Update for Monday, November 14th

Daily blog entries can be found at http://www.effectivevolume.com in the GGT Forum.

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Summary:

• The price slope model turned long on Friday with the day's action, and did so on really poor volume. We have the slopes of the slopes pointing up for the past 2 days, which is a start in the right direction. We're right at thresholds with the slopes (just above/below 0 line) so caution is advised at new long positions.
• The day-over-day acceleration of the price slope model prices has stalled. Out of the last 4 trading days we've been stuck at a relative level of 55 on 3 of those days, showing us that we're not going up or down. BIG warning sign here.
• The strength index moved up and is in a good range for picking up positions on the long side. This being said, we're back to ~0.5 range, which is in the center of the scale. If you must pick long positions make sure they have a high RS.
• The LCR slope model continues to show bearishness across the board. Based on this, and my commentary below, new positions in longs are not advised.
• The EV 20d MF indicator is barely positive and it too is sitting right at thresholds. Note that the 20d MF average is well above the indicator AND it has a negative slope -- not a great situation for new long positions.
• The 5d/65d MA intermediate-termed timer is still long.
• The Elder Intermediate-Termed Force Index timer has moved back to LONG mode. This was a clear whipsaw and is indicative of the stalling nature of prices.

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Before I jump into the standard presentation, I want to convey some work that I've done regarding using the LCR (Long-Cash Ratio) as a timer for when to buy stocks. I am not representing that this is a complete strategy, but in looking for an edge on when to buy stocks which are correlated with the GGT price index (closest ETF is the VTI, the Vanguard Total Index, R^2 = 0.972 since 9/08), this will be something that I'm implementing going forward.

Refer to the figure below. Right-click on the image to open in a new window or tab, as per usual.

I struggled with the presentation and finally settled on this - the symmetry will become obvious once you understand what you're looking at.

Across the top is the label "Master Signal: Buy LONG ONLY if these LCR Slopes are Bullish". I've also placed columns ranging from 2d through 65d in length, and followers of my work here know I use the Fib numbers plus the 65d length in most of my moving average analysis.

On the left are the same names for the rows, 2d through 65d, just like the column names.

The values within the table are the values of $1.00 multiplied by the gains of the GGT price signal when the respective signal was bullish. For example, under the 5d column, on those days that the LCR slope was bullish (positive), if we were to buy the NEXT day's GGT price at the open if the 2d (row) were also bullish, we would have turned $1 into $1.65 since January 2009 assuming the same money management since that time. By the same method, if the 5d LCR slope was bullish and the 3d was also bullish we would have turned the $1 into 1.75. Timing our buys with one moving average only (e.g., the 5d) would have resulted in our turning $1 into $1.86 in this time.

The first not-so-obvious question is "If just buying when the 5d LCR is positive provides the best opportunity to catch new bullish waves, then why would we consider using 2 MAs together if they result in a lower value?"

The answer to this lies in a concept called slope. Think of a mountain peak, then think of the slope of the land as you climb that mountain. What we want to see is a gradual rise to the peak from all directions, or the same beneficial behavior of gradual slope increase to the peak. Put in context of the diagram above, we want all the cells around the 5d-by-5d cell ($1.86) to be "close" in magnitude to each other, to have some confidence that the days not shown on the graph (4d, 6d, 7d, 9d ...) are not "valleys" that are hidden from us.

If you look closely the adjacent cells around the 5d-by-5d cell range from $1.59 to $1.75. Close enough for Govern't work.

From the table I conclude that we can introduce an edge into our buying provided that we stay on the shorter end of the moving averages as far as the LCR is concerned. 5d-by-5d produces the "best" response in the table, but any of the combinations immediately surrounding the 5d-by-5d cell ($1.86), such as 5d-by-3d ($1.75) also produces good results. This tells me that I should be seriously considering buying stocks on the LONG side any time the LCR table 2d, 3d, 5d, and 8d MAs are long.

I've said many times here that the best time to buy stocks is when the LCR shows the database expanding. By this I mean that the slopes of the various EMAs measuring the LCR are positive. Positive slopes on the LCRs correspond to the gray cells -- you'd buy if the 2d, 3d, 5d, ... out to the 65d were all positive. If you look closely, the gray cells all correspond to values that are above $1.45. If all the MA's were bullish (positive), we'd have an expectation of moving long, and the table here shows that in aggregate we'd most likely be making money, albeit a bit late than if we were to participate in the shorter MAs.

So now you're wondering "What is the status of the LCR?" Here's the chart:

As you can see on the left side of the table, ALL of the slopes are Bearish (negative), and have been across the board for the last 2 days and for many others, much longer. Buying stocks on the long side right now simply is not advised.

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While we're on the matter of the LCR, the LCR Acceleration, which measured the weighted day-over-day change in the LCR, is behaving in a manner that it did last year. It will be interesting to see if we duplicate last year's behavior, which resulted in a good run up in December and then in February:

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Lastly is the Price Slope Model:

As mentioned above in the summary, the GGT price index rose +2.11% on volume that was -30% below the 50d MA. This is a poor performance of rising price action and I'm concerned that we're in for more volatility. This being stated, the model has moved bullish across the board so perhaps the LCR will reverse course and show the same behavior.

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My plan for Monday is to sit on the sidelines but I will keep an opportunistic eye on the stocks that I listed here. In general, while I'm creating my lists daily and while there are a few candidates, position sizes will be reduced until I see whether they are going to work out.

Make it a great week.

Regards,

pgd