Monday, March 14, 2011

Avoiding Intermediate-Term Long Positions; Contras Should be Considered

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A pause here to think about the folks in Japan.  My brother-in-law, Paul Hurley, has a daughter Nicole who is an English teacher in Sendai.  After several days of living on pins and needles they finally heard from her and her husband Bob, and Nicole/Bob are amongst the people who are safe.  They have electricity, food, and bottled water, so are better off than many.  It's amazing just how close some of this can touch your family, extended, distant, or not, and it puts everything in perspective....

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Summary

  • Overall, the majority of my indicators point us towards a defensive position on the market.  Buying stocks aggressively to the long side right now is simply swimming up stream.  Don't do it unless you are an excellent swimmer.
  • The GGT price index rose +1.26% on Friday on volume that was 6% lower than the 50d moving average.  This is a weak showing by the bulls and should tell you that the markets are dangerous on the long side.  The FinViz dashboard of stocks (www.finviz.com) shows that the markets moved up but on much lower than average relative volume, confirming GGT's measurement.
  • The price change accumulator tool that I use to tell me if stocks are short-term overbought or oversold moved to +14 on Friday, in line with the markets moving up, causing the reward/risk ratio of entering new positions on the long side to be extremely poor.  Because I am positioned defensively, entering contra ETF positions early on Monday could be a good selection, provided that good contras exist.
  • For the record, the GGT Short-Term LCR Change Timer is in CASH, as well as is the VTI timer, which is tightly correlated with the LCR Change Timer.  These two timers indicate that purchasing stocks and ETFs on the long side with a short time frame have poor reward/risk characteristics.
  • Also for the record, the Intermediate-Term Elder 13d Force Index timer, when applied to the GGT database, is also in CASH.  This is telling us not to purchase stocks on the long side.
  • The contraction of the Long-Cash Ratio (LCR) is slowing, possibly showing that we may get a bounce here in the next few days.  I will avoid the temptation to enter stocks on the long side, but rather, will use the opportunity to enter selected contra ETFs.
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Contra ETFs

My posture is defensive right now, so Contra ETFs have my full attention.  This being stated, I let the HGSI dashboard view that I have created to tell me how they are performing.  

I like to use the Direxion -3x Bears as a source to create an index on contra positions overall.  I do this simply because the levered ETFs are more sensitive than their -1x counterparts, and as a result, we see trends easier with the -3x leveraged ETFs than we do with the -1x underlying ETFs.  As with all my images, right-click on the picture to open in a new window or browser tab:



A quick glance at this index view shows that we are still early, but we are getting closer to an "all-in" signal.  Here's my interpretation of the chart:
  1. Starting with the top two lines, we have Bull and Bear Power.  These are Elder creations, and Bull Power is simply the distance that the high of the bar is above the 13d moving average, and the Bear Power is the distance that the low of the bar is above the 13d MA.  I like to see both of these as a positive number at least once and early in a new bull cycle (for contra positions), and right now, the Bull Power is +0.844 and the Bear Power is -0.4782.  We did see Bear Power pull within -0.0403 of going positive this past Thursday, so we are close as far as this set of indicators is concerned.  Thursday's price doji doesn't instill a tremendous amount of confidence at this point though.
  2. Below Bull and Bear Power are three more Elder creations, the Force Index.  I plot two different methods of calculation of the Force Index in the top two lines, one using an exponential (faster) moving average, and one using a (slower) moving average.  Both are green, which means both are positive, and this is bullish for contra ETFs in general.  I note that the lower ribbon here is red, which is the 2d Force Index, and this means that it is blocking us from entry into contra ETFs at this time.  Ideally, we want this to move green (negative), THEN enter on strength of the positions, in which case it would move red with the close of markets that day.  This is subjective though, and a frequent and valid complaint is that if you wait for the FI(2) to move green-red then you miss the initial strength of the move.  Whatever your method, Elder's FI methods are bullish on contra positions.
  3. Next is the MACD histogram, and we see that the histogram bar is positive, which indicates that the MACD line is above the MACD-signal line, which is bullish for contra positions.  
  4. Bollinger's %B is yellow, and this is simply telling us that we're middle ground in terms of price volatility and actual index price.  Risk/reward is neutral at this point.
  5. Below this is my favorite 13d/34d EMA slope plot.  First, the 13d slope is above 0, which is bullish on this time frame.  Contra ETF prices are heading upwards, and the daily change of prices is accelerating to the upside on this time frame.  We also see that the 34d is about to cross the zero line, and it too is pointing upward, again confirming on a much longer intermediate time frame that contra ETF prices are moving upward, and more importantly, are accelerating to the upward side.   We're almost there -- not quite, but when the 13 and 34d are BOTH above the zero line, and they are pointing upward, we have confirmation to enter contra ETFs.
  6. The pricing graph below the slope window shows that we are early.  First, we still do not have a crossing of the 8d EMA above the 13d EMA from below, although if Monday is a down day it looks like this will occur.  THIS WILL BE A SIGNAL TO ENTER a 25% CONTRA position in my portfolio.  Further closures of price above the ribbon of EMAs will continue to pull the EMAs upward, further showing that we need to be entering on this side of the market.
  7. Finally, look at the slope of the 50d MA of VOLUME in the lowest window.  The slope is moving upward on the average line, indicating that contra positions are increasing in demand.  This is bullish for these contra positions.
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Trading Plan for Monday

I intend to enter Contra positions early if I can identify any that have good reward/risk characteristics.  
  1. SMB is a contra on the short municipal market that seems to be attracting money.  
  2. BOM is a double short (-2x) contra on base metals that is also attracting money.  
  3. EFU is a thinly-traded ultra short (-2x) on the EAFE (European Asian Far-East) markets that is also attracting money.  
  4. SQQQ is a -3x on the NASDAQ that also is attractive to me.  
  5. DOG is the -1x on the DJ30 that rocketed in terms of Effective Volume on Friday at the close, so pay attention to it too.
In the Direxion index that I created and displayed above, TYP, SOXS, DPK, MWN, and LHB are all risky but good candidates for further review.  Watch correlations though, and if you're not familiar with how to use Excel's PEARSON() function to determine correlations, you need to do some work.  Pick ETFs that are loosely correlated, and ensure that you're using good money management.  Note that leverage in early signals can backfire, so only consider the Direxion ETFs if you are aggressive in nature.

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Remember, you are responsible for your trading actions, 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 positions in the following equities:  BOM, REW, SMB, SOXS, SSG, TYP.