Monday, May 9, 2011

Monday, May 9: Too Early for Mass-Movement to Contras, but No New Longs

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There is a face-to-face meeting this Saturday, May 14, at the Great Falls Public Library.  Doors open at 10, and the meeting should start around 10:15.  I will attempt to broadcast via WebEx; stay tuned to the GGT Yahoo! group for details.

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Summary

  • According to Effective Volume considerations, we are in a confirmed "short signal".  Aggregate money flow is moving out of the market.  According to backtesting, new long positions should not be initiated.
  • The Intermediate-length Elder Force Index timer, applied to the GGT universe, is confirmed in cash, and has been since 5/3.
  • The short-term VTI timer, which is based on the day-day movements of the GGT long-cash ratio (LCR), is confirmed in cash and has been since 5/3.
  • ALL slopes of the GGT pricing moving averages are now negative.  The last time this occurred from a long --&gt cash view point was 8/12/10, and we stayed in these conditions until 9/7/10.  This means that on all time frames less than 66 days in length that the average daily change is now negative $/day, and this is unhealthy for our portfolios.
  • ALL slopes of the GGT LCR moving averages are now negative.  This does not look at price, but at the ratio of stocks in the database with a favorable recommendation (LONG) to those with unfavorable recommendations (CASH).  Right now the all slopes less than 66d in length are negative, which means that we are losing more stocks to the CASH side on a per-day basis than we are gaining.  Put another way, your stock-picking abilities must improve dramatically as the pool of stocks gets smaller day-over-day.
Conclusions:  Aside from being oversold to some degree, it is difficult to justify any new long positions.  Holding existing long positions, cash and a careful review of contra ETFs look good from here.

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Same as Last Year?

Take a look at the following chart:



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

The chart shows the daily change in slope for the 13d, 21d, and 34d prices of the GGT index.  We have seen levels like this -- one year ago to be exact.  I've adjusted the chart to review 1 year ago and you can see that the GGT price index bounced around a few % here and there, but in general, tested new lows prior to moving higher at the end of the summer.  

This is the data view of this next table, which many of you will recognize:



Whereas the previous chart showed only the 13d, 21d, and the 34d slopes, the left side of the table above shows us the 5d through the 65d slopes.  Compare the table above with the chart above for the 13d/21d/34d and see if you can convert between the two -- it's important that in your mind when you see a transition from green to red in the table above you understand what is occurring in the figure above.  

Of particular importance on the left side of the table is that the 65d moving average has now reverted to RED/Bearish, and this hasn't occurred since August 2010.  Even though we may move up and down from here, it takes a fairly strong up signal to move a 65d moving average, so I'll go on record as saying that I think some opportunities to play the contra side of the market are about to evolve.

The RIGHT side of the table shows us that the "slope of the slope", or visually, the direction that the slope is pointing, is down.  Whereas slope is a measure of "change/day", and in this case, "dollars change/day", slope of the slope is "change in change/day", and the sea of red on the right side shows us that we are changing MORE to the downside per day than up.

Takeaway point:  we absolutely need the right side of the table to start showing green before the left side does (why?).  The fact that the right side is a sea of red, and we don't have any green anywhere, is solidly convincing that the bears are in control, bounce or not.

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20-day Money Flow

I'm going to use a chart from Pascal's Effective Volume work to show you just how hard the market is working to get no where:



The top figure is the daily % change in 20-day money flow, e.g., this is the equivalent of my slope analysis but applied to money flow instead of GGT prices or the Long-Cash Ratio.  The top pane shows us that the 20-day money flow has just crossed the moving average from above (a bearish indicator), as well as crossing below 0 (confirming the MA crossing to the bearish side), causing us to realize a "short signal".  This doesn't actively mean short everything, but it does mean that historically, when this has occurred, initiating new long positions from here has not worked.

The middle pane is the S&P500.  As you can see, typically, when we get a "short signal" the S&P has churned around a bit, all with the exception of January 2011.  Every signal is not full proof, but when this signal changes, we should pay attention and look at other indicators.

The bottom pane is Pascal's Overbought/Oversold indicator, and as you can see, we've taken out the lows of April 2011 and are working on moving lower.  Sure, we can bounce upward from here, but right now, and with my aforementioned GGT pricing slope analysis, specifically the 65d signal, we are not in a position to have a raging bull from here.

I simply cannot see any compelling reason to move into new long positions on Monday, May 9th.

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Contra ETFs

With the indicators largely blocking any new entry into long positions, the question begging to be answered is "what about Contra ETFs"?

Take a look at the following chart:


Again, right-click on the image to open it in a new tab or window.

The chart is created in a software package called HGSI, and it permits visualization of the market in ways that are easier than some of my other platforms.  The chart was created by taking the leveraged 3x contra ETFs from Direxion and creating an index.  I use the 3x leveraged ETFs because they are ultra-sensitive, and together, they can form an early-warning system for what is developing.

There is a considerable amount of information here, so let's look at each piece individually:
  • Bongo Weekly:  this is RED, which says for Contra ETFs, the overall trend for contra ETFs is down.  WE ARE EARLY to move en masse into contra ETFs or to short stocks on an intermediate basis, as indicated by this tool.
  • Bull Power:  This is a measure of Elder's, and it basically looks at the highs of the bar in relation to the 13d moving average.  In the chart above, this is POSITIVE, which is BULLISH for Contras.
  • Bear Power:  This too is from Elder, and it looks at the LOWS of the bar in relation to the 13d moving average.  To confirm an uptrend, we want this to be positive (lows above the 13d).  Right now it is NEGATIVE, which is BEARISH for Contras.
  • Force Index:  Another Elder indicator, I'm showing two calculation methods.  The top one is an Exponential Moving Average (EMA), and the lower one is a Simple Moving Average (SMA).  When these two are the same color, they are aligned.  When they are mixed colors, we have uncertainty.  We are mixed, with the EMA showing LONG (for contras) and the SMA showing CASH (for contras).  We are early for Contra ETFs according to this system.
  • (skip 2d Force Index)
  • The chart below the Elder work is a MACD.   Here, we have a positive histogram (black bar is positive), so we are uptrending, and have been for the past 4 days.  This is a good sign overall, and with the MACD and MACD Signal lines in the lower half, we are poised to move upward a significant amount if the trend continues.  Color the MACD bullish.
  • (skip %B)
  • The chart below the %B ribbon is a graphical view of the 13d and 34d SLOPES of these moving averages.  The faster moving average, the 13d, is positive, which means on this time scale that contra ETFs are gaining in $/day.  The slower moving average, the 34d, is negative, which means that on this time scale that contra ETFs are LOSING in $/day.  Hence, we have a mixed signal -- I want both of these to be positive, and until they are, we are early for Contra ETFs in terms of momentum.
  • Finally, in the lower panes, we see moving averages superimposed with the daily price candles.  NONE of the moving averages have crossed each other from below, so we certainly are early here.  
Conclusions:  We are early to move into Contra ETFs as an entire change in position.  Until we get confirmation across multiple indicators, the bull trend is intact, but obviously it is very weak right now.  While there are some Contra positions that are worthwhile to play, consider those that only have a positive-trending LEV.

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GGT + EV Candidates

The following are stocks that I am watching in the event the market money flow reverses and we have a new long signal:



Many of these have a 2d Thrust which is negative, so although buying continues and they are rated in some form of GGT long, money is exiting on a short-term basis.  I do like the chart patterns of many of these from an EV perspective, but I will not swim up stream on Monday.

GGT + EV Contra ETF Candidates

Although we are early to move into Contra ETFs en masse, there are some worthy of our attention.  Here are a few for your review:
  • SMN -- solid longer-term LEV support, short-term LEV just starting to positively diverge from the SmEV.  Presently in the middle of a Darvas box which found a floor on 5/2, so the downside is defined.  GGT Affirmed Long on Friday.
  • FAZ -- solid longer-term LEV support, short-term LEV started the positive divergence in earnest on Friday.  In the middle of a Darvas box which formed the floor on 5/2.  Weekly tools do NOT confirm a move into this ETF, but it is hard to argue with LEV.    GGT Long on Friday.
  • FXP -- good looking longer-term LEV pattern, but short-term LEV pattern is mixed.  Broke out of the upper right corner of a Darvas box on 5/3 at $26.49 or $26.76 (depending on how you calculate the box), and this typically is a bullish move.  GGT Long on Friday.
  • SKF -- same as FAZ but with a 2x leverage amount instead of FAZ' 3x leverage.  GGT Long on Friday.
  • SDS -- although this is a GGT "Cash" recommended ETF, it is only so because volume is relatively poor.  The strength of SDS is a +3, which means that if we get ANY volume here it will convert to a New Long.  LEV patterns on both the short-term and long-term basis are strong.

Futures are up, so if these make a solid dip then reverse, we may have a good entry.  VERY RISKY given the broader picture for Contras, so DO YOUR OWN WORK!

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Trading Plan for Monday

Many of my long positions are at the waterline, and I've placed a 1% Trailing Stop Loss on those that have falling LEV, with the hope that the futures today move them upward then close.

I'm watching the GGT + EV Contra ETF Candidates closely.

I'm still long in my wife's Thrift-Saving Plan (TSP), the blog which you can find here.

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

Regards,

pgd