Remember that old TV commercial? That was my thought watching the market action today as strong pre-opening indications gave way to sideways action most of the day after the employment numbers came out, followed by a “get the heck outta Dodge” reaction in the final hour. Moody’s Investors Service’s warning that it may downgrade Spain certainly didn’t help matters, either.
The Dow Industrials ended up losing 96 points to close at 9,774.02. The S&P 500 Index posted its first quarterly loss in over a year with a decline today of 1.01%. The Nasdaq Composite fell 1.21%.
Despite the last-hour sell-off there weren’t any out-sized gains in any ETFs. The falling stock market once again boosted treasuries and hurt financial stocks, as evidenced by FAZ, the 3x leveraged short Financial ETF, climbing 3.57%. DRV, the 3x leveraged Real Estate bear ETF, added 3.44%. QID, the leveraged short S&P 500 Index, rose 3.14% and closed above its 200-day SMA for the first time since March 23, 2009. QID was above its 200-day SMA from September 3, 2008 until March 23, 2009, a few weeks after the market bottomed and QQQQ began a run that gained 70% at its peak. Please click on the symbols for details.
I’m not finding a lot of opportunities on the short side right now, what with the market becoming extended to the downside. If anything I’m finding short opportunities on short ETFs, like the SIJ (leveraged inverse Industrials ETF) short I blogged about on Monday. I suggested that shorting this inverse ETF also can be accomplished by going long the forward ETF, which is UXI. So far the first long trade would have been bought at 31.43 and a second buy (scale-in) at 29.03, so with today’s close at 28.60 they aren’t work out too well…yet.
A similar signal using the MDU strategy went off today to short SRS, the leveraged inverse real estate ETF. You can synthetically short SRS by going long URE, the leveraged real estate Bull ETF. Today’s entry would have been at 35.67. Interestingly enough, URE is above its 200-day SMA and fired off its own buy signal using the MDD strategy. Please review Monday’s blog for details about the strategy. This gives both a long forward ETF and short inverse ETF signal on the same day. The unleveraged real estate Bull ETF IYR has given off several Connors buy signals the past few days using various strategies.
Yesterday I discussed the Volume Zone Oscillator (VZO) and its interpretation in trending market conditions. Today I’d like to discuss its interpretation in non-trending conditions, using GLD as an example. Please review the chart below, which you can make full-screen by clicking on it:
The 14-day ADX on GLD is well below 18 (the divider between trending and non-trending conditions in the VZO), at 11.56. When the ADX is below 18, the relationship between price and the 60-day EMA is ignored. The first buy signal is when the VZO crosses up from below -40 to above -40. A second buy signal (which could be used to scale-in a second trade) is when the VZO crosses up through 15.
The first sell signal is when the VZO crosses from above 40 to below 40. The second sell signal (which can be used to sell additional shares or scale in a second inverse ETF buy) is when the VZO crosses down through -5. Note that the second sell signal is not the reverse of the second buy signal (unlike when ADX is above 18, when the sell and buy signals are the reverse of each other. See yesterday’s blog for details). Now let’s look at the GLD chart with annotations.
On March 3, 2010 the VZO rose above +15 when the ADX was below 18. That was the first buy signal (yellow rectangle). The VZO fell below -5 on March 8 (blue rectangle) so the trade would have been sold for a loss of 1.56% before transaction costs. The VZO issued a second buy signal on March 29 (yellow rectangle). GLD rallied from here and by April 9 the VZO was above 60. The ADX was still below 18, though, so you want to ignore the relation between price and the EMA. The VZO fell below 40 on April 13 (green ellipse), which was the signal to sell. This second trade would have been sold for a 3.9% gain before transaction costs. Of course, these trades are merely hypothetical and there’s no guarantee they would work out like this in the future.
One important point to note is the VZO strategy does not incorporate a stop-loss methodology. There are some technicians like Larry Connors who eschew using a stop-loss on the basis that it hurts more than it helps. These technicians exit a long position when the system issues a sell signal, and they manage risk by adjusting their trade size. Other technicians will not enter any trade without a stop loss. There are pros and cons for both sides of the argument so you have to make that decision for yourself.
There have been numerous buy signals on GLD since June 7, when ADX fell once again below 18 and the VZO rose above 15. The VZO has not risen above 40 nor below -5 since June 7 so there have been no sell signals.
More conservative swing traders would probably want to see the VZO fall to -40 or rise above +40 before buying or shorting when the ADX is below 18. The problem is that by the time the VZO rises or falls to those levels, the ADX will probably be above 18 so you would need to monitor the relationship between price and the EMA before taking a directional trade.
Another possibility is to use periods where the ADX is below 18 to buy or sell (write) option straddles or strangles. These are neutral option strategies used when you believe the underlying asset (the ETF) is very stable and you don’t believe it is going to make a large price move. An ADX move above 18 would be a signal to exit the straddle or strangle.
We’ve now covered the use of the VZO in both trending and non-trending market conditions. I’m very enthusiastic about this strategy and intend to incorporate it into my swing trading analysis. When I’ll next have the opportunity to take advantage of its signals is something I will know in the fullness of time.