General Market Index (GMI) table

Great Washington Worden Seminar; Market in short term down-trend; Mainly in cash

@ 5:38 pm
GMI1/6
GMI-R1/10
T210815%

On Saturday,   I had the opportunity to present for 2.5 hours at the Worden software work-shop.   I showed the audience how I use TC2007 to manage my trading. It was gratifying to see the warm reception I received from a   local, primarily older adult group.   I just finished two courses at the university and have been accustomed to lecturing to college students.   It was a new experience for me to present to a class of people who were their parents’ ages.   A big surprise was that my star student from three years ago surprised me by attending the work shop and told me that when he graduates in a few weeks, he will move to California to open up his own mutual fund.   The year after he completed my course, he made a lot of money buying put options (betting on a decline)   on USO during its dramatic decline in 2008, from over $100 to around $22. So the afternoon presentation was an exciting time and most of the 120 attendees said they would take my course on the market if it were ever offered more widely………

The market action last week spooked a lot of people.   My account actually rose on bizarre Thursday, with my position in TYP. This is now a good time for me to be in cash on the sideline.   The GMI and GMI-R are both back to one.   The only indicator that is still positive is my weekly indicator of the QQQQ.   The QQQQ remains in a Stage 2 up-trend (see weekly chart of QQQQ), as defined by Stan Weinstein (see his book to right).   So, in my trading account I am short and mainly in cash.   In my university pension I remain fully invested in mutual funds.   I only transfer my pension funds to cash when the weekly trend enters a Stage 4.   By that time, the 30 week average will have curved down.   I have successfully avoided past major down-trends by getting out at the beginning of a Stage 4. Note that the QQQQ closed right on the 30 week average (red). As long as the 30 week average continues to rise, I will ride this up-trend in my pension account.

In spite of the short term down-trend in the QQQQ, I do not   think this is the time for me to begin to short stocks in my trading account.   This is because the Worden T2108 indicator, at 15%,   is already in an area where prior bottoms have occurred.   If this indicator, which declined from 64% last Friday, should hit single digits this week, I would be looking for a bottom.   I might even buy some QLD (ultra long QQQQ ETF), if that occurs. Every time I have said this, I get scared when the T2108 hits such a depressed level.   This time I will try to take advantage of a further drop into such an extreme level.   The T2108 touched 6% at the re-test of the bottom in   March, 2009, and 1% at the panic bottom in October, 2008.   These were extreme readings, however, not seen any other time in the past decade.   Friday was the third day of the new QQQQ short term down-trend.   I will be more certain of this new down-trend if it lasts for 5 days.   Once we pass that point, trends tend to last for a while.   Note that only 1% (1) of the Nasdaq 100 stocks closed with its MACD above its signal line, another sign of short term weakness. For the first time since February 4th, there were more new 52 week lows than highs (46 vs. 10) in my universe of 4,000 stocks.   This is not the time for me to be buying stocks at new highs.

I looked at the performance of the IBD 100 list published on Monday, 4/12/2010. Since these stocks closed on 4/9, only 17% have advanced through last Friday.   Put another way, during this period the QQQQ has declined 7.4%, while more than half of the IBD100 stocks declined 9.5% or more.   Growth stocks tend to go up more in up-trends and decline more in down-trends, as traders take profits. For example, since 4/9 to 4/26 when the QQQQ topped, 50% of this IBD100 list advanced 4.9% or more, while the QQQQ increased only 2.8%.   So I continue to concentrate my buying in IBD100 stocks, but only in QQQQ short term up-trends (within a longer term up-trend).

By the way, remember I ran my submarine scan on 4/29?   Well, since then, all nine of the stocks that came up have declined, as did all of the Nasdaq 100 stocks.   Three of the nine (33%), however,   are down 17% or more, during a time when the QQQQ declined by 9.6%, but only 5% of the Nasdaq 100 stocks declined 17% or more. So,at least that time, the submarine scan did select stocks with a greater likelihood of sinking more during this period.

Remember, one must trade with the trend in order to maximize the chances of success. Right now, the short term trend is down, and I will not go long.   (The longer term trend is still up (Stage 2), so I will keep my pension invested in mutual funds and continue to dollar coast average in with new contributions, until it looks like Stage 2 is over.)   I trade like a chicken, run from a down-trend, and conserve my capital to trade only when the odds are in my favor.

Market Showing Serious Signs of Weakness; Surprising TC2007 Submarine Scan Results

@ 7:00 am
GMI5/6
GMI-R7/10
T210864%

I have noticed that during market up-trends, stocks tend to rise in anticipation of the release of good earnings.   Once the results come out and after the immediate reaction, many stocks tend to regroup and often decline, until they begin to rise as the next quarter’s earnings season approaches.   We are now in the period when many stocks have reported and we may be in the refractory period when stocks consolidate or decline.   Regardless of the true story underlying recent market action, it is clear to me that my indicators are weakening and that the coming week could cause a serious deterioration in the GMI and GMI-R.   If a short term down-trend begins, we never know how long it will last.   We have to wait for definitive signs of a new up-trend.

So, here are the facts as I see them now.   First, many of the stocks that led this advance are breaking down or failed to hold new highs reached recently (GOOG, ISRG, GMCR,to name a few I have traded). Even AAPL, the leader of the tech sector, could not hold new high ground last week.   (AAPL remains in an up-trend.)   Then, the Worden T2108 Indicator began to break down, now at 64%, and is in a down-trend.   This pendulum of the market is an excellent indicator of market extremes.   Having held around 80% since early March, it finally has begun to decline.   Many market declines bottom out when T2108 is around 20%. (T2108 measures the percentage of NYSE stocks that closed above their average price over the past 40 days. If a stock is trading below its average price over the past 40 days, one might think of it as a sign of weakness.) I also monitor the percentage of Nasdaq 100 stocks whose daily MACD (12/26/9) is above its signal line.   That percentage is now at 24%, lowest since last February and is another sign of short term weakness. The GMI is at 5 and the GMI-R is at 7.   (The QQQQ short term up-trend completed its 50th day on Friday.)   A further market decline next week could reduce these values quickly, but I try not to jump the gun.

I told you that to hedge my long positions I had purchased call options on gold (GLD) and on the 3X   Tech Stock Short ETF (TYP) that rises as tech stocks fall.   Both of these positions advanced last week, minimizing declines I had in a few remaining long positions.

As long as the general market indexes remain in up-trends (and this could change next week), I do not like to short stocks.   But I wanted to alert you to a scan I ran using TC2007 to find “submarines,” stocks that appear to be entering a major down-trend, according to certain technical patterns I watch.   Because I look for fallen leaders to short, this scan was limited to stocks in my TC2007 watchlist that contains present/past IBD100 or New America stocks, published by IBD.   Note that stocks typically begin declines before the fundamental reasons become public.   Therefore, when I short, I rely solely on the technical patterns.   I was so surprised to see some of the stocks that came up in this scan that I thought I would post the list.   If I   owned any of these stocks (which I would not, because they are below critical levels I follow), I would move my sell stops up, hedge them with puts, or sell them outright.   I do not buy “bargains” that have declined far from their tops. This is not a recommendation, just intended to teach you how technical analysis can be used to reduce risk.

Here is the list of 13 stocks: MSTR, SWN,CVLT,GILD,ATHN,PWRD,NTES,GS,ABVT,SYKE,GOOG,SQM,MCFE. Some of these stocks had terrible days last week but did show up in my scans before those days.   To my surprise, GS and GOOG are on the list.   I was especially interested in the fact that two stocks in the same industry showed up with ominous similar chart patters, PWRD and NTES.   This “naked” weekly chart of PWRD,without prices, shows more clearly the pattern of key weekly moving averages.  (NA represents about when the stock was written up in IBD’s New America column.)   When the shorter averages (4 dotted, 10 blue) are below the longer term average (30 red) which itself is beginning to curve down, it suggests to me that the prior up-trend is over and a new down-trend is likely. The end of the up-trend should be evident to even eyes unaccustomed to technical analysis. When shorting, I like it if multiple stocks in the same industry are failing, indicating a potential sector-wide decline.   (Both NTES and PWRD are Chinese online gaming stocks.) Over 2 years ago, I wrote about an impending meltdown in the banking sector when I saw how many financial stocks were giving me similar sell signals.   With regards to this list of   stocks, maybe I am wrong this time….

True Religion (TRLG) break-out?

@ 7:00 am
GMI6/6
GMI-R10/10
T210881%

I have been watching TRLG for a while.   It came to my attention when it hit a 52 week high a few weeks ago.   I went to its monthly chart (click on chart to right) and saw that the stock has two promising characteristics.   First, it was about to break its all-time high.   TRLG reached a high of 31.82 in September, 2008, just before the market began its swoon. This maker of high priced jeans was probably hurt by the coming recession but may do well as affluent consumers spend again.   Second, TRLG is a recent IPO, having come public in 2005. My students should remember   that William O’Neil has said to look for great stocks among those that have come public in the last 8 years or so.   The “NA” on the chart indicates that IBD wrote about TRLG in its New America column last summer–another plus. So, TRLG got my attention as it approached its all-time high.   It has fought back from a low of 7.80 in March, 2009.   When a stock can regain all of its lost ground and push to an all-time high, I become very interested.   And last week TRLG did that, closing at 33.11.   The only thing that was missing was   unusual high volume when it broke out. The other potential problem is that earnings are coming out on May 4th.   Maybe the stock is rising because insiders know earnings will be great, or maybe the company will miss and the stock will dive.   TRLG has a short ratio of 11.7 and it could really rise if the shorts have to cover. I have bought some May call options on TRLG and am betting on a rise.   I really like stocks that can push through to an all-time high. (I posted about AAPL weeks ago.) If I am wrong and TRLG comes back down, the most I can lose is the cost of the calls. If I am right, I GES you may call me a jeanius!

Meanwhile the GMI and GMI-R remain at their maximum readings. Friday was the 45th day of the current short term up-trend in the QQQQ.   QQQQ has not closed below its 10 day average since last February.   This has been an amazing and rare up-trend.   Both the SPY and QQQQ have closed above their 10 week averages for 8 weeks.   The Worden T2108 Indicator remains at a high level, at 81%.   T2108 has been above 77% since March 5th.   This indicator acts like a pendulum of the market.   The market tends to hit tops around 90% and bottoms below 20%, but not always.   Anyway, with the up-trend in place I remain fully invested in my university pension and have been trading individual stocks and options in my IRA.   The scan I talked about in the Worden webinar and the TC2007   scan I posted last week has helped me to find some promising stocks.