Update for Monday, May 14th

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All my models are indicating CASH (not SHORT) at the present time.

The GGT Price Index fell a significant amount on Friday (-2.6%) on volume that was -2% below the 50d MA of volume. This is a huge move for the index and places the daily value under the 200d MA for the first time since 1/18/12. This action will also cause the 200d slope to turn negative, which is an incredibly bad sign for the bulls.

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


The GGT Database Strength indicator, which rolls up price change, volume, and rate of price change, dropped a bit more than 1%. This shows that while prices did drop, volume was not present in the drop (average volume only), and also that the rate of change of the drop was not significant across the board. Friday's action was a controlled distribution of stocks and I interpret as a simple unloading of positions going into the weekend.

You can see from the table above that the slopes of the various price EMAs are all negative, and have been since 5/4. You can also see that on the right side of the table that the slopes of the slopes (acceleration of prices) are back and forth -- we do not have panic developing, but we do have a steady trend down.

There is nothing in the price slope model that indicates a floor is in place or that we are about to bounce.

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The Long-Cash Ratio (LCR) slope model continues to indicate a contraction of the database, e.g., we should not be buying stocks on the long side at the present time. You can see this in the slopes of the LCR all remaining negative:

Of interest to me though is that we are starting to see some positive indications that the contraction is stabilizing. The right side of the table, which is the slope of the slopes and represents the acceleration of stocks moving to LONG recommendations or CASH recommendations, shows that we've had two days of positive-moving acceleration -- and this is a pre-requisite of the database starting to move back upwards in price. This is the primary indicator which tells me that we may be abating in the present drop, as two days of upward acceleration is becoming significant for a short-term bounce.

Futures are down as I write so this will obviously get tested and possibly negated today.

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All my timers are indicating that we should be in CASH:

The shortest time that the 13d / 65d timer has been negative in the past is 19 consecutive days and we just completed day 2. While we could whipsaw from here and move positive, my intermediate-termed Elder timer is hugely negative and has no chance of going positive unless we get a +500 point day in the markets -- probably not today.

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As many of you know, I've been watching divergence of prices with EV for Pascal's universe. He publishes the list of equities daily in his DIVA.xls file, which is available for subscribers at www.effectivevolume.com, and if you are not looking at this file, you're missing a learning experience.

Positive divergence is a rising price and outflow of volume -- large institutions are leaving the equity but it not yet reflected in price.

Negative divergence is the opposite -- large buyers are entering and price has remained low or is dropping.

When I net the two groups against each other a balance for the day is formed and it looks at the average behavior over the last 3 days. Hence, if we have a greater number of negative divergent equities, we are net buying in the market and visa versa, or so my theory goes.

When I apply different lengths of correlation with my GGT index to the net value of divergence, I get an interesting plot:

Normally, a rising price in GGT is heavily correlated with a falling value in net divergence -- sellers step in and begin exiting as prices move higher. The converse is true too -- buyers step in as prices drop. This gives us a negative correlation value, and it typically lies in the -0.4 to -0.6 range on a 34d lookback.

But take a look at what happens if we simply consider just an 8-day lookback: we have periods where the correlation moves strongly positive, indicating that there are points where the market prices AND effective volume align. Also note that I've circled some of these peaks, and they typically correspond to turning points in the GGT price index. Not 1:1 exactly, but they do alert us that things are happening.

On Friday, we jumped into positive territory for this 8-day correlation. This means that because the GGT price index fell -2.6%, and over the past 8 days has been falling a great deal, that we are seeing a significant OUTFLOW of EV that is in line with GGT prices. 

My crystal ball is as good as yours but I think we're at a short-term capitulation point with Friday's and possibly today's action (I'm writing before the open on Monday, 5/14), and I would expect to see the markets move up here shortly.

We'll see.

Make it a great week!

Regards,

pgd

Update for Monday, May 7th -- Transition to Cash

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With the close of markets on Friday, May 4th, all GGT models are transitioning from LONG to CASH. None of my indicators are suggesting the short side of stocks, although a number of -3x leveraged ETFs did signal "New Long".

I will close my QQQ position at the open Monday for a loss of about -3.1%. This position was derived from a test model that I am developing and I was exposed at a level of 0.5% equity with a -6.61% stop loss. While above the SL level, the macro model signal is kicking me out.

I will continue to hold my UVXY positions and will add to those on any sign of market strength.

For those of you who are watching my TSP model over my shoulder, it too has signaled a move to cash in the C-, S-, and I-Funds. Ensure you read the details here.

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My primary model is based on a combination of the Elder Force Index Timer and 13/65d moving average cross timers which I have developed. Let's look at the individual timers:

Yesterday (Thursday close), there was a mismatch between the 13d Force Index calculated with an exponential moving average (faster) and a simple moving average (slower). Today (Friday close) these two are in agreement, and with the 13d and 34d GGT price slopes negative (red), we are confirmed CASH in this model.

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

The graph above shows the state of the subtracting the 13d EMA from the 65d EMA. The scale on the left is the one to pay attention to -- if we drop below 0, then the long-term trend I track will also be DOWN. We are close to this transition and any sustained weakness in the markets will be reflected here quite quickly.

The combination of these two timers results in a signal which requires the 13d and 65d crossing to be LONG and the Elder timer to be LONG for entry. If either of these transition to CASH, we're out. The Elder timer has confirmed this latter state, hence, we're out.

 I've listed the most recent statistics on the chart above -- we did fall a bit because this last cycle is a net loser on the broader index, but overall, performance is quite sound. Recall that we want:

• PRR > 1.0 and preferably above 2.0
• ME > 0 and preferably above 1.0
• T-Test > 1.7 and the larger the better
• # trades > 20-30 and we're working on that
• Compounded Rate of Return as large as possible

Here's a snapshot of the detailed metrics to date - make your own decisions:

 Unfortunately, this last signal has resulted in a loss of -1.85% not including commissions or slippage, but this is well within the worse recorded trade level of -2.41% and is a bit larger than the average losing trade level of -1.58%. 

I am compelled to take the trades indicated by the model as long as the metrics hold. So far, so good, despite this last loss.

Finally, in terms of equity and all the timers I track, this combo timer represents a good trade off between performance and number of trades, and I have confidence in the model:

 In the end, the short-term timer is in CASH, the intermediate-timer is in CASH, and only the long-term timer is holding long:

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The GGT price index fell -1.72% on volume that was +7% above the 50d MA of volume. This is significant. Coupled with Thursday, where we saw a -1.27% decline on volume that was also +7% above the 50d MA, we have a one-two punch that tells us to exit the markets. Hence, the models are responding.

There is nothing bullish in the GGT Price Slope Models:

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The LCR Slope Model is also quite bearish:

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Monday should be relatively easy. There are no compelling signals aside from sensitive 3x leveraged instruments telling us to go short. Hence, cash is king, and aside from my UVXY positions, I intend to focus on other things.

I will be in Spokane, Washington all week next week. Postings and Dropbox files will be updated as time allows. 


Regards,

pgd

Update for Friday, May 4th - Short Term Timer = Cash, Intermediate Timer = Mixed (Warning)

We've had a state change in my timer system:

The short-term 4d Long-Cash Ratio (LCR) timer has moved to cash. This occurs when the database begins to contract, and the daily LCR value falls below a 4d simple moving average (SMA). 

The intermediate-termed Elder Force Index timer has moved to a mixed state. A mixed state occurs when their is disagreement between the 13d Force Index calculation using a faster exponential moving average (EMA) and a slower simple moving average. The faster EMA value is now negative, while the slower SMA method is still (barely) positive. This is a significant warning.

The longer-termed 13d / 65d price index crossing is still positive. 

Correspondingly, we are in a long-term uptrend, but the intermediate time frame is under tremendous pressure and the short-term is telling us to exit if we took the most recent signal.

The natural question is "what to do?" 

To answer this, I draw upon past model performance:

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


The Combined Long-Term (13d/65d) and Elder Timer model is still long, and is shown at the far right. We are a bit underwater from our starting point (-0.13%, no commissions or slippage), but in terms of practical, sustained performance, this model is telling us to hold the line and remain long. The worse realized loss from this model is only -2.41% since 11/25/08, and while intraday drops will certainly be below this value, and while we have yet to see the next worse trade (a model's worse trade has not yet occurred), this model is telling us to sit pat. The confidence in this model is high -- the t-Test/SQN value is 2.65, and we want values above 1.7 -- this is telling us that we are far better than chance in performance. Further, the mathematical expectation (ME) value is well above 0 at 2.62, which is very, very good and tells us that this model has a solid edge to the long side. Finally, the Pessimistic Return Ratio (PRR) is 2.77, well above 1.0, and again, confirms the model's long-term efficacy.

The Short-Term and Re-Entry Timer models both had conditions which were triggered with the 4/25 buy signal. They are now both indicating that we should exit, so it is not surprising that their gains for this last trade are equal. You can see from the statistics that the 4d, short-term model has the poorest performance overall and the weakest PRR value, so despite the good ME value, we can rank the signals from the 4d model as the lowest of the 3. On the other hands, the Re-Entry Timer has performed quite well at getting us in and out of trades if the master signal is LONG, and correspondingly, this one is telling us to exit.

So we have a mixed situation -- the combined model is long, the short-term model is indicating cash but is not a solid performer, and the re-entry timer, which performs well, is telling us to exit. It's a coin toss but the coin is biased to 2 against 1, and I intend to reduce 1/2 my positions at the open today. I will keep a nominal position on the table due to the combined timer.

I'm also holding a QQQ position which is based on a new test system. I've held the position since 4/17, and am now slightly underwater. The test system is indicating to hold QQQ on Friday, which I will do. I will not adjust the position size, as this runs independent of the systems described above. Hence, you may see me refer to a QQQ position, and that is the rationale of continuing to hold.

In my TSP account, which I discuss here, there are no signal changes going into the day on Friday. This is a long-term portfolio and I can only make two transitions per month, so I need to protect those moves.

Make it a great weekend!

Regards,

pgd

Update for Friday, April 27th -- Elder Force Index Timer Confirms LONG

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With the close of markets on Thursday, April 26, my Elder Force Index Timer has confirmed a move to the Long side:

The hold out here was that I use two methods -- a slower simple moving average (SMA or MA) and a faster exponential moving average (EMA) to calculate the Force Index (price change * volume). Both are positive on a 13d average, so we have confirmation. 

Shorting stocks (or Contra ETFs) at this point in the market is a low-probability proposition at best. This is an intermediate-termed timer and with the long-term timer (13d / 65d crossing), the direction is up from here.

As you can see, all of my primary timer systems are long.

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The combined timer historically has kept us on the right side of the market:

If you have a long(er) term view, this could be a viable methodology to know whether you should be in the markets or out. I'm targeting "in" right now with a core position in IWM.

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If you read my entry yesterday on my GGT blog, you know that I was going long in IWM.

I didn't get into IWM for a couple of reasons, all mechanical. To wit:

1) I set a limit order at the previous day's close (80.94)
2) I set a timed delay (active @ 9:35 a.m.) to allow the overnight book to clear. The markets opened below the close, moved down, and by 9:35, were above my limit. They never looked back.
3) I was away from my PC so couldn't monitor that this was occurring, or I would have attempted to get in by 10:30.
4) Lunchtime is typically weak, but not yesterday. Hence, my VWAP entry never executed.

I'm still largely in cash, with a GTC limit order at 80.94 still pending. Futures are up as I write so I need to get on the bus or risk being locked out of this entry. Shoot. I hate chasing.

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Shameless plug:

I will be away from my PC most of today and all weekend. I am riding over 100+ miles this weekend with disabled veterans from the Pentagon to Gettysburg, PA. Read about it here: 

http://worldteamsports.org/ 

Please read my personal fund-raising page here: http://goo.gl/4rXRW, and if you are so inclined, please contribute to this cause. We, in America (and all around the globe -- I am a verteran and was stationed overseas), benefit from these sacrifices and this is a good cause.

Regards,

pgd

Update for Thursday, April 26th -- Combo Timer Signals New Long

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Effective with the close of markets on Wednesday, April 25th, the GGT combo timer, which is comprised of both the Elder Force Index timer and the GGT 13d / 65d cross timer, has signaled a New Long.  Entering positions early in the morning the day following a transition of this timer to a long state has been profitable more often than not since November 2008.

Let's look at the timer performance coupled with the GGT index (which generally looks like the ETFs IWM or VTI):

(Right-click on the image to open in a new tab or window)

As many of you know, I have developed a number of timers -- their performance since 1/1/09 is shown above.  The best timer -- the 13d/65d timer, has considerable drawdown and most people would abandon it once they gave back half their gains.

Surprisingly, when we combine the best timer and the "worse" timer (someone has to be last), we get a complementary pair that works well together.  The "worse" timer is the Elder timer.  Combining with the best timer gives us the purple curve, and as you can see, it behaves well overall.  Not perfect, and I want you to look closely at the areas I've circled -- these are areas where all the gains have been given back and then some, which is certainly a possibility at this stage in the market.

You must be aware that no timer is perfect, all timers whipsaw, and all timers are subject to their worse drawdown IN THE FUTURE.  Internalize this statement, and make sure you understand it.

Now, with that caveat out of the way, let's look at the performance statistics.  There is more than equity to quantify the behavior of a timer -- and you should at least be somewhat familiar with how I do this.

The timer has been in CASH since 4/4/12.  At that point, since 11/25/08, the timer was responsible for turning an initial $1 into $2.03, a gain of 103.7%, and a compounded rate of return of 23.15%.  The timer is only in the market 49.5% of the time, so consequently, it has a very good efficiency -- a bit under 2.1.  Values above 2 are considered quite good.

The worse trade in this entire time, not counting commissions and slippage, is only -2.41%.  This is accomplished by executing early the following morning as close to the previous close price as possible (or better).

The best trade is +19.59%, and it goes without saying, when the system works, it works.

Dropping down, the system has only had 19 trades since 11/25/08, so this is a low-cycle timer.  I'd like this number to be higher, but my time machine has failed and I can't advance to the future to check the performance, so we must do this the old fashion way -- day by day and trade by trade.  The system values will start converging around 24 trades, and more is better.  All in time.

Dropping down a bit further, Van Tharp's t-test/SQN metric is a solid 2.65.  Not a great system in his book but not bad either.  We want values above 1.7 to assert that our gains are not due to chance.  More trades improves the quality of this value.  I'm looking to see it go up with increasing trades -- we'll see.

Dropping down to the yellow line, mathematical expectation (ME) is 2.62.  This is an amazing number, relative to systems like Connors' and others.  This shows that there is a high degree of probability that the system will produce gains going forward -- we have a significant edge on the long side.

Finally, the PRR value is the Pessimistic Return Ratio, and it improves as the number of trades increases.  A value above 1.0 shows that we'll most likely make money, and values above 2.5 are considered very good.  We're there.

Again, I cannot stress enough -- 19 trades is a low number of trades for metrics on any system.  It is quite possible that the 20th trade will be a significant loser -- AAPL *IS* the market right now, and if AAPL goes down, the market will likely follow.  Unrest in Europe with the ECB, Spain, Italy yields, "Sell in May and Go Away", I could go on and on.  Markets climb a wall of worry and we're there.

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A number of conditions triggered this timer long today.  The Elder Intermediate timer turned to "mixed" mode, which is essentially "long" but not confirmed by a slower-moving average method:

Essentially, I use both a simple moving average (SMA) and a exponential moving average (EMA) method to calculate Elder's Force Index.  The SMA is still below 0 (by very little), and the EMA is above 0.  Hence we get a "mixed" signal there.

Of some importance is that the 13d Force Index slope is pointing upwards -- it is gaining day over day.

Next, the 13d and 34d EMAs on the GGT index are positive slope - they are pointing upward.   Prices are moving upward.

Hence, by a pure EMA method, we have Elder LONG going into tomorrow.  If we incorporate a slower moving average to require confirmation, we're not there yet, hence we're Mixed.

I tend to be more aggressive so I'm long at this point.

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The 13d / 65d timer was already long going into today:

As a result, we have the necessary and sufficient conditions for the combo timer, and we have a "Enter Position" signal.

It's difficult at this point to know if this signal will work; your crystal ball is as good as mine.

I had lunch a few days ago with a fellow HGSI user and I made a statement "start with ETFs ... if you can't make an ETF work, then stock picking will be more difficult over the long haul.  I believe that here too.

At a bare minimum, I plan to enter IWM tomorrow at the open (or even before).  I base this on answering the question "What does GGT look like in the most recent time frame?"   The answer lies in the Pearson correlation with the GGT index and various other indexes:

The closer the value is to 1.000 the more the GGT index is acting like the various ETFs shown over the time periods shown.  You could argue that the VTI and IWM are close -- they are -- and I simply am picking IWM because I picked VTI last time  :)

How big will my position size be?

Let's say you have a $100,000 account.

Let's further suppose that you only want to risk 0.5% on this "newfangled" idea from Paul.

Here's how I calculate the position size.

Account Equity:  100,000
Risk:  0.5%
Amount to Risk:  100,000 * 0.5% = 500.00
Worse Trade in System:  -2.41%
Position Size = 500.00 / 2.41% = 20,746.88
Closing Price IWM:  80.94
# shares = (round down) 20,746.88 / 80.94 = 256 shares
Stop Loss:  80.94 * (1-0.0241) = 78.99

With this stop set, your maximum exposure on a 20K position is $500.

REMEMBER:  the worse trade has NOT occurred, and the worse drawdown has NOT occurred.  This could be a bumpy ride.

For those who regularly read my entries at the Effective Volume site (http://www.effectivevolume.com), here are the obligatory price and LCR model tables and figures, without commentary.

I intend to set my stops as indicated, and let the markets do what they do.

Enjoy your Thursday.

Regards,

pgd

Update for Tuesday, April 10th -- Cash is King

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I blog (almost) daily at www.effectivevolume.com; please register there to view my updates.

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Aside from positions in UVXY and AMLP, both of which are longer-termed holdings, I'm in cash.

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The Price Slope Model is losing the bullish battleground, with the 34d slope now transitioning negative. I've used this in the past as a "canary in the coal mine" and if we hold the negative value today the overall direction of the markets is most likely continued down.

Note that the GGT price index fell -1.28% on volume that was -18% below the 50d MA for volume. This was not a "nail the coffin shut" sell off. I do note too that the database strength index, which combines price, volume, and rate of change of price information, did drop to under 0.3, which historically has been a ripe area for reversals to the up side. Time will tell.

Certainly, the last 4 days have seen increasing bearishness, so we need some green on the right side of the table or we'll continue to transition negative on the left side of the table. If all the slopes turn red, this bull leg is completely dead.

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The LCR slope model has been bearish for some time and continues so:

With more stocks in the database with a "cash" recommendation than with a "long", there is plenty of fuel to go higher if Mr. Market decides to reverse.

Monday saw a -30% drop in the LCR value, which is the 52nd largest drop out of about 450 that I've registered. Notable.

There's nothing bullish about this table. It has been telling us that cash is king for some time.

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The short-term timer, which is based on a simple 4d MA and the Long-Cash Ratio (LCR) value, has been in cash for several days. Graphically, this is what it looks like:

You can see that we are heavily extended below the 4d MA and we'll need a huge rally to move the stocks from the bearish side to the bullish side. I'm not overly optimistic of any transitions today.

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The Elder Intermediate-termed timer, which uses the 13d Force Index, the slope of the 13d Force Index, a 13d Pricing Slope (GGT), the 34d Pricing Slope (GGT), and a big AND statement, is completely in CASH, and has been signalling cash since 4/4.

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The Longer-termed 13d/65d crossing timer is still long, and it is telling us that the 13d is still 6% or so above the 65d:

Of interest here that your eye can see the lower highs and lower lows (LHLL), and if you look back at the inception of this timer, the results are pretty clear.

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Correspondingly, the three timer systems that I employ are short-term cash, intermediate-term cash, and long-term still invested, BUT, I combine the long-term and the Elder intermediate-term timers to give a better result. Hence, I'm in cash.

The performance of the various timers is quite good, and they are my roadmap forward:

You can see that the long-term 13/65d is still long and is the best performer, but it also has you fully exposed with higher drawdowns than any other timer.

Right-click on the following image to open in a new browser or window:

The combination timer is at the far right and is the one that is the best performer. You can see the various statistics on the other timers. Although the 13/65d [fixed typo] cross timer is the best performer, it only has 3 total trades, so the statistics are suspect. Nevertheless, we put performance in the bank, and this one does not lie. Note that the exposure of 63% is high relative to the others.

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Overall, I'm on the sidelines. Nothing is telling me to enter the markets, and nothing is telling me that I should be preparing to enter either. I'm focusing on other things today.

Regards,

pgd

Update for Thursday, April 5th - Elder Intermediate Timer Signals Cash

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I blog daily at www.effectivevolume.com; please register and follow me there if you want daily commentary.  I generally make time to blog here only if I get a transition in one of my measurement/timer systems.

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With the close of markets on Wednesday, April 4th, the Elder Intermediate-termed timer has transitioned to cash. This is a trigger event to sell long-term holdings, and I will do so at the open.

Shorter-termed holdings should be looked at very carefully for exiting. Longer-termed holdings, such at those purchased around January 5th and which have a solid gain, are probably safe but my models give no further selling guidance beyond what I'm posting today and history has shown that waiting for the 13d/65d model to transition to cash on it's own is generally a "give back solid gains" decision. I'm moving to cash and waiting for the next entry signal.

The latest entry the morning of 3/13 resulted in a net +0.63% gain overall to the combined 13d/65d model:

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


Note that ME has dropped a bit due to the smaller gain but PRR has increased, giving me further confidence at this approach.

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The price slope model is mildly bearish/bullish, with a few of the shorter termed slopes below 0 and the remainder above 0. This is mixed and the bulls/bears are fighting the battles on above-average volume:

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The LCR slope model is completely bearish and is telling us not to enter stocks on the long side.

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Of interest to me is that there is some life left in the long-term timer before it crosses into bear land:

Note the distance between the end of yesterday's signal and the 0 line. Barring a major collapse of the markets, the long-term timer should remain long, indicating that long-term positions can continued to be held.

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When I calculated net Effective Volume divergence this morning I was surprised at the apparent amount of net inflow into equities. There are far more stocks that are attracting money on decreasing prices than the converse, and this leads to the conclusion that this dip is being bought:

Time will tell whether this is the correct interpretation.

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I'll be away from my desk most of the trading day today.

Regards,

pgd