I learned this idea from my stock buddy, Judy. Whenever a rising stock or index floats above its rising simple 4 week average (the weekly low is well above the average), that security often times is extended and it reverts to the average. This weekly chart of the SPY shows times in the recent past when this index ETF has become extended according to this definition. The red dotted line is the 4 week average. We may be facing a consolidation or brief pause now as DIA and QQQ are also showing this pattern.
Whenever a daily stock chart shows a stock or ETF going vertical, I usually get off. Both the SPY, QQQ and DIA have vertical patterns. I have therefore become very defensive. Take a look at this chart of QQQ.
I am also concerned that NVDA, a leader, could not go to a new high on good earnings. There are signs of high volume institutional selling in NVDA. It shows up clearly in a weekly chart. Look at the huge red volume spikes of selling at the two peaks. Failure to retake these peaks would set up a major decline in the stock–and probably the market….
I wanted to examine how the index ETFs have performed since the GMI (my General Market Index) turned green on 11/10/2016. The GMI components mainly measure momentum in the QQQ so its signals should probably work better for nonfinancial growth and tech stocks contained in the NASDAQ 100 index (measured by the QQQ).
This table shows that between 11/10 and last Friday (1/13) the QQQ rose +6.4%, the SPY +4.7% and the DIA +5.6%. Note also, by definition, the leveraged ETFs for the QQQ rose much more, the QLD rose +13.3% and the TQQQ +20.2%. The really interesting finding in the table is that these leveraged ETF far outperformed most of the individual stocks in these indexes. For example, only 12% of the NASDAQ 100 stocks, 10% of the Dow stocks, and 13% of the S&P500 stocks rose more than 13%. In other words, the QLD did better than 87-90% of the stocks in these indexes. The triple leveraged ETF, TQQQ, beat about 96% of the individual stocks in these three indexes! So I again come to the conclusion that if I can pick in advance the 4% of stocks that can beat the TQQQ, then I should do so. However, for most of us mortals, one only has to ride the TQQQ during an up-trend (GMI=green) to beat the pants off of most individual stocks, and it is so much easier to monitor one index ETF than to manage a portfolio of individual stocks……..(I have been accumulating the TQQQ since the GMI flashed green.)
The GMI remains green with 5 (of 6) components positive.