Tuesday, March 8, 2011

Market Models are Confirming Move to Cash, but not Contra ETFs (yet).

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Summary

  • Investor's Business Daily Market Pulse has moved to "Market in Correction".
  • Effective Volume has confirmed a 20d Money Flow "short signal" which has been confirmed by 4 high-liquidity contra (inverse) ETFs.
  • Elder's 13d Force Index, using the simple moving average (SMA) method, has confirmed a move to cash within the GGT system.  The exponential moving average (EMA) method is within 0.15% of a daily move of confirming the move to cash, and is within the noise of calculations.  Color Elder in CASH for the GGT universe given other indicators.
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Contra (Inverse) ETFs

Market tops never occur on a sole day, or even a sole week for that matter.  I remember October of 2007, when the market peaked around the 12th, dipped, then went to a higher high around the 21st, dipped, and then the wheels came off the cart starting November 1st.  We had plenty of warning, but it was over a 3 week period.    Only on November 2nd or so could we confirm that "Yes, we should have moved to cash in mid October."

This was not unlike what we are seeing right now.

Of course, your crystal ball is as good as mine, and we could certainly rally from here.  Many stocks have pulled back to their 17d average, 50d average, and 200d average, and these are historically programmatic support levels.  The question is whether they will hold.  If they do, we'll see a nice move upward to previous levels.  If they do not, we'll have a nice opportunity to make money on the down side using contra vehicles.

Note that my observations are whether the supports will hold, not whether the resistance levels of new highs will be penetrated.  This is key, as it points to the risk model (actual and perceived) as being defensive.  Given this, my attention naturally moves to the status of the Contra ETF universe.

I like to start with the 3x Direxion Bear ETFs, as these are hyper-sensitive to moves.  These trade -3x to the underlying, which means that if the Russell 2000 Small Cap Index moves upward +1.0%, then the tracking ETF (symbol TZA) will drop -3.0% on the same day.  The converse is true too, which is why these are attractive vehicles.

When you combine all of the Direxion Bears into an index (I use HGSI software), we get the following presentation:


The presentation above contains a considerable amount of content, so let me go line by line.  As with all my images in my blog, right-click on the image to open in a new window or tab in your browser.

The image includes a data window, so you can see the numeric values.  Please follow along:
  1. Two Elder creations, bull and bear power, are at the top of the figure.  Bull power is the height of the day's high (in this case the average high of the 16 Direxion contra ETFs) compared to the 13d moving average.  This value is positive, which is good.  Bear power is the day's low compared to the same 13d moving average.  When this number is positive (it's not), we have confirmation of a significant uptrend.  Right now, it's negative, and until we see this move positive, it should give us some pause about the legs under the present trend.
  2. The next three ribbon bars are also Elder creations, each having to do with Force Index.  Force Index is a measure of the daily change in whatever multiplied by the change in volume.  The top two ribbon bars apply a 13d MA, and the bottom ribbon bar applies a 2d MA.  I've inverted the colors on the 2d MA compared to the 13d MA because you want to consider buying when the FI(2) < 0, which is green, and is transitioning to FI(2) > 0, which is the first day of red after a FI(2) < 0 green.  We see in the presentation that we have just encountered our first day of both FI(13) methods moving green, which means they are positive.  This is bullish for contra ETFs.  We also see that the FI(2) value is red, which means that it is above 0.  This means that the reward/risk ratio of entering any of these contras is worse than it was yesterday.  Hence, a move into contra ETFs today could be risky under Elder's FI system (more on this later).
  3. Under the ribbons I have the MACD.  We see that we are early, as evidenced by the negative histogram value, as well s the blue MACD line being below the red MACD signal line.  Ideally, we want the histogram to be positive, and ideally, we want the MACD to be above the signal line.  Neither case is true, so we are early as far as this indicator is concerned.
  4. Under this is the pricing window, and you can see I've plotted a number of moving averages.  Note that every single moving average is inverted, e.g., the 8d < 13d < 34d < 40d < 160d.  This is BEARISH for the contra ETFs, meaning that again, we are early for any consideration of moving into these on an intermediate-termed basis.
If you've followed along this far you can draw the conclusion that while the markets certainly are under pressure as far as the bull is concerned, the bears have not won convincingly (at least as of the close of markets on Monday, March 7th).  One day does not make a market change, and although we've been drifting up and down over the past few weeks, not really making progress on the bullish side, we've also not skidded off the road either on the bearish side.  We're in balance.

Furthermore, these ETFs that I have shown above amplify moves 3x.  They are incredibly sensitive -- far more sensitive than 2x or 1x ETFs.  If a trend change were present, either way, we'd see clear, compelling evidence of the change.  What I am seeing right now is a bull that is still very much present, albeit weak, and an equally weak bear.  In fact, I'd give the balance to the bulls as of today's date, simply because the prevailing trend always remains until we have compelling evidence of change in the other direction.

Given this state of affairs, and contrary to recommendations on other sites/blogs, I do not think that it is a prudent move to jump into contras today.  What I do think is prudent is to transition to cash and get ready to move either way depending upon market trends and conditions.

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GGT - EV Candidates for Tuesday, March 8th

Knowing that the markets could reverse and resume their upward march, the following are candidates making my watchlist for today.  All of these stocks have some form of GGT long (New Long, Affirmed Long, Long) recommendation:
  1. TXT isn't moving on a short-term Large Effective Volume (LEV) scale, but it has seen significant accumulation over the longer term and someone picked up 668K shares at $26 on Friday (follow the whales)
  2. SYT looks good on both the 8d LEV and 40d LEV time scales.  Small Effective Volume (SmEV) has been decreasing while LEV has been diverging on the 8d scale, which is a great setup.
  3. CE was on my list yesterday and it has repeated today.  I note that LEV increased yesterday while price made new lows on the day and SmEV sold off.  
  4. LFT continues the divergent LEV/SmEV pattern on the 8d chart, and the 40d LEV pattern is showing solid accumulation.  Further, the action last Thursday saw significant buying as the price fell, which is a great pattern.
  5. NFX is newly emergent in terms of short-term and long-term LEV /SmEV pattern, but even with the selloff in price yesterday, LEV remained solid, e.g., no institutional selling.
  6. SUN saw significant LEV accumulation yesterday at the end of the day, while price remained constant.    The stock has a wonderful 40d LEV pattern.
  7. WXS sold off yesterday but LEV ended the day where it started.  Again, this stock has a wonderful LEV pattern over the last 40d.
  8. JNJ has a solid 40d accumulation pattern and saw significant buying yesterday while price dropped.  @ $60 a share, $-volume in the last 15 minutes of the day was notable.
  9. CVH has a constant LEV pattern over the last 8d while the 40d shows solid accumulation.  FUrthermore, price has dropped significant in the short-term in step with SmEV, showing smart money is sitting pat and the retail investor is fleeing.  This is a great setup.
  10. COV is a newly diveregent LEV/SmEV pattern on both a long-term and short term basis.  Volume picked up yesterday in the last hour.
  11. PLL has a great 40d LEV pattern but rather weak 8d LEV pattern.  Despite this, the last hour of buying yesterday saw LEV move upward dramatically while price remained constant.  Volume was 30% above average yesterday.
  12. AGCO saw constant LEV accumulation yesterday while it sold off.  This is a great pattern to watch
  13. VMED continues to experience great LEV accumulation, but someone dumped nearly $100M on Friday
  14. ITW continues to show accumulation faster than price, which is a great sign.
  15. AVY saw increased LEV accumulation while price dropped yesterday.  LEV/SmEV divergent pattern is strong here.
  16. SBUX was on my list yesterday and made the list again today.  LEV continues to move up on the 8d scale, and the 40d is cosntant.
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Trading Plan for Tuesday, March 8th
  1. I'm not making in progress in the TSP funds, which invest in the equivalent of the ETFs SPY, EFA, and VXF.  Total gains over the last 30 days are less than 1.5%, and the last few days of markets have put these gains in jeopardy.  Because of this I am transferring my wife's TSP funds to cash, effective with the market close today.
  2. My position in BTI is even, and short-term large effective volume (LEV) is waining.  If I had a large gain in this stock I'd be inclined to hold onto it, as the long-term LEV is still very bullish in terms of accumulation, but any selling by institutionals will most likely result in a price drop, causing me to fall under water.  I intend to exit this position today.
  3. NXY is more or less the same as BTI in terms of position in the portfolio, so I'll exit on strength today for a slight gain.
  4. TPLM dropped 5% yesterday, but effective volume remained constant compared to Friday's levels.  This stock saw considerable accumulation on Friday, having attempted to close above it's 50d MA but failing.  We are only 7% into a full position here, so the hit to the account is minor, and if I see any uptick in effective volume I'll continue to enter the position and complete a full 25% level.

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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