Tuesday, March 15, 2011

Approaching Oversold Areas & Expecting a Long Bounce

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Summary

  • The GGT price index fell -0.49% on average volume that was -2% below the 50d moving average.  This is normal market noise, when taken in isolation.
  • Internally, the number of stocks with "stabilizing" price action is increasing.  This indicates (today's futures action not withstanding) that these stocks are finding a floor of support.
  • Database strength, which is a measure of overbought or oversold conditions, has just completed four consecutive days of dropping, and a 5th day is rare.  Again, given external events and the futures, it looks as though we will experience a 5th day of dropping in this indicator, which will place us deeply into oversold territory and set us up for a bounce upward on the long side.
  • There was short-term strength developing within the different market segments after 1 pm on Monday, and despite the futures this morning, we need to watch for this strength to develop (figure included below).
  • The Long-Cash Ratio (LCR) continues to drop, and is now in the same territory as it was back in August 2010.  While the absolute level is not as important as the direction, it is noteworthy because we have essentially moved back to the same conditions that we experienced in the mid-summer 2010 time frame.
  • My risk/reward indicator has moved back to neutral ground, indicating that risk/reward, on a short-term basis, is balanced.  This being stated, given oversold levels, I would not move into new contra ETF positions today, rather, protect any gains and get ready to play the long bounce.
  • In the big picture and with respect to the GGT index, we have only fallen -3.3% from the high established on 2/18.  World events aside, this is a minor pullback.  Note that since Tuesday of last week we have fallen -2.5%, so this is a rapid decline in a short period.  I have every expectation of a long bounce within the next day or two.  While the short-term trend is down, the intermediate trend is still intact and pointing upwards, and we must keep this in perspective.
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GGT Long-Cash Ratio 

In my discussions last night with Bob Wilson, who has taken over from Joe the task of updating the ETF pages to give Joe a much needed break, Bob poked me to update the GGT dashboards.  I obviously review these daily, but due to overall time constraints and a desire to streamline content, I hadn't posted the views for some time.  

The most important tables that I watch are the slope tables.  Here, I construct exponential moving averages of between 5d and 65d in length, then I calculate the slopes of these different EMAs.  If they are pointing up, this is generally good, and if they are pointing down, then this is generally bad.

As with all my images, right-click on the picture to view in another window or tab.



This first image for today is the dashboard for the pricing slopes.  As you can see by the red areas that are evident in the figure that we have a number of slopes that are pointing downward, and more importantly, we have just experienced 3 consecutive days of this behavior.  Looking back in the table this 3-day green/3-day red play has typically characterized a choppy market, and as I indicated in my summary above, we've only dropped less than 4% in total since our peak on 2/18.  The greenness of the figure shows where we have been -- bullish -- and the lack of total red across the bottom of the figure indicates that on the longer time frames, we still are in a bullish uptrend.

This next figure gives us a view of the database in terms of the number of stocks with a long recommendation, compared to those with a cash recommendation.  To recall, in order to have a long recommendation, price and volume must be above historical optimized levels where the stock has performed well, and to have a cash recommendation, all that is required is for price (not volume) to be below this historical optimized level.



The LCR view above is more sensitive than the price view simply because we're looking at more than one variable -- price -- so as price and volume expand and contract, we get a greater amplification of market sentiment and direction.  I place more emphasis on the LCR slope table above, for obvious reasons, but in the end, we put PRICE action in our bank accounts, not the LCR behavior.

In reviewing the figure above, the market turned decisively bearish on 2/22, and with the exception of a brief bounce that started around 3/3, really hasn't looked back.  I view the rightmost columns -- the 55d and 65d slope lines -- as the primary indicators of the health of the intermediate trend, and for now, the health of these longer trend lines is in trouble.  As you saw in the previous figure, the pricing table showed that the 65d pricing EMA was pointing upward, but with the LCR 65d line pointing downward, we have fewer stocks that are supporting the pricing action.  

In the end, the two must align in direction.  It is impossible to sustain a growing pricing action for these lengths in time while the number of stocks moving up is declining.  This is exactly the situation that we have now.

In summary, I think that while we are due for a bounce here due to our oversold conditions, I do not see anything that will spark us upward and sustain a new expansion.  Caution is advised.

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GGT Stocks for Further Review

A number of stocks are on my watch list and are worthy of consideration if they hold support from here:
  1. CAB fell significantly yesterday but 8d and 40d LEV support is evident.  The low touched the 50d MA yesterday but it closed above the 50, and the highs appear to be bounded by the 17d.
  2. CMG is starting a new short-term accumulation pattern in the presence of an established longer-term pattern.
  3. EIX held EV levels well yesterday despite a major selloff in price.  There may be resistance at the 17d, so watch this one.
  4. FE is in the same boat as EIX, and they are from the same industry.
  5. GWR has a convergence of the 50d and 17d, and the EV patterns has been relatively good.  It appears to be holding well at the 17d/50d convergence level.
  6. GWW is nearly the same as GWR.
  7. MPEL is behaving very nicely on the 50d, but the 17d is below the 50d, which I take as a warning.  This being said, the LEV patterns are compelling.
  8. PCP saw price pressure yesterday but LEV held nicely throughout the day.  It also experienced a bullish engulfing pattern with a close above the 50d.
  9. SUN continues to perform well in terms of EV and 50d support.  It's well above the 17d, which is above the 50d, so I intend to wait for a pullback
  10. AAPL bounced nicely off the 50d twice, and is now just above the 17d.  EV is solid.
  11. LULU has behaved nicely at the 50d for many consecutive days, and although it finished above the 17d, the longer-term LEV pattern is holding.  I do not see any short-term 8d LEV accumulation, but I don't see any short-term selling either.
  12. CEG is another utility that has a confluence of the 50d/200d MAs converging, and it experienced a bullish engulfing candle over the last two days, closing above the convergence.  Further, LEV looks wonderful on short and long time scales.
  13. PNC, which is a bank, is at a confluence of the 17d and 50d, and it is respecting this convergence nicely.  LEV is good on short/long time scales.
  14. HDY is a riskier play, but the 17d/50d lines are interwoven and the price is more-or-less behaving.  Premarket today shows it down at $5.32, but I'd place a low at $5.18, so it still is worth considering.  The appeal here is that LEV has been supportive and that buying stepped in yesterday.
  15. HTZ is respecting the 50d well and the long-term LEV looks good.  I do not see any significant buying on the 8d LEV pattern though, so beware.
  16. ESV is a more volatile play but is respecting the 50d within the past few weeks.  Longer-term LEV is solid; 8d LEV is weaker.
  17. HK saw a considerable amount of buying yesterday near the close, driving price upward.
  18. TEX is respecting the 50d but appears to have resistance at the 17d.  LEV looks solid.
  19. NYX is continuing their hostile bids and this is reflected in LEV, so give it a look.
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Internal Strength Indicator

I've modified an indicator that Hsin provided to me to reflect the behavior of the 2x ETF markets, specifically those ETFs that have less than a 1:1 correlation.  Here's the chart:



The top trace is a 5-minute bar on the SSO; the middle histogram is a composite index comprised of the average movement of 9 +2x ETFs, and the bottom trace is comprised of the average movement of 10 -2x Contra ETFs.  The middle trace value reflects the 2xAggregate subtracted from the SSO, the 2x of the S&P500, and the bottom trace reflects the performance of the -2xContraAggregate minus the performance of the SSO.  Consequently, if we see green in the middle graph, we know that the underlying +2x market is outperforming the 2x S&P500, which I show as a good indicator for the longs, and if we see green on the bottom graph, we know that the -2x Contra ETFs are outperforming the 2x S&P500.

Yesterday was an interesting day in terms of this graph.  We see that the -2x contras started off with a small gain, but it grew throughout the day until 1 pm or so.  During this time the +2x ETFs held relative steadiness while the SSO dropped.  Once the SSO stabilized, we see that the -2x contras stabilized too.  Interestingly though, the +2x ETF started to grow in relative strength, showing that the market internals were stabilizing.   Furthermore, after 1 pm, we started to see the SSO begin to recover, market internals began to improve by the amplitude of the middle graph growing (the +2x ETFs were relatively stronger than the SSO), and at the same time, we saw a general degrading of the amplitude of the -2x Contras.  

Hence, while the -2x Contras finished in the green, we saw significant strength internally in the market in the face of really bad news from Japan.  Today will be telling.

Note that you cannot infer anything across the day-boundaries; the data is not valid in the first 5 minutes of trading, as the 1st bar is set to 0.

The way I use this indicator is to watch the relative trends of the 2x and -2x ETFs.  If I'm long, I don't want to move into the market while the -2x ETF lines are growing in relative strength.  Conversely, if I'm in contra positions, I don't want to enter additional contras if I see the +2x ETF lines growing.  You get the idea.  Basically, it's riding the short-term wave to better time entries.

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Trading Plan for Tuesday

I'm net short on most of my positions, both personal and with GGT, LLC, so I'll close these if they start to appear weak.  There are a number of good stocks above -- if they show strength today in terms of LEV I'll enter as the setups allow.

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

Regards,

pgd

Position Disclaimer:  as of this writing, I own or influence positions in the following equities:  BOM, BZQ, DRV, EFU, QID, REW, SMB, SOXS, SSG, TYP.