General Market Index (GMI) table

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

I only ride the yellow band trends! Down-trend, in cash or short; Some possible submarine stocks–GOOG????

@ 7:00 am

Well, the GMI is back to zero and, by my definition,   the QQQQ short term up-trend is now over.   One of the toughest lessons I have learned over the past 40 years is that I should only stay in the market when there is a well defined trend.   What used to happen to me was that I would ride an up-trend to profits only to give back all of my profits and more, as the market entered a decline.   But how to determine when there is a meaningful trend?   After studying past winning stocks, I discovered the “yellow band” pattern that works quite well for individual stocks.   I decided to apply my yellow band approach to the Guppy Multiple Moving Average daily chart of the QQQQ. (Click on chart to enlarge.) The yellow band pattern is present when I can draw a yellow band between   certain short term and longer term moving averages, that are in turn rising or falling together.   Here you can see the yellow band up and down trends that occurred in the QQQQ since late 2009.   It is during yellow band trends that I can usually make money trading consistent with the trend. At the present time, the QQQQ is not in a well defined trend, although it may be starting a new yellow band down-trend.   All of the short term moving averages (black lines) in the chart are now below the longer term averages (red lines), but they are not separated by much.   For me, the odds are presently slim for my trading   long or short positions profitably, until a new yellow band trend materializes.   Just remember, a change in trend can begin at any time.

So, the GMI is back to zero, indicating that my original short and longer term market indicators are all negative. The revised, more sensitive GMI-R is at one, because there were more new highs than lows on Friday in my universe of 4,000 stocks. Friday was the first day in the new QQQQ short term down-trend (D-1). The QQQQ and SPY have remained below their 10 week averages for 8 weeks, so even during the brief, 7 day   short term up-trend that just ended, the longer term weekly trends were weak.   The Worden T2108 Indicator is at 41%, in neutral territory.   And 58% of the NASDAQ100 stocks have their MACD above its signal line, down from 95% last Friday.

I wish I could be more positive about the market’s trend.   But when my indicators are so weak, it makes no sense for me to try to make money by going long stocks.   And yet, the QQQQ short term down-trend is only one day old.   When I get a new down-trend I sometimes buy a little   QID or TYP (ultra short ETF’s) with the idea of selling it if the trend reverses up, or adding to my position if the market decline deepens. The key to trading success is to have many small losses and a few very large gains.

I promised to provide a list of some submarine stocks, stocks that look weak to me by my technical standards.   See the last post on submarines I did when I discussed PWRD, which is down more than 30% since then.   Submarine stocks tend to decline, sometimes greatly,   as long as the market’s tide is going out.   Here are 10 of the 95 stocks that showed up, based on my TC2007 scan of the market after Friday’s close: WDC, TECD, VPRT, ALGT, ATNI, UIS, ATHR, BWLD, SLAB, and most interestingly, GOOG.   These stocks may be forming Stage 4 declines, a la Weinstein (see his book to the lower right).   This is a good watch list for me to   research on such things as sector strength, short interest and other technicals. I hold no short positions in any of these stocks.