs to determine EV using Pascal's site above or www.monest.net/charts .

Finally, take a look at this table from GGT:


The table above shows all of the contra ETFs tracked by the GGT system, sorted in terms of strength THEN recommendation, from strongest to weakest.  Pay attention to those ETFs at the top of the table ... all they need is volume and they could be the early emergers.

Every evening my colleague JumpinJoe A.  posts this ETF data in the Yahoo! GGT forum -- you can download yourself and track this without my help.  Simply send a request to join to GreekGodTrading-subscribe@yahoogroups.com if you are interested in accessing the Files section (as well as other GGT discussion).

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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