Thursday, March 17, 2011

Surgical Strikes using Connors' TPS Strategy, Cash is King

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Summary

  • Since the market peak on 2/18, the GGT price index has fallen -6.5%.  In comparison, the dip after the 11/8/10 peak was -10.4%, but the 1/18/11 peak to subsequent drop was only -3.90%.
  • Wednesday's action saw the GGT price index fall -1.33% on volume that was 33% above average.  This was a significant day down, and it caused many stocks to move into a CASH recommendation.
  • The 34d pricing slope has now turned downward.  This is the first time that this has occurred since 11/16 & 11/17, and during that period, it only lasted 2 days.  If we are to recover, I would expect that this will move back to the upside very quickly.  If it does not turn up, then I will maintain my bearish outlook.
  • My pricing change tool that I use to determine reward/risk levels is pegged against the bottom rail at -14, indicating a great reward/risk on the long side and that I should move into stocks aggressively on the long side.  This is a day-over-day tool, so in no way is this telling me to open new positions for any duration of time.  My overall outlook on the intermediate term is bearish.
  • The Long-Cash Ratio (LCR) Change Timer, which is a short-term timer, is solidly in cash.
  • The Elder Force Index timer, which is an intermediate-termed timer, is solidly in cash.
  • GGT database strength has just notched it's 6th contiguous day of dropping, the first time it has done this since August 2009 (yes, 2009), and is well overdue for a bounce to the upside.
  • The LCR has dropped to 0.305, the lowest level it has been at since 8/26/10, when it dropped to 0.300. This is an incredibly low level.
  • The slopes of all the LCR EMAs are pointing downward, and the day-over-day change of these slopes has been negative for three consecutive days.  Three consecutive day-over-day changes to the downside means we're running really fast into oversold territory, and a 4th day of this pattern is rare (11/9 - 11/12 inclusive, 10/14 - 10/19, 6/21 - 6/24, 9/21/09 - 9/24/09 ...).  I would expect a bounce upward either today or tomorrow, which is quadruple witching day.  Until some of these slopes start appearing to move to the upside I will maintain my bearish outlook on the market, and will keep a high degree of cash.
Overall, we are due for a bounce upward.  This doesn't mean that it will be sustained, so nimble is the key.

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Market Internals

The broad market started strong yesterday, with the underlying sectors outperforming the S&P500 most of the day, both on the upside as well as the downside.  Sentiment changed about 11 a.m. EDT, when a recycled rumor caused most everybody to panic, and this was enough for Contra ETFs to establish a foothold on the day and dominate.


I discussed this chart yesterday in my blog so refer to that entry for details.

The greenness in the middle trace tells us that while the S&P500 was falling, the other sectors in the market were falling LESS than the S&P, on a relative level. This means that they were holding up and I generally like to see this as a precursor to any move upward.  I especially do not like divergences when the S&P500 moves up and this group of 9 ETFs moves down, the latter showing a lack of support.  This wasn't the case yesterday, so I was overtly bullish to the health of the market.

The bottom trace is the 2x Contra ETFs, and we can see that they underperformed the broader market until about 11 a.m. EDT, then there was no looking back after 11.  The fact that they increased their bearishness stance into the final hour of trading, while the +2x ETFs held steady (relative to the S&P500), simply tells me that people were in a sell-sell-sell mode, which caused me to buy-buy-buy in terms of Connors' TPS ETFs.  And that is exactly what I did in the final 10 minutes of the day, simply because the candidate ETFs were being driven fast and far away from the RSI(2) reading of 70.

Futures are up as I write this, and given the performance yesterday of the +2x ETFs, I would say that we'll have healthy participation across the board on the long side.  We'll see.

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Trading Plan for Thursday

I'm short on time today so I'll not post my watchlist.  It's risky to enter stocks for the longer haul, so nothing lost.

Almost all of my Connors TPS trades are above their average P/L levels, which are my inside targets.  I've got meetings starting at 10 a.m. and will not be able to watch the markets, so I'll place stop loss orders at these profit points just prior to 10:00 and lock in those gains.  This is a deviation from the Connors rules but the next couple of days are going to be challenging for me in terms of watching the market so until the Japanese issues are under control, cash is the best place to be, oversold or not.

I may enter additional Connors TPS trades IF the market is significantly lower just prior to the close.

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

Regards,

pgd

Position Disclaimer:  as of this writing I own positions in the following equities:  BIDU, EFA, EWH, EWT, IWM, QQQQ, SJM, SWI, TBL, XLF, XLV.