General Market Index (GMI) table

Major indexes remain in longer term down-trends; in cash or short

@ 7:00 am
GMI2/6
GMI-R4/10
T210846%

For those of you who are first time readers, welcome!   I want you to know that I write this blog to share my experiences gained from trading over more than 40 years. I also write this blog to educate my students at the University of Maryland, who are enrolled in my classes on technical analysis of stocks.   I am passionately committed to educating people about trading because I believe that our education system has failed to prepare its citizens for their financial survival.   My students learn to greet assertions and   advice from the pundits in the financial media with a heavy dose of skepticism and their own critical analysis.

As a part-time trader, I have educated   myself through extensive reading of the works of successful traders and through analysis of my own trading performance.   I bring my training as a research psychologist to the subject of trading. I have been able to multiply my IRA 14x since 1995 and have been able to keep my university pension safely in cash during all of the major market declines since 1998, and to reinvest the funds in the subsequent advances. My university pension has been spared the scars and heavy losses from the declines in 2000-2002 and 2008.

I rely heavily upon my General Market Index (GMI) to keep me on the same side as the major market trend.   The GMI is a simple count of the six indicators that I use to gauge the market’s short and longer term   trends. I exit to cash when my indicators signal a major down-trend, usually when the GMI is below 3. I wade back into the market slowly when the GMI recovers. I do not predict the length of trends, I try only to ride them until they end. The few excellent books that made a difference to my trading are posted to the lower right of this blog, and most are required reading before my students are allowed to formulate trading rules and test them in a virtual trading exercise.   I compose each daily post after the market close, and publish it on Monday through Friday around 7:00 AM EST. While I publish the GMI reading every post, I present the GMI’s full components only on   Monday morning. I hope that readers will benefit from my experiences and apply whatever they find useful to their own trading.   I am empowered by your comments and ask that you give me feedback in the comment section of each post, or send them to me via email at:   silentknight@wishingwealthblog.com.

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One reader chastised me for appearing to depart from my prior recent posts in which I wrote about a weak market. He said that if I began to question the down-trend, then Mr. Market had finally fooled me, and the market would fall.   He was right, the market did decline on Friday, but I think it had little to do with my sentiment about the market.   I have been saying that the longer term trend of the indexes remain down, even as my short term indicator for the QQQQ turned up late last week.   According to my way of identifying the short term trend of the QQQQ (Nasdaq 100 index ETF), the market completed its third day of its new short term up-trend on Friday, which is a counter-trend move within a longer term down-trend.   I have been showing you that the daily 10,4,4 stochastic statistic reached very overbought levels and the market was due for another dip.   It was this overbought condition, and not the reasons posited by the media pundits why the market sold off. So now we have to wait to see whether this dip will go to new lows or hold above them. You can see in this daily chart of the Dow 30   (click on chart to enlarge) that the stochastic at the bottom window (red line) has just curved down.   Whether it will fall to oversold levels again is unknown, but note that all of the recent declines ended with the stochastic well below 50 . We just need to wait for the market to reveal its trend.   I also use the stochastic to time my buys and sells.   For example, I was not looking to take any new short positions while the stochastic was very low. By the way, the other two major index ETF’s   I follow (SPY, QQQQ) show the same pattern as the Dow.

But all of this daily action is occurring within a weekly down-trend.   It is the weekly down-trend that tells me whether to be in cash or in stocks.   As you know, I have moved all of my university pension from mutual funds to money market funds recently.   I could be wrong or perhaps premature in my timing, but my philosophy is to be in the market when we are in an established longer term up-trend and to stay on the sideline safely in cash otherwise.   I was able to remain invested for a long time while the GMI was at 4 or higher. But the GMI has been less than 4 for much of   May and June and every day since June 22nd.   As you can see, the GMI is now at 2? (of 6) and the more sensitive GMI-R (revised) is at 4? (of 10). The “?” indicates one of the indicators is too close to call. In addition, the Worden T2108 Indicator is at 46%, in neutral territory. Prior tops tend to occur when the T2108 is near 80% and bottoms when it is below 20%.   (The T2108 measures the percentage of NYSE stocks that have closed above their simple 40 day moving average of price.)   86% of the Nasdaq 100 stocks have their daily MACD above its signal line, a sign of a short term up-trend. Finally, the QQQ and SPY have closed below their 10 week averages for 11 straight weeks.   I cannot make money trading on the long side when these indexes are below their 10 week averages. More disconcerting is that the 10 week average is now declining below the 30 week average (click on weekly chart of the QQQQ below to enlarge).

So, to sum it up, I remain largely in cash or short.   I will not trade long when the major averages are in longer term down-trends.   When they reverse, there will be plenty of time to get back in during the next major longer term up-trend. Unfortunately, we have all been wrongly taught that we cannot time the market and   should remain in the market all of the time.   The most successful traders in history, exit the market or go short when the trend turns down.

New up-trend or dead cat bounce?

@ 7:00 am
GMI0/6
GMI-R2/10
T210852%

When the market has been in   short and long term down-trends, and then it   goes up 5% in four days (measured by the Nadaq 100 ETF, QQQQ) , one is left with the question of whether it is time to go long?   The truth is that no one knows for sure if the current rally is the start of a new up-trend or just a dead cat bounce. How we trade this scenario   has to be guided by what our trading rules tell us to do.

My rules tell me   that when we are in   short and long term down-trends   that I do not go long until both trends have signaled a new up-trend.   This means that if this rally is the start of a new up-trend, I will miss some of the gains, but such is the fate of the trend follower.   We follow defined trends until they end and a new trend is established.

With clear 20/20 hindsight, I realize now that last week, I was not focusing enough on the extreme bearish sentiment that   signaled that at least a bounce was likely.   First, the QQQQ declined seven days in a row–a   rare occurrence. The put/call ratio (number of put options traded divided by the number of call options traded) reached about 1.2, showing that option players were more likely to trade as if stocks would decline. This is a decent contrary indicator–at extreme values, these traders tend to be wrong.   The Investor’s Intelligence survey of newsletter sentiment, another contrary indicator,   shows that there are nearly as many bears as bulls.   Most of the time the bulls far outnumber the bears. And finally, the daily (10,4,4) stochastic indicator that I use to time trades was extremely oversold,   near zero.   Look at the daily chart of the QQQQ below (click on to enlarge) and you can see that market bounces tend to occur when the stochastic is around 20 (bottom horizontal line)   and starts to rise. I should probably not be looking to initiate short trades on the market when this stochastic is below 50, and certainly, not when it is near zero.   The stochastic acts much like the T2108 Indicator; it is sort of a pendulum of   market sentiment. The stochastic indicator works for ETF’s as well as individual stocks.

The stochastic reached its lowest reading of the year before the July 4th weekend break, and then started rising. I am now waiting to see if the rally will end after the stochastic rises to the high levels seen at other tops this year. It may take a few more days of a rally until the stochastic reaches overbought levels again, or it may never get up there….

The GMI remains at zero but the more sensitive   GMI-R is at 2.   The rise in the GMI-R occurred because there were more new highs than lows on Friday in my universe of 4,000 stocks and because the QQQQ has closed above its 10 day average.   There has also been improvement in the Worden T2108 Indicator (52%), and almost one half (49%) of the Nasdaq 100 stocks have their MACD above its signal line, a sign of short term strength. But we remain in a QQQQ short term down-trend, now having completed its 10th day.   And the QQQQ and SPY have now closed below their critical 10 week averages for 10 weeks.   I find that I only trade growth stocks profitably on the long side when the QQQQ closes above its 10 week average.

So, according to my trading rules, I must remain mainly in cash and a little short until my indicators turn.

At the BEGINNING of a big market decline? My next Worden webinar

@ 7:00 am
GMI0/6
GMI-R0/10
T210825%

At lunch on Friday I told my friend that I was moving 60% of my pension holdings from stock mutual funds to money market funds.   She was incredulous that I would do so after the market was already down so much.   I think her statement represents the psychology of the moment. The market has already declined, so it must be too late to get out–we have to be close to the bottom.   Maybe we are.   But my approach to the market is to look at the price and volume patterns and to ignore my emotions and beliefs about what I might want it to do.   So, when I ran one of my my TC2007 PCF ‘s (personal criteria formula)   on all ETF’s, I was struck by what I saw.   First of all, let me tell you that I ran this PCF several years ago and came up with a company that I knew little about.   The topping pattern looked so compelling that I actually bought a put option on the stock, betting that it would decline. I did not hold the put long   because I was not as convinced then of my methods.   You may have heard of the stock, Enron. My PCF detected trouble in the stock’s pattern long before anything came out in the press and before the stock began a long decline to zero.

Anyway, I ran the same PCF on the list of ETF’s in TC2007 and found 91 hits out of 951.   The PCF I ran detects a pattern where the long term average is just beginning to reverse down.   Thus, a lot of other ETF’s that are already in established down-trends would not come up.   I was struck by the ETF’s that did come up because they represented entire country markets in some cases.   For example, India (BKF, INP), Latin America (ILF), Asia Pacific (GMF), China (GXC), Brazil (EWZ), Emerging Europe (GUR).   Add to the list a few of the U.S. indexes that came up such as:   S&P500 (IVV), Dow 30 (IYJ), Russel 1000 Growth (IWF).   Russell 3000 Value (IWW).   Now add to the list a whole set of industries: Financials (IYG), Metals and mining (XME), Software (IGV), Oil (IEZ), Healthcare (IYH). These are just a few of the indexes and industries whose ETF showed up in my scan.

No one knows how long these   down-trends will last.   However, I am talking about down-trends based on weekly averages, which generally are related to major trends.   For my own comfort, I would rather get out of the market and wait for these averages to reverse up again, than to gamble my critical pension money while I hope for the turn.   If the market were to turn up in the next few months I would have no regrets as I would simply hop back on at a higher level.   The weekly averages tend to represent trends that last for months, so I have plenty of time to ride a new up-trend.   In the past, during the few times I have moved my pension funds to money market funds, I have always been scared that I was making the wrong move.   But my   early exits saved me from taking huge losses in the 2000-2002 and 2008 market declines.   When I look at this monthly chart of the Dow 30 (click on to enlarge), I see an ending of the rebound from the 2008 decline and a possible resumption of the decline.   How far the Dow 30 will fall this time is unknown, but with the other ETF’s   from the rest of the world in a decline, I am staying safely on the sidelines until I see a new up-trend. See this interesting article about Robert Prechter who is predicting a massive decline–yet again!

Meanwhile, the GMI and GMI-R remain at zero.   The Worden T2108 Indicator is at 25%, still out of oversold territory where markets tend to bottom.   The QQQQ short term down-trend has now continued for six days. The QQQQ and SPY have closed below their critical 10 week averages for 9 weeks.   And now, only 8% of the NASDAQ 100 stocks have their MACD above its signal line, a sign of short term weakness. With market leaders (GOOG, NFLX, AAPL) weakening, it bodes poorly for the entire market.   When the leaders cannot hold their ground, it often portends a down market. I am mainly in cash or short and will use any short term strength to short more.

I am very concerned about the consequences to our society and to our financial well being if this market declines back to the 2008 lows or beyond. I do not generally look to the fundamentals to assess the stock market’s trends, but with federal, state and local governments apparently getting ready to sacrifice millions of workers on the altar of deficit reduction, I see little reason for an up-turn in consumer psychology and spending.

I am presenting my second Worden webinar on August 24. I plan to provide details of my submarine scan and how I find stocks to short. You can see my first webinar by going to their site (worden.com) and scrolling down to the one entitled: A word from the professor.   It will be a while before you can sign up for the August free webinar. I am pleased to support Worden with these webinars because the company has been a strong supporter of my university classes in technical analysis.   I compute virtually all of my market statistics using their incredible charting and analysis software.

You may contact me at:   silentknight@wishingwealthblog.com