ETF

GMI: +6; QQQQ weakening; All that glitters: GLD

@ 12:01 am

The GMI is still at the maximum level of +6, but I see some serious indications of weakening.  Gmi1216 While there were 148 successful 10 day new highs (stocks that hit a 52 week high 10 days ago and closed higher on Friday than 10 days earlier), they constituted only 47% of the 313 stocks that hit a new high ten days earlier.  There were 173 new highs in my universe of 4,000 stocks on Friday, but only 23% of the Nasdaq 100 stocks advanced.  The S&P 500 stocks (44%) and the Dow 30 stocks (40%) had more advances, but still less than 50%.  Only 46% of stocks are in a short term up-trend, the lowest percentage since November 9.  More bearish was the fact that only 53% of the Nasdaq 100 stocks closed above their 30 day averages, the least since October 28, just before the current rally began.  This time, however, we are coming off of a major advance, and this weakness might signify the beginning of a decline instead of the end. The QQQQ has closed above its 10 week average for seven consecutive weeks and Friday was the 33rd day of the up trend (U-33).  The percentage of stocks closing above their 10 week average is 69%, and suggests that the longer term up trend is still intact. 

The WPM shows the major short term weakness in the QQQQ as well as in the S&P Wpm1216_1small cap stocks (IJR). Only 53% of the Nasdaq 100 component stocks and 54% of the S&P small cap stocks closed above their 30 day averages.  The other indexes appear to be stronger, with the S&P 500 (SPY) stocks doing the best (72%).  The longer term indicators are stronger for the Dow 30 stocks (77% above their 30 week averages) and the S&P 500 stocks (71%)…….

I have moved all of my sell stops to just below their moving averages and have been getting gradually sold out.  Two days of closes of the QQQQ below 41.30 (closed at 41.58) would make me exit this market.  I have successfully avoided market declines since 1995 because I am such a chicken.  The key to successful trading is to conserve capital so as to be able to remain in the game. I can always wade back in when the market strengthens………..

BE CAREFUL OF GOLD! Too many pundits are touting its value.  Look at the weekly chart of the ETF that tracks the price of gold (10x).Gld  There was a high volume reversal this week with a high of 53.73, a low of 49.93 and a close of 50.09, down 2.31 for the week.  The weekly volume was the highest since this ETF began trading at the end of November, 2004.  This may not be the ideal time to test our "mettle" by chasing gold. This most recent rise began in mid-November after a six week consolidation.  Better to buy on the breakout from a new consolidation, rather than after a substantial rise from a base…………

Have you used this site to inform your trading?  Can you send me some experiences I can post for others  (anonymously, with your prior permission)?  Please send your pearls of Wishdom to me at: silentknight@wishingwealthblog.com. 

Appel’s new book on TA; GMI declines to +5; WPM shows short term weakness; Long bonds to weaken; Some weak sectors: Wash sale rule

@ 1:35 pm

"One successful trade makes us feel good.  Two successful trades in a row make us feel pretty smart.  Three consecutive successful trades makes us feel like a genius.  That’s when they get us…"     Gerald Appel (2005, p. 224)

Appel’s new book, Technical Analysis– Power Tools for Active Investors, is the most refreshing and clearly written discussion of a select number of technical indicators that I have had the pleasure to read.  If you have read Stan Weinstein’s introduction to technical analysis (listed in my favorite books section to the right) you are ready to proceed to this engaging and personally written book by the inventor of the MACD indicator. (I earn absolutely nothing from the sales of these books)………………….

The GMI weakened a little on Friday.  Fewer than 50% of the 158 stocks that hit a new high ten days earlier closed higher than they did ten days ago.  In other words, stocks hitting new highs have not tended to rise.  Failed breakouts in growth stocks is often a sign of a topping market.  Gmi1209 But this is only one sign and the up-trend is still intact.  There were 160 new yearly highs in my universe of 4,000 stocks and 73% of stocks closed above their 10 week averages.  However, only 47% of stocks are in a short term up-trend, down from 65% on 12/2.  So the weakness is apparent in the short term indicators.  While all weakness, by definition, shows up in these indicators first, it is not certain that the longer term indicators will also weaken.  While 84% of the stocks that have doubled in the past year closed above their 30 day averages, only 12% of them hit a new high on Friday.  Still, 27% of stocks are within 5% of a new high, compared with 8% close to a new low. Friday was the 28th day of the up-trend (U-28) and the QQQQ has closed above its 10 week average for the past six weeks.

The WPM short term indicators show marked deterioration in the components of  the five indexes.  Wpm1209 All indexes closed above their 30 day and 30 week averages.  However, only 61-74% of their component stocks closed above their 30 day averages, down from 80%+ last week. There was greater short term weakness in the DIA (63%) and QQQQ (61%) stocks.  There were also very small declines in the percentage of stocks closing above their 30 week averages.  The short term weakness occurred across the board and reminds me to trade with more caution. While it is often said that small cap stocks gain strength in the new year, there is no evidence of impending strength yet.  Small cap stocks are among the weakest, with  only 63% above their 30 week averages.  The bottom line for me is to keep my sell stops tight so that I do not lose too much of my recent profits if the decline continues………………..

I ran some scans of the market for weak stocks and sectors.  I was surprised to find so many municipal bond and other interest sensitive ETF’s near 52 week lows.  This chart of the Lehman 20+ year treasury bond ETF demonstrates how long term rates appear poised to rise.  Tlt1209 Note that for the first time since August 2004, the 10 week average (dotted line) is below the 30 week average (red line) a sign of considerable weakness.  Higher long term rates may be on the horizon.  It probably explains why my scan also found plenty of housing stocks in steady downtrends and hovering near their 52 week lows.  Another weak group that came up is publishing/media. Stocks such as NYT, DJ, KRI, LEE, JRC, WPO, GCI also are in confirmed down-trends.  There are always some stocks to satisfy the bears, even as the bulls feast………………..

I often talk about the benefits of buying back a stock that I sold at a loss if it quickly begins to rise.  A reader asked me whether I am concerned with the IRS wash sale rules. I replied that the wash sale rule does not apply to me when I trade in my IRA, since I pay no taxes on transactions until I withdraw the funds at retirement.  For many years I had misunderstood the wash sale rule.  The wash sale rule is designed to prevent people from intentionally creating a tax loss (usually at the end of the year) in a security they own by selling it and then buying it back within 30 days.  As the educational link above explains, one does not really lose the tax loss, but only defers taking it until the subsequent securities purchased are sold.  The loss from the first sale is added to the cost basis of the second transaction.  So in taxable accounts, the wash sale rule is not a valid reason to avoid buying back a stock that we sold at a loss, if it rebounds (an all too common occurrence for me–consult with your accountant)…………….

NOTE:    A NEW SECTION TO THE BOTTOM RIGHT PROVIDES LINKS TO MY FAVORITE PRIOR POSTS.  THESE INCLUDE MY STRATEGY POSTS, DEFINITIONS OF THE GMI COMPONENTS, AND MY ANALYSIS OF WHY THE TRADING TECHNIQUES OF THE GREAT NICOLAS DARVAS WORK BEST DURING BULL MARKETS AT ALL-TIME HIGHS.

How have you used this site to inform your trading?  Can you send me some experiences I can post for others  (anonymously, with your prior permission)?  Please send your pearls of Wishdom to me at: silentknight@wishingwealthblog.com. 

GMI: +6; Short term weakening; Failed break-outs: CMTL

@ 6:52 am

Things remain fine with the GMI still at the maximum value of +6.  Gmi1207 However, for the second time since this rally began the SPY and the DIA each closed below their 10 day averages, a sign of short term weakness in these indexes. The QQQQ is stronger and remains above its 10 day average.  These three ETF’s remain far above their 30 and 50 day averages, so the up-trend remains intact.  Between 27-33% of the Nasdaq 100, S&P 500 and Dow 30 stocks rose on Wednesday.  Note also that only 49% of the 351 stocks that hit a new high 10 days ago closed higher on Wednesday than they closed ten days earlier.  This is a sign of failed break-outs (see CMTL below). The percentage of stocks in my universe of 4,000 that remain in a short term up-trend continues to recede and is now at 53%, down from 65% last week.  However, 84% of the stocks that have doubled in the past year remain above their 30 day averages and 69% of all stocks are above their 10 week averages.  These latter stats indicate that in the face of the short term weakening, the longer term up-trends remain in place, especially for the leading stocks.  Wednesday was the 25th day of this QQQQ up-trend (U-25)………….

It is still a good idea to make sure all sell stops are in place to protect against sudden drops. Cmtl  Some breakouts are failing miserably.  For example, I was stopped out of CMTL on Monday and it collapsed on Tuesday.  When stocks that look like they are breaking out suddenly reverse like this one did, it can be a sign of some impending weakness in the general market. If I had bought a lot of shares in my initial purchase of CMTL or failed to immediately place a protective stop loss, I could have been hit with a significant loss.  I always place a protective sell stop immediately after I make a purchase.  If I get sold out and whipsawed, I can just buy the shares back.  Stocks that fake me out with a sudden decline and then rebound often go considerably higher. I have learned that I should ignore my negative emotions from the prior loss and just buy it back (and put in another protective sell stop).  If I am faked out of the stock, so were other traders.  After we all sell, and give others the chance to buy our stock at reduced prices, the rise can begin. 

NOTE:    A NEW SECTION TO THE BOTTOM RIGHT PROVIDES LINKS TO MY FAVORITE PRIOR POSTS.  THESE INCLUDE MY STRATEGY POSTS, DEFINITIONS OF THE GMI COMPONENTS, AND MY ANALYSIS OF WHY THE TRADING TECHNIQUES OF THE GREAT NICOLAS DARVAS WORK BEST DURING BULL MARKETS AT ALL-TIME HIGHS.

How have you used this site to inform your trading?  Can you send me some experiences I can post for others  (anonymously, with your prior permission)?  Please send your pearls of Wishdom to me at: silentknight@wishingwealthblog.com.