Sunday, May 22, 2011

May 20 Weekend Update

Effective today (May 22nd) I'm posting weekend updates here, and daily updates at my forum at Effective Volume.  I'm finding it nearly impossible to simultaneously operate multiple forums due to various time constraints, so please join me at the EV site, where you will find my content as well as other very valuable content concerning market timing.

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  • For the week, the GGT price index fell about -1.2% on volume that was -17% below the 50d MA.  This is within a standard deviation over the average so I wouldn't read too much into the lack of volume.  The bears are in control.
  • The pricing slope model clearly shows the bears being in control, as ALL pricing slopes, from the 5d through to the 65d, are pointing downward.  This means that on all time frames we are losing $/day, and this further supports that the bears are in control.
  • Of the 5 days this past week, three of them showed a renewed attempt by the bulls to pull the market prices upward.  Friday showed that they failed, and the bears resumed control.
  • The Elder Force Index timer is in CASH.  We should not purchase stocks on the long side with the intent of holding for the intermediate term.
  • The slopes of the Long-Cash Ratio (LCR), which tell us how fast stocks are moving into a long recommendation on a per day basis, is solidly bearish with all moving averages through the 65 showing some negative value. This means that the number of stocks per day that have a favorable setup compared to historical performance is decreasing on a per-day basis.  Put another way, your stock picking abilities have to improve when these slopes are falling, because the pool of outperforming stocks is falling day-over-day.
  • Despite the LCR slopes being negative, they are all pointing UP, which means that we have the internal markings of the bulls trying to make a comeback.  Even with Friday's down day the number of stocks falling into CASH status was less than those moving into LONG compared to Thursday, which is important if we are to see any form of bounce from here.
  • Contra ETFs, as measured by the 5/65 method (presented below), are showing that we are too early to commit both feet to contra ETFs.  This could easily change if we continue moving downward.  Conversely, long-rated ETFs are looking poor too, so we're in middle.
  • Effective Volume techniques ( are showing a net outflow of money in the market on Friday, and the value is becoming more negative in terms of change/day than Thursday.  This timer remains short on the market as a whole.

Conclusion:  we have confirmation between the GGT pricing slope model, the GGT LCR slope model, and the EV 20d MF model that we should not be long.  The pricing model slopes are pointing down after a failed attempt to reverse this past week, which is bearish, but the LCR model slopes are pointing up, which shows that the number of stocks falling off the cliff each day is decreasing.  This can be viewed as a real-time attempt by the bulls to bring in a new set of leadership to the market.  Until this is demonstrated, we should not be long in the markets.


Leveraged ETFs as an Early Warning Indicator

One of the techniques that I like is to review a composite indicator of leveraged ETFs to see what they are doing in terms of price performance.  Leveraged ETFs offer an early-warning system over non-leveraged instruments because their daily changes are multiplied by the leverage value, resulting in an amplification of a change in trend.

I use HGSI software to accomplish this, as it makes it child's play to build your own indices.

Start with the Direxion Funds, which can be found here.  Select only the bullish, or bearish funds for your respective index.  I get 13 ETFs on either side.

When I plot the Direxion Bears, I get the following:

As with all my charts, right click on the chart to open in a separate window or tab.

The chart is very simplistic:  
  1. Along the top I have the slope of the 65d moving average of price.
  2. In the middle I have the 5d EMA of price, as well as the 65d EMA of price.
  3. Along the bottom I have the price of the index, as well as the 65d EMA.
The rules for this system are very easy:
  1. Buy the components of the index en masse when the 5d EMA crosses above the 65d EMA, AND when the 65d slope line is positive.
  2. Sell the components of the index en masse when any of the following occur:
    a) the 65d slope moves negative, or
    b) the 5d EMA crosses the 65d EMA from above, or
    c) the price closes below the 65d EMA
So, let's interpret the graph above:
  • The 65d slope is NEGATIVE by a hair.  This prevents en masse movement into the components of the index (but does not prevent surgical strikes)
  • The 5d EMA is (barely) less than the 65d EMA, preventing en masse movement into the components of the index (but does not prevent surgical strikes)
  • Prices are still closing below the 65d EMA, which is bearish for the index.
All this being said, what does the BULLISH side of this model appear as?

Let's use the same analysis as above:
  • The 65d slope is POSITIVE by a hair.  This shows that we do not have complete breakdown, and although I stated above that the bears were in control, they are not 100% in control according to this methodology.
  • The 5d EMA is LESS THAN the 65d EMA, again by a hair.  We should not be holding any of the Direxion components for the intermediate term at this point (assuming that we got in early)
  • Prices are closing below the 65d EMA, which means we should have exited with the signal on 5/13/11
Conclusions:  Based upon the above, we should avoid contra ETFs in general as the primary component within our portfolio, as the most sensitive 3x components have not confirmed a move to the contra side of the market.  Further, we are seeing a general breakdown in the long side using these leveraged instruments, and based upon these findings, we should be exiting long positions.

Given the above, it is possible to use the same criteria for the components of the index.  Knowing that we are at the tail end of a bull, and knowing that an index is the average of the components, it's a reasonable assumption that there are some strong performers in the leveraged contra group that are pulling the index upward.

Here are some charts for your review given this assertion:

LHB: Direxion -3x Latin America Bear

According to this method, we have a BUY as of the close of 5/12 on LHB.  This needs to be reviewed in context of Effective Volume.  Unfortunately, LHB is NOT tracked at the EV site, due to the low volume of the ETF.  Luckily, the other side of LHB, which is the +3 leveraged instrument called LBJ, does have $-volume greater than $10M-sh/day, so it can be used as a shorting instrument if we see short term AND longer-term LEV decreasing (e.g., removal of institutional support from the long instrument):

Here is the short-term EV view from TradeStation of LBJ, the +3x leveraged Direxion fund for Latin America.  Note that 6 days of EV data are presented, and 8 days of price/volume data are shown (a quirk of TradeStation):

We see that in general, LBJ has been losing institutional support in terms of selling over the last 6 days.  This is significant, and suggests that we can short LBJ as long as this trend continues.  The red line above is SmEV, or the retail players, the blue line is the LEV, or large players, and the yellow line is the TEV, or total EV, which is the sum of the two values.

As a check, here is the longer-term EV view of the same ETF (LBJ):

Same color scheme as before.  What this shows is that we've been experiencing a general lack of volume support for the +3x Latin America fund, and hence our HGSI 5/65d analysis holds -- we can most likely short LBJ.  Note how the SmEV is remaining fairly constant to a slight downward slope, whereas the LEV/TEV pair are moving down aggressively.  

As a check, let's see what GGT has to say about LBJ:

GGT is showing LBJ as "CASH", and it has been for the past two weeks (all red in the squares to the right of the word "Cash").  GGT's timing has been fairly stable on LBJ; here's the timing diagram over the past year:

The red line above shows when GGT was calling either a "Long" or "Cash" position on the equity.  It appears that the signal was neutral during the December call as well as the March/April call, but as you can see, it performed will during the 2010 long period.

I'd like to see this one continue lower than Friday's low before entry on the short side, but certainly I would not enter at any level above Friday's open.

FAZ:  Direxion -3x Financial Bear

Here's the HGSI chart for FAZ:

Again, using our screening criteria, it's clear that this one is just making the grade in terms of price.  Any further deterioration of financials in the market will most certainly move this one off it's 65d EMA line, which will most likely remove the chance of whipsaws.

FAZ *is* tracked at the EV site, and the chart pattern is interesting:

The first thing that appeals to me is that the total effective volume (TEV) is above the average line shown in pink.  We need this to continue for us to consider this instrument.  Next, you can see that the average line in pink has a slight upward trend.  Hence, FAZ is not screaming to the upside in terms of new money moving in, but it certainly is not being distributed as it was on the left side of the chart.

Here's what TradeStation has to say about FAZ, on a short-term basis.  Note that about 4.5 days at 1 minute bars are displayed:

Indeed, the downward slope of TEV, then the movement upward that appears in the previous figure is certainly present here.  On a 8-day scale, FAZ has been distributed, but as we can see by the blue trace, over the last two days this has reversed.  We see this also on the previous figure, so the two correlate.

Another thing that I like in the TS presentation above is that there was considerable volume action at the end of the day, pushing price upward, and moving TEV / LEV upward also.  While not a rule, when I've seen this in the past, it bodes well for the equity and in this case, since this is contra Financials, poorly for the market overall.

As a check, here is what GGT has to say about FAZ:

Here, we see that FAZ moved long this past week (Monday, to be exact), and on Friday, was jumping up and down wildly, flailing it's arms, saying "look at me".  You can see this by the "Aff. Long" recommendation.

We're looking Mr. FAZ, we're looking.

Continue to give FAZ, or it's weaker leveraged ETFs (SKF = -2x, SEF = -1x) your attention.


GGT Price Model - Slopes

I know that many of you follow this next sequence, so here's an update:

I've described this chart in previous posts; if you have questions, please submit them at the Effective Volume site in the GGT forum so everybody can learn.

The left side shows the value of the slopes of the GGT price index moving averages, from 5d in length to 65d.  Aside from two days where it appeared that the 5d was going to lead to a thawing of the bear ice, we've been solidly in bear territory since 5/6 and have had early warning indicators of this occurring since 4/29.

The right side of the table shows us the direction of the slopes, independent of whether they have a negative sign in front of them or not.  THE RIGHT SIDE MUST HAVE MORE GREEN THAN RED if the bulls are going to resume the upward march.  If you do not understand why this is so, you need to ask.  It's crucial.  THE RIGHT SIDE IS A LEADING INDICATOR relative to the left side of the presentation.  Again, you must stop and think about this, and if you do not understand why this is so, please ask.  It's crucial to understanding any form of slope analysis, whether it be mine or someone else's.

The above presentation should leave no doubt in your mind that we are in bear territory, and for now, we have no indications of moving out of this territory.

Defensive postures, please.


GGT LCR Model - Slopes

The same presentation can be applied to the number of stocks in the database with a "Long" recommendation compared to those with a "Cash" recommendation. We typically do not want to buy Cash-recommended stocks except only as a bottom feeding exercise and ONLY when we have positive-moving Large Effective Volume / Total Effective Volume.

Here's the latest:

The presentation is more or less the same:  the left side is the sign of the slope, red = negative, green = positive, and the right side is the direction of the slope, independent of the sign.  On the right, red = pointing downward and green = pointing upward.

As can be seen, the database LCR (Long Cash Ratio) has been moving downward steadily since 5/3 on multiple time scales.  Look carefully at the right side, and you'll see that the few days prior to 5/3 we had negative-pointing slopes, as evidenced by the red.  Hence, we have leading indicators on the right compared to those on the left.  This is important.

Look at the presentation on the right for 5/18 - 5/20; the number of stocks moving to the dark side is reversing.  While still losing in the number of stocks/day, the rate of the bleeding is tapering off, day over day.

This indicates that we may be seeing some form of rotation/rally appearing, and we must be vigilant for this occurring this next week.

For now, buying stocks is not advised, as there are a number of indicators that say we'd be swimming up stream against the current.  Remember -- salmon, when they swim up stream, they get eaten by the bears....


I'll post my review of stocks in the EV forum either later tonight or in the morning.

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