8.28.14 – Blog Will Resume Tuesday

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8.27.14 – Wading

I remember as a kid in camp taking swimming lessons and learning how to wade, i.e., paddle in one place while exerting a minimal amount of energy.  That’s what the stock market seems to be doing as we wind down into Labor Day.  Momentum is disappearing as the Dow Industrials gained 15 points to close at 17,122.01.  The S&P 500 Index was flat while the Nasdaq Composite Index slipped .02%.  Bond yields continue to fall.

BRF, the Brazil smallcap ETF, climbed 3.18% on more than triple its average daily volume.  Other Brazilian ETF’s rose today as well.  PGAL, the Portugal 20 ETF, was up 2.59%.  Please click on the symbols for details.

I’m seeing some negativity behind the scenes on SPY, the S&P 500 Index ETF.  The Volume Zone and Price Zone Oscillators, developed by Waleed Khalil, have not been keeping pace with the ETF.  SPY has made higher closes the past few days but the oscillators are not following suit.  Please take a look at the chart below, which can be made full- screen by clicking on it:

SPY

This bearish divergence doesn’t mean sell everything and move to a cave in the woods, but be aware that momentum is waning.  With rates so low and the Fed accommodating equities by not being in a hurry to raise them, there really isn’t much of an alternative for investing money.  But that doesn’t mean the market can’t make a sharp 3% – 5% pullback so don’t be surprised if that happens.

I’m not going to the Hamptons or the Jersey Shore for Labor Day but I am taking the next two days off.  I will update Subscribers Only! both days so don’t worry your pretty ‘lil head now about that.

Enjoy your holiday!

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8.26.14 – Everybody’s Working For The Weekend

Even though it’s only Tuesday.  Very light pre-Labor Day trading sent the Dow Industrials up just under 30 points after gaining as much as 77 points, to close at 17,106.70.  The S&P 500 Index inched up .11% while for a change the Nasdaq Composite was stronger, gaining .29%.  Bloomberg reported that more than $1 trillion has been added to the value of American equities since a two-month low on Aug. 7 .

JO, the coffee ETN went on a tear today and gained 5.26%.  Biotechs were strong for a second day and XBI, the biotech ETF SPDR, was up 2.66%.  GDX, the gold miners ETF, rose 2.22%.  Please click on the symbols for details.

I’m not seeing any major changes in directionality today in any of the equity indexes but it’s starting to look like QQQ, the Nasdaq-100 Index ETF, has reached overbought territory.  That doesn’t mean it should be sold tomorrow but it does bear watching.  On the daily Price Zone Oscillator and Volume Zone Oscillator charts below you see that PZO is now greater than +60 (65.59) while VZO closed at +57.30.  Either oscillator reaching greater than +60 is considered overbought under most conditions by the indicator developer, Waleed Khalil.  You can make the chart full-screen by clicking on it:

QQQ VZO-PZO

PZO is greater than VZO although VZO may catch up and exceed it.  I doubt that will happen, though, given how high PZO already is.  Price (PZO) leading volume (VZO) is potentially bearish because in a bull move, volume usually leads price.  Wait another day or two and see if VZO catches up.  If it does not and/or PZO reverses and closes under +60, that would be a signal to close long QQQ trades and/or consider hedging a Nasdaq-weighted portfolio.

Despite the relentless bull move there has been some ETF’s pulling back and that’s given us a buying opportunity in an ETF.  The %Winners was 75.97% and the average hold time was just over 5 days.  Wanna know which ETF I’m talking about?  Odds bodkins!  Get thyself over to Subscribers Only! and find out!  It costs only $5/month and new subscribers receive the first two weeks of service free.  You’ll find not only swing trade ideas for ETFs but also longer-term ideas with stocks and Fidelity Mutual funds.

The rest of this week volume will continue to be very light which can exaggerate directional moves.  Everybody who is anybody is already out in the Hamptons or on the Jersey Shore; us great unwashed will have to muddle through on our own.  What happens next with this two-month bull market is something we will know, in the fullness of time.

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8.25.14 – A Space Oddysey

Cue up Also Sprach Zarathustra, as the S&P 500 Index hits 2001 for the first time ever.  Bloomberg reported that corporate dealmaking and prospects for economic stimulus bolstered confidence in the bull market. The Dow Industrials gained 75 points to close at 17,076.87 while the SP added .48% and the Nasdaq Composite was up .41%.  Confusingly, bond yields are falling while equity prices are rising; you would expect yields to rise as assets flow out of bonds and into equities.

FBT, the biotech Index ETF, shot up 4.17% on a gap open higher.  UNG, the natural gas ETF, gained 2.40%.  Please click on the symbols for details.

Despite the relentless move by the equity indexes, the VIX, the CBOE Options Volatility Index, is not yet showing excessive optimism.  The VIX is interpreted as a fear index, with low readings indicating complacency and high readings indicating fear.  For months now the VIX has been very low compared to its historical range so I like to place Bollinger Bands around it.  When the VIX reaches the -2 Standard Deviation Band, that usually means market players have become too complacent and equities start pulling back in profit taking.

The chart below shows both the VIX and the SPY.  When the VIX gets too low (hits the lower Bollinger Band), SPY tends to stall and pull back.  When it gets too high, sometimes the +2SD Band but more commonly the +3SD Band, the fear level gets too high and the SPY bottoms out and starts rising.  As always, you can make the chart larger by clicking on it:

VIX-SPY

Back in the 1990′s Larry Connors published an interesting book titled “Connors on Advanced Trading Strategies.”  Included were a number of VIX reversal strategies.  He named them “CVR” – Connors VIX Reversal strategies.  CVR II takes the VIX and adds the Relative Strength Index (RSI) of the VIX to help time entries and exits.  The trading rules are pretty simple:

1) Take a 5-period RSI of the closing VIX value;

2) When the daily RSI closes > 70 and today’s closing RSI < yesterday’s closing RSI, buy the market on the close.  You would use an index ETF like SPY here.

3)   Exit five to eight trading days later or use some kind of trailing stop.

Connors backtest showed the strategy to be successful 61% of the time but that was back from 1993-1997, when he wrote the book.  Backtesting with more recent data using SPY data over the past two years and exiting at the end of Day 7 has a win rate of 67.4%.

At this point it’s easy to say wait for a pullback before jumping on board this moving train but who knows when that will be?  Time is on your side so don’t be in a hurry; wait until conditions are just right for you.

 

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8.22.14 – Blog Will Resume Monday

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8.21.14 – Dragged Kicking And Screaming

The Bulls pushed the market higher today, dragging behind the kicking and screaming Bears.  The Dow Industrials gained 60 points to close at 17,039.56, still a little shy of the former highs.  The S&P 500 Index hit a new all-time high and closed up .30%.  The Nasdaq Composite lagged for a second day, rising only .12%.  Financial stocks did well.

I read a very good analogy about the market action the past two weeks: “It’s like trying to push a beach ball underwater and having it pop right back up,” said John Manley, the chief equity strategist for Wells Fargo Funds Management.  A very apt description.

DUST, the 3x leveraged gold miners Bear ETF, rose 5.86%.  FXP, the leveraged inverse China 25 ETF, gained 2.45%.  Please click on the symbols for details.

With the Dow Industrials trekking higher it’s bumping up again against resistance – the 138.2% Fibonacci extension level.  While Fibonacci analysis is frequently used for calculating retracements, it can also be used to calculate extensions.  Extension ratios are used to set price objectives.  Common extension ratios are 138.2%, 150%, and 161.8%.  These extensions can be calculated well in advance of the date they are actually reached or attempted to be reached, making them ideal targets for taking profits or setting shorts.  Take a look at the monthly DIA chart below and you’ll see what I mean about bumping into resistance:

DIA monthly

The current monthly bar is interesting.  It’s an engulfing bar; the open and close (so far) are outside the open and close of last month’s bar.  It looks like a bullish engulfing bar but that’s a reversal bars found after a downtrend.  DIA is in anything but a downtrend.  If the 138.2% extension level is taken out at the end of the month by more than just a few points, look for a test of the rising trend channel resistance line around 175 – 180 (17,500 – 18,000 Dow points).

Did you know Subscribers Only! yesterday identified a Larry Connors swing trade setup?  And that it exited today for a one-day gain of .93% before transaction costs?  What’s that; you say you didn’t know?  Well, for $5 a month you can get swing trade suggestions and plenty more.  Please check it out and see what’s there.

Barring a major move in either direction tomorrow, that wraps it up for me this week.  My wife is heading out of town early Monday morning for 12-18 months with a new job so I’ll be helping her pack stuff tomorrow.  Enjoy your weekend.

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8.19.14 – Marching Higher

Damn low volume, full speed ahead!  An apparent lack of sellers helped push the Dow Industrials up another 80 points to close at 16,919.59.  Reports out today showed inflation pressures remain limited and housing starts jumped. The S&P 500 Index gained .50% while the Nasdaq Composite “lagged,” up only .43%.  Yesterday morning a major investment banking firm came out with a report that they expected the S&P 500 to gain only 1% the rest of the year.  I hope they meant as of year’s end because between yesterday and today the index is up 1.40%

Oops.

ITB, the home construction ETF, gained 2.39%.  It closed back above its 50- and 200-day SMAs on more than 1.5x average daily volume.  UNG, the natural gas ETF, rose 2.16% but for the second time in a week halted at its declining 20-day EMA.  Please click on the symbols for details.

Despite the strong advance the market has made the past week and a half, I’m still not seeing too many signs that the advance is overbought yet.  The composite long index I created back in 2010 is helpful here.  I developed the composite indexes, both long and short, using High Growth Stock Investor software.  The long composite combines the following non-leveraged, index ETF’s:

EFA – Msci Eafe; EEM – MSCI Emerging; IWM – Russell 2000; IJR – Small Cap 600; QQQ – Nasdaq-100; MDY – Midcap 400; and SPY – S&P 500.

I created the short composite by combining the following non-leveraged, short index ETF’s:

EFZ – short Msci Eafe; EUM – short Msci Emerging Markets; RWM – short Russell 2000; SBB – short Smallcap 600; PSQ – Short QQQ; MYY – short Midcap 400; and SH – short S&P 500.

The composite index then has Bollinger Bands applied to it.  The +/-2 standard deviation bands typically applied in a Bollinger Band includes 95% of all the data while +/-3 standard deviation bands includes 98% of all the data.  The price bars in the long composite chart below are flanked by 2 standard deviation (blue solid lines) and 3 standard deviation (red dashed lines) Bollinger Bands.  The green line is a 4-day SMA.  The data in this chart is as of yesterday’s close:

synthetic

Below the composite index and the Bollinger Bands is the SPX.  You can see the S&P tends to pull back after the composite index hits the +2SD Bollinger Band.  We’re not there yet.

The light volume the past couple of weeks is no doubt due to it being August.  Light volume moves can be sharp in either direction, and decreasing volume while prices move higher usually is a trap.  Having said that I received an e-mail last week commenting that volume has been below average almost every month since the market bottomed in March 2009.  Very true.

Unless all hell breaks loose tomorrow I won’t blog again until Thursday.  I will update Subscribers Only! tomorrow, however.  And speaking of Subscribers Only!, today it discusses a Larry Connors swing trade idea in an ETF with a historic success rate of 79% and an average gain of over 1% in a little longer than 6 days. What ETF is this?  For just one-twentieth of a Benjamin, a mere $5, you can find out.  Click on the Subscribers Only! links to subscribe.  New subscribers get the first two weeks of service for free.

See ya’ll on Thursday.

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8.18.14 – Peace In Our Time?

Talk of tensions easing between Russia and Ukraine sparked a stock rally that shot the Dow Jones Industrials up 175 points to close at 16,838.74.  The S&P 500 Index rallied .85% while the Nasdaq Composite Index gained .97%.  Very low volume last week didn’t seem to worry market players today.  Homebuilders rose sharply.

SCIF, the India Smallcap ETF, followed through on last week’s bounce by adding 4.08% on less than half its average daily volume.  Contracting volatility sent SVXY, the inverse VIX  short-term futures ETF, up 3.89%.  UDOW, the leveraged Dow 30 ETF, was up 3.06%.  Please click on the symbols for details.

I’m not a big fan of trying to catch a falling knife but it’s an investing style some are successful with. There’s an old saying on the Street that you want to buy when there’s blood running in the street. Case in point – DBC, the commodity index ETF that’s trading well below all major moving averages.   Please take a look at the daily chart below, which can be made full-screen by clicking on it:

DBC

But consider the following: U.S. railroads reported last week that 8 of 10 of the carload commodity groups posted increases compared with the same week in 2013, including petroleum and petroleum products with 16,804 carloads, up 32.1%; grain with 21,191 carloads, up 26.5%; and nonmetallic minerals with 40,716 carloads, up 9.6%. The only commodities posting a decrease were coal with 114,101 carloads, down 2.6% (a pattern that’s persisted for several years now), and farm products excluding grain and food with 15,567 carloads, down 1.3%.

Here’s a table showing the ten commodity groups and their components, plus intermodal units. The table comes courtesy of the American Association of Railroads:

AAR

For the first 32 weeks of 2014, U.S. railroads reported cumulative volume of 9,221,860 carloads, up 3.7% compared with the same point last year. If commodity traffic on the railroads is increasing that means more commodities are being shipped, which means the producers are selling more. That eventually passes through to the bottom line and ultimately, to EPS. Rising EPS usually turns into rising stock prices which would be reflected in DBC.

All this is fine and dandy and has been good for railroad stocks and IYT, the DJ Transportation Index ETF, but it don’t mean squat unless DBC starts recovering. But if you like buying a falling knife, DBC is worth keeping an eye on.

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8.15.14 – Modem Crash; No Internet

Sending this from my phone.  See you next week.

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8.14.14 – Finding What’s Hot And What’s Not

Tensions easing a bit in Ukraine sent the stock market higher on falling volume, with the Dow Industrials rising 61 points to close at 16,713.58.  The S&P 500 Index rose .43% with the Nasdaq Composite doing the same.  Treasury yields closely slightly lower.

SCO, the leveraged short crude oil ETF, gained 5.16%.  Biotech was up again and BIB, the leveraged Nasdaq Biotech ETF, rose 3.18%.  DUST , the 3x leveraged gold miners Bear ETF, closed 3.10% higher.  SCIF, the India Smallcap ETF has been in a downtrend but added 2.13%.  Please click on the symbols for details.

There are two schools of thought to buying ETFs rising on momentum: 1) Buy strongly trending ETFs that are pulling back within the trend (techniques used by Larry Connors and Dave Landry); and 2) Buy ETFs as momentum accelerates.  I usually discuss the pullback strategies here in the blog but today I’d like to discuss a new way for finding ETFs that are hot and eliminating from consideration those that are not.

EdgeRater Pro performs super-fast backtesting, scanning and trade simulations.  I’ve blogged about it before and you can read the review for more details.  Developer Chris White recently added a Group Rotation template and it’s ideal for finding which ETFs have rotated into favor.  It’s easy to use and only takes a few minutes to run the analysis.

Start by updating the data base (Symbol List).  After that’s complete select the “Liquid ETFs” data group.  Next, select “PRO Tools” from the Excel templates; you have two choices, %Change template and Group Rotation template.  Choose the latter:

EdgeRater

Next, click “Run.”  After a few seconds the analysis is complete.  The template looks at data over the last 22 trading days to (% Change Period”) calculate momentum, both upward and downward.

The tab “RankValues” shows the percent gain or loss over the 22 days ending on the date selected:

EdgeRater2

YINN had gained 24.66% for the 22 days ending  8/13/2014.  It had gained 25.22% for the 22 days ending 8/12/2014, and so forth.  By clicking on the date you can rank the Symbol List of 366 ETFs from high to low or low to high.  The next tab to the left is RankOfValues and it converts the % Gain or Loss into a 1-99 ranking scale:

EdgeRater3

YINN has the highest rank of #1 on August 13 and the previous two days as well, showing strong momentum.  The next tab to the left, FinalRank, is a smoothed average of the rankings over a 5 day period:

EdgeRater4

When smoothed we see the decreasing volatility over the past few days as the market rose resulted in strong upward momentum in UVXY, the leveraged VIX short ETF, which was ranked #1 the past six days as of yesterday.

If you think evaluating the past 22 days is too short or too long based on your trading or investing style, you can easily change that by clicking the “Change Settings” button see in the first screen grab.  Here it is for 100 days:

EdgeRater5

Click OK and then Run to update your analysis:

EdgeRater6

When analyzed over the past 100 trading days we see YINN, the 3x leveraged China Bull ETF, has very strong upward momentum.  Clicking anywhere on the YINN line brings up a chart, which you can customize to show any of the dozens of indicators available in the script library:

EdgeRater7

The second tab on the left is “Dashboard” and it summarizes the Top 10 and Bottom 10 ranked symbols; the biggest rank change to the upside and downside; and the fastest acceleration to the upside and downside:

EdgeRater9EdgeRater9

With EdgeRater Pro you have an easy way to find the ETFs gaining and losing momentum, giving us one more tool to help make money in the markets.

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