Monday, September 5, 2011

Weekend Update for September 2nd

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Program selling on the NYSE started late Wednesday, August 31st, and continued with some acceleration into the close on Friday.  The easiest way to view this is with the cumulative $TICK pattern, which shows the 8000+ stocks on the NYSE:


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

The top pane shows minute-bars on the SPX, simply as a point of reference.  The middle pane shows the daily cumulative tick pattern with a 250-stock filter applied.  This means that if the bar has 150 stocks either moving up or moving down it will not be added to the cumulative tick pattern in the middle pane, but if the number is 251 or greater it will.  This helps to catch the big algo moves.  The bottom pane shows various length moving averages on a non-filtered and continuous (non-resetting) $TICK pattern, and you can see that slightly more than 4 days are shown.

It should be clear to you that once the instantaneous (white) cumulative $TICK pattern failed to clear longer moving averages, and as soon as those moving averages started to slope down, we had a good short-term signal to move into the markets on the short/contra-ETF side.

Tradestation creates tick presentations for stocks that comprise the NDX-100, the SPX, and the Russell 2000.  The NDX pattern has been relatively poor all week:



The selling started on Wednesday, almost from the start, and with a 25/-25 filter applied (there is only 100 stocks), we can see that it remained on Thursday even thought the instantaneous tick pattern was relatively unchanged.  The top trace is the NDX-100 and it's clear that we lost price value on both Wednesday and Thursday, supporting the middle pane presentation.  The roll-over of the moving averages on Wednesday certainly gave plenty of warning to close any QQQ/QLD/TQQQ positions and to look closely at PSQ/QID/SQQQ.

Friday was absent of algo selling in the NDX stocks, at least large groups of stocks moving down at 250/min or faster.  The middle pane is relatively flat (until the end of the day), and a sailboat drifting in windless oceans immediately becomes the vision in my head -- we won't know what direction we're going until the wind picks up.

The Russell 2K stocks have been getting hammered too:


Interesting pattern Thursday and Friday -- the algo selling didn't start until after lunch on both days.  The filter level here is 500/-500, which means that 500 stocks / min had to be moving up/down in order to move the middle presentation.  This is a graphic example of broad-based institutional selling and I think that positions in RWM/TWM/TZA are worthy of consideration.  Given the fact that we're 2.5 days into the selling, I most likely will back off of the -3x ETFs and steer towards shorting a position in IWM rather than using a leveraged instrument (more liquid).

As has been the case for the last month or so, the stocks of the SPX are the last to sell / seem the most resilient.  I've heard all sorts of reasons why but the primary reason most likely has something to do with dividend yield of the SPX compared to the dividend yield of treasuries.  Whatever the reason, we're not seeing the broad-based, multi-day selling that we see in the other baskets of stocks:


All that being said, the SPX appears a great deal like the stocks on the NYSE in general, e.g., gentle rolling-over of the moving averages, etc.  It was only late Friday afternoon that we saw the selling algos kick in, which seems to be tantamount to throwing in the towel before the long Labor Day weekend.

While I can read a chart, I'm terrible at predicting the future.  Despite this weakness, I can say that even if we get a dramatic move upward on Tuesday it will take some work to move the tick MAs so that they are pointing upward, which all but rules out me moving long on Tuesday.  The converse isn't overly attractive either because this signal is 2.5 days old (or so) -- futures are down sharply as I write this due to a myriad of problems in Europe (ECB, Germany, Euro) and the Med (Greece) -- so I'm more inclined to launch positions in PSQ, RWM, SH or shorting QQQ, IWM, SPY (liquidity is better) than I am to move long.

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GGT Price Slope Model

The PSM has moved to a decisively bearish stance:


The GGT price index fell -1.61% on Thursday and -2.75% on Friday on volume that was indicative of a long-weekend being in the crosshairs of most people.  Notable was that on Wednesday the GGT strength index stalled at 0.832, which is in bullish territory, only to fall to 0.207 on Friday, which is nearly from one end of the range to the other.  It's hard to believe but this rapid movement from end-to-end actually supports the assertion that we may bounce this week -- the change between 0.83 to 0.21 is large and to do this in 3 days is rare.  In each case that I can find in GGT's history we've ALWAYS bounced within 5 trading days.  Of course, "n" is small, so we could continue south with no regard to the past or market psychology.

The right side of the table tells the story.  We saw gradual breakdown of the slopes of the slopes of the moving averages starting on Tuesday, continuing on Wednesday (albeit weak), then the hammer on Thursday and Friday. You don't need me to tell you that your short-term pricing on your long positions probably told you to close them at the open on Friday morning.  If you held across the weekend you'll most likely pay a price for this optimism come the open on Tuesday morning if the ES continues to look as poor as it does as I write this.

With the red bar across the bottom of the table, on both sides, the PSM is basically telling us to get out of our long positions.  We have no idea if the downtrend will continue, and it's only the magic of support levels and the market's interpretation of such that can give us any hope at reversing the bleeding.  I personally do not see much support where we are at and where we can go, but I'll leave that commentary to those more skilled in such things (Billy @ http://forums.effectivevolume.com and Bob English at the same location are probably the best and most patient folks to read concerning this topic).

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LCR Slope Model

The LCR Slope Model doesn't look as nearly as bad as the PSM, but the metrics are completely different too.  The database has shed nearly 41% of it's long positions in just 2 days, effectively halting any advance in the model:


On the right side, while we've seen a gradual "buy-in" on a day-over-day basis of stocks moving to the long side (as evidenced by the staircase pattern of "bullish" readings), Friday was characterized by only a few of the slopes of the slopes of the moving averages moving bearish.  This shows weakness -- near threshold levels -- and overall, indecisiveness.  I prefer right-side presentations where the slope of the slopes ALL turn one way or another on a given day, and we've not seen this since back in July.

The presentation above tells me we've effectively halted any advance to the long side in the LCR and that a contraction of the database is very possible.  It only takes a price drop to move a stock from some form of LONG recommendation to CASH, so continued erosion in prices will cause a widespread contraction in the database LCR.  I've shown in previous posts that investing when the LCR is contracting is bad for our bank accounts, so again, if there were any doubt, you probably should move to the sidelines.

As evidence of this contraction, I track an indicator that I've developed that shows the day-over-day change in the number of stocks moving to the long side, or conversely, to the cash side:



We peaked earlier this week, as I noted in my blog at http://forums.effectivevolume.com, and now we're in the process of pulling back.  We've pulled back only a slight amount, and given that the database strength has fallen to 0.2 (see above), it's very possible we could bounce this week, taking this indicator upward and potentially to new highs.  For now we're on a downward move, and this contraction location is the wrong place to be entering long positions.

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My final graph refers back to a graphical view of the strength index, simply to illustrate the broad movement we are experiencing in strength.  I wrote about this up above in the PSM section:




I showed that we had a great probability of reversal this past week, and now we've plunged quite low.  Certainly, we can remain here, but when we move fast and furious in either direction you can see that we tend to bounce ping-pong style between bullish/bearish.  Whipsaw indeed.

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If you feel the need to play the markets, I suggest you concentrate on ETFs tied to the tick patterns.  Of course, you must have access to at least $TICK in order to do this, and if you have TradeStation you can download my ELD and TSW files from the "Links" thread in my forum at http://forums.effectivevolume.com.  I personally think that this is a terrible time to play stocks either long or short, so tread there only if you have the confidence and trading rules in place to cut your losses and take your profits at predefined levels.

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