The stock market ended the quarter up for the fourth consecutive day as the dollar weakened and the Greek parliament supported a European bailout.  The Dow Industrials tacked on another 153 points to close at 12,414.34.  The S&P 500 Index rose 1.01% and the Nasdaq Composite gained 1.21%.  Crude oil prices and natural gas prices rose while gold fell.  Treasury yields continue to rise but closed well below today’s lows.

USD, the levered semiconductor ETF, jumped 5.36% and closed right on its 200-day SMA.  UXI, the levered Industrials ETF, rose 3.15%.  CMD, the levered short commodity ETF, gained 3.01%.  Please click on the symbols for details.

The major equity indexes are all back above their 50-day SMAs and give or take a point, have retraced 50% of their decline since the year highs in May.  The important test is what comes next, if/when they pull back to their 50-day SMA.  A pullback that holds, particularly if it occurs on low(er) volume, will be viewed positively by the Bulls.

It’s possible that the momentum is starting to swing back to the upside.  Volume was good yesterday and today as opposed to Monday and Tuesday, when it was below average.  There will be normal trading hours tomorrow but with the three-day weekend upon us, it’s likely many of the Big Boys will leave work early to ride the Cannonball out to the Hamptons.  I expect the action to be quieter than today…but what the heck do I know?

I’m taking tomorrow off as well.  Enjoy your holiday weekend.

Can I time it or what?  I take off Monday and Tuesday and the market bounces sharply higher.  {Sigh}…I’m convinced at times that the day my ship comes in, I’ll be waiting at the airport….

The stock market rose for the third consecutive day today, gaining almost 73 points to close at 12,261.42.  The S&P 500 Index rose .83% while the Nasdaq Composite was up .41%.  Bond prices have fallen sharply the past few days and yields have jumped.  Commodities like gold, silver, and crude oil rose as the U.S. dollar fell.

AGQ, the levered silver ETF, gained 6% today.  Resistance is up ahead at its 20-day EMA, around 175.70 – the EMA stopped upward movement three times since May 31st.  UYG, the levered financials ETF, rose 4.67%.  It is still below both its 50- and 200-day SMAs.  Don’t know why but EWD, the Sweden ETF, tacked on 3.87%.  GDXJ, the junior gold miners ETF, tacked on 3.16%.  Please click on the symbols for details.

ITB is the home construction ETF I blogged about last week.  It fired off sell short signals on several of Larry Connors swing trading strategies.  One of the three strategies exited today for a flat (neither gain nor loss) but the other two strategies are still long.

Last Friday I discussed the VIX (CBOE Volatility Index) and how it had pulled back to its middle Bollinger Band (BB) earlier in the week and then bounced higher.  When that happened at the beginning of March, the market fell apart (of course, the tsunami in Japan had something to do with that, too) and I opined it was likely to happen again.  Bzzzz!  Wrong – I called the bottom.  Guano happens.

The VIX continued to pull back and today reached the lower BB before bouncing.  Please review the chart below, which you can make full-screen by clicking on it:

The lower BB touches by the VIX are highlighted in yellow circles and the corresponding price action is below, in light blue rectangles.  In January the market pulled back just a bit after the touch and the late May/early June touch resulted in a deeper pullback.  The April touch was marked by the market moving significantly higher.

Last Wednesday I discussed EEM, the emerging markets ETF, and historical volatility (HV).  HV is the standard deviation of day-to-day price changes expressed as an annual percentage.  If you know how much an asset has fluctuated in the past, you can use this information as a gauge for how much it is likely to fluctuate in the future.

As a rule of thumb, stocks and ETFs with higher HV readings have fluctuated more in the past than stocks and ETFs with lower HV readings.  Furthermore, those assets with higher HV readings will likely fluctuate more in the future than assets with lower HV readings.  You can find historic volatility calculators on the web.  What you want to find is ETFs with higher historic volatility.

Just knowing an ETF has a high historic volatility isn’t a timing tool, however.  Larry Connors developed the methodology of using the ratio of a shorter-term HV (six-day) divided by the longer-term HV (100-day).  When the reading falls below 50%, volatility is prone to revert back to its mean so you can expect to see a sharp price move.

The weekly chart below of EEM, the Emerging Markets Index ETF, shows eight instances since April, 2009 where the HV Ratio fell below .50 (yellow ellipses).  As of today it has fallen below .50 once again.  Please click to make the chart full-screen:

Assuming the HV Ratio closes below .50 (it’s currently .47), an increase in volatility is likely.  The weekly ADX is low (17.76) and the weekly stochastic (not shown) has turned upward from below 20, indicating a bullish reversal.  The weekly RSI (also not shown) bottomed last week at 44.17 – in a bullish trend, RSI tends to bottom between 40 – 50 before turning higher, rather than the traditional oversold level of below 20.  Constance Brown, citing the work of Andrew Cardwell, discusses this in her book, “Technical Analysis for the Trading Professional.”

It’s possible that this week’s strong bounce can be attributed to end-of-quarter window dressing by institutional players like mutual funds; bargain hunting after a pullback; or both.  There is also a seasonally bullish bias going into the holiday weekend.  The next quarter starts on Friday so we’ll know soon enough whether the bounce continues or we start a new leg down.

The stock market continued to slide on continued concerns over European debt and poor earning reported by Oracle.  Micron also missed projections, contributing to big losses in the tech sectors today.  The Dow Industrials lost 115 points to close at 11,934.58.  The S&P 500 Index fell 1.17% and the Nasdaq Composite lost 1.26%.  The Semiconductor Index tumbled 2.50%.  Gold and silver fell hard but oil and Treasury bonds were more or less unchanged.

ZSL, the levered inverse silver ETF, gained 5.84%.  SSG, the thinly traded levered short semiconductor ETF, jumped 4.45%.  VXX, the S&P 500 VIX Short-Term ETN, rose 4.16%.  Please click on the symbols for details.

Yesterday I suggested there was a bullish divergence between price action and the RSI on SPY.  The RSI line today broke below the support line of its rising trend channel, seen in the chart below which you can make full-screen by clicking on it:

I was flattered to discover my blog was read by Andrew Cardwell, one of the experts when it comes to RSI interpretation.  Mr. Cardwell explained that my interpretation was incorrect – a bullish divergence is actually bearish and it shows a market is overextended, not oversold.  I defer to the master!  You can learn more about how he interprets RSI at his website: cardwellrsiedge.com.

Despite the higher close yesterday, the VIX – the CBOE Volatility Index, a.k.a., the “fear index” – closed well below its open and near the low of the day.  This also suggested the possibility of positive action today, but alas, it was not to be.  The VIX made a large move higher today and closed near its high, showing continued fear in the market.

The chart below is one I’ve posted before.  It plots the VIX with Bollinger Bands (BB) and below that is the SPY on the same days:

Please note how back in late February-early March the VIX rose above the middle BB and touched the upper BB.  A pullback on March 1 closed well above the middle BB and stayed above it until after the earthquake/tsunami in Japan which spooked the markets something good.

I see a similar pattern occurring last week and this week.  Note how last week the VIX hit the upper BB, then on Tuesday and Wednesday the VIX pulled back to the middle BB but closed on or above it.  This was followed by the higher close yesterday and the much higher close today.  The pattern is eerily similar to the VIX action from February 23 – March 1.

Does this mean that history will repeat itself and some event, either political, economic, or otherwise, is going to smack the market down hard in the next week or two?  The answer to that question is something we will know in the fullness of time.

I’m taking off Monday and Tuesday so the blog will appear next on Wednesday.  Enjoy your weekend.

“Oh, my….”

Daytraders had a field day as the market tanked this morning, only to recover in the afternoon after news came out that Greece agreed to a five-year austerity plan.  The Dow was down well over 200 points shortly after the open but closed down “only” 59 points at 12,050.00.  The S&P 500 Index lost a modest .28% but the Nasdaq Composite rallied, gaining .66%.  Bond yields dropped sharply and both gold and silver fell.

SCO, the levered short crude oil ETF, gained 5.37%.  SRS, the levered short real estate ETF, was up 3.58%.  GLL, the levered short gold ETF, rose 3.45% while USD, levered semiconductors, added 3.30% on strong volume.  Please click on the symbols for details.

The S&P 500 Index is caught between two opposing forces: a rising long-term trend (the 200-day SMA) and a falling short-term trend (the 20-day EMA).  The daily chart below shows this clearly and you can make it full-screen by clicking on it:

Note how the SPY stopped short on Monday, and was turned back yesterday, at the EMA.  Note too how the EMA overlaps the former descending trend channel support line.  There’s an axiom in technical analysis that a former support line once broken tends to act as resistance when tested.  That seems to be the case here.

The situation is not entirely grim, however.  In fact, I’m seeing a bullish divergence between price and the Relative Strength Indicator (RSI):

This trend line chart is constructed a little differently from the way I normally plot them.  Typically, I’ll plot resistance and support lines using the highs and lows; that’s what I did in the top chart when I drew the support channel.  The lower chart includes a RSI indicator, which is constructed using closing prices.  In order to make an apples-to-apples comparison I drew the resistance line of the past two weeks by connecting the price closes – rather than the highs – of 6/9, 6/14, and 6/21.

All three closes are within a few cents of each other.  But note how the RSI has made higher closes while over the same time period, price is not making higher closes.  That’s a bullish divergence, which suggests there may be some accumulation taking place.

Of course, TA doesn’t mean diddly squat; price action does.  Will the market move higher from here?  I dunno, which means the answer to that question is something we will know in the fullness of time.

Prospects of an economic recovery dimmed as the Fed acknowledged the need to continue monetary stimulus measures.  The equities market trading in a narrow range until the last couple of hours, with the Dow Industrials losing 80 points to close at 12,109.67.  The S&P 500 Index lost .65% and the Nasdaq Composite fell .67%.  Bonds were unchanged.  Is a QE3 in the works? Helicopter Ben says No.

FXP, the levered short China ETF, rose 3.63%.  Volume was heavy.  UGA, the gasoline ETF, was up 3.28%.  Please click on the symbols for details.

ITB, the home construction ETF I discussed in yesterday’s blog, closed one cent higher today so additional shares were shorted.  Two other Connors/Alvarez strategies went short last Friday (Multiple Days Up) and this Monday (%B), so the short-term/swing strategies are looking for lower prices.  Doesn’t mean it will happen, though.

The three major index ETFs I watch – SPY (S&P 500); QQQ (Nasdaq-100); and DIA (Dow Diamonds) – all rallied to their 20-day EMAs and then stalled.  This EMA is a great canary-in-the-coal mine indicator of changes in the short-term trend.  An ETF that rallies or falls to this EMA and doesn’t move decisively through it tends to continue moving in the prior direction.  Crossovers, especially on good volume, tend to signify a change in short-term trend direction.

In my work with the PopSteckle (a.k.a. Stochastic Pop), I discovered that when the ADX was below 20, and especially below 15, the asset had “non-trended long enough” and a sharp move was likely to occur very soon.  In a similar vein of analysis, historical volatility (HV) tends to be mean reverting.  HV is the standard deviation of day-to-day price changes expressed as an annual percentage.  If you know how much an asset has fluctuated in the past, you can use this information as a gauge for how much it is likely to fluctuate in the future.

As a rule of thumb, stocks and ETFs with higher HV readings have fluctuated more in the past than stocks and ETFs with lower HV readings.  Furthermore, those assets with higher HV readings will likely fluctuate more in the future than assets with lower HV readings.  You can find historic volatility calculators on the web.  What you want to find is ETFs with higher historic volatility.

Just knowing an ETF has a high historic volatility isn’t a timing tool, however.  Larry Connors developed the methodology of using the ratio of a shorter-term HV (six-day) divided by the longer-term HV (100-day).  When the reading falls below 50%, volatility is prone to revert back to its mean so you can expect to see a sharp price move.

The weekly chart below of EEM, the Emerging Markets Index ETF, shows eight instances since April, 2009 where the HV Ratio fell below .50 (yellow ellipses).  Please click to make it full-screen:

With the HV ratio currently at .54, a weekly ratio close at or below .50 could drop volatility substantially and offer an opportunity to make money with EEM.  I’ll be monitoring this and will let you know if such an opportunity arises.

The stock market made some nice gains today, not unexpectedly if you read yesterday’s blog entry.  There is a growing expectation that Greece will avoid a debt default.  Crude, silver, and gold were all up today.  The Dow Industrials picked up 109 points to close at 12,189.86.  The S&P 500 Index rose 1.34% and the Nasdaq Composite tacked on 2.19%.

UYM, the levered basic materials ETF, gained 5.98% and is back above its 200-day SMA.  UMDD, the levered Midcap 400 Index ETF, rose 5.22%.  GDXJ, the junior gold miners ETF, added 4.29%.  VNM, the Vietnam ETF, gained 4.11% but on light volume – it’s also below all the major moving averages.  Please click on the symbols for details.

With home sales still deep in the dumper and new home starts at multi-decade lows, ITB, the home construction ETF, looks ripe for a short sale.  It has risen the past few days but is trading below its 200-day SMA and volume has been well below average.  ITB also fired off a R3 short sale signal on today’s close.  The strategy is discussed in the book, “High Probability ETF Trading,” co-authored by Larry Connors and Cesar Alvarez.

The trading rules for the R3 short strategy are simple:

1) The ETF is below its 200-day SMA.

2) The 2-period RSI rises three days in a row and the first day’s rise is from above 40.

3) The 2-period RSI closes above 90 today.  Short on the close.

4) Buy a second unit if prices close higher than the initial entry price any time you’re in the position.

5) Exit when the 2-period RSI closes below 30.

In a backtest with 20 non-leveraged ETFs from their inception to 12/31/08, there were a total of 361 trades with an average %P/L of 1.15%.  The percentage of winners was 70.4% and the average trade length was 5.2 days.  The aggressive strategy which buys a second unit if price keeps rising, had an average %P/L of 1.58% and a percentage of winners of 75.6%.

Mr. Chris White, developer of the ETF Trading Bandit software which I reviewed in the February 3, 2011 blog entry, walked-forward the testing from January 1, 2009 through August 31, 2010.  His tests showed the R3 short strategy had a %Winners of 71.79% with an average %P/L of 1.38%.  The average holding period was 6 days.

I ran a backtest of the R3 short strategy on ITB from inception through today’s signal.  It has a %Winners of 75.76% on short trades, using the aggressive trading rules of shorting additional shares.   Of course, just because it was usually successful in the past doesn’t mean the trades will be successful this time or next time – past performance is no guarantee of future results.

Despite today’s positive action the market’s short and medium-term direction – a.k.a. Dave Landry’s Big Blue Arrow – is pointing lower.  Whether the action continue to be bullish or weakens from here is something we will know in the fullness of time.

The weather, that is, not the stock market.  DFW has had several weeks now of triple digit heat indexes and I tell you what, walking outside in a 30 mph hot wind will dry you out in no time flat.

I wish the market had been hot these past three weeks but I’d be lying to you if I said it was.  The equity indexes are in the midst of their longest pullback since February – March 2011.  Are they close to bottoming?  That remains to be seen.

Although the market closed higher today, volume was weak.  The Dow Industrials gained 76 points to close at 12,080.38.  The S&P 500 Index rose .54% and the Nasdaq Composite was up .50%.  Bond yields rose slightly.  Oil, gold, and silver all made modest gains.

ETFs were very quiet today.  URE, the levered real estate ETF, rose 2.21%.  TNA, the 3x levered small cap bull ETF, rose 2.07% and is fighting to hold onto its 200-day SMA.    XRT, the retail ETF, was up 2.02% on a little better than average daily volume.  Please click on the symbols for details..

Bond yields have been dropping since mid-April. TLT, the 20+ Year Treasury Bond ETF, moves higher when yields drop.  Dave Landry’s Bow-Tie indicator picked up the downturn in yields back in mid-April. The chart below shows the upside bow-tie crossover and the entry point is highlighted with a yellow circle.  Please click on the chart to make it full-screen:

The bow-tie involves three moving averages: the 10-bar SMA, the 20-bar EMA, and the 30-bar EMA. The moving averages should converge and spread out again, transitioning from a proper downtrend order (10-SMA < 20-EMA < 30-EMA) to a proper uptrend order (10-SMA > 20-EMA > 30-EMA).  According to Landry, ideally this should happen over a period of three to four days.  The creates the appearance of a bow-tie in the ETF.

Here are the entry rules for a long trade (short sales are reversed):

1. The moving averages transition from proper downtrend order to proper uptrend order.

2. The ETF must make a lower low and a lower high.

3. Once #2 has happened, go long above the high of #2 until filled.  If the ETF starts trading below its 20- or 30-day EMA before you’re filled, reevaluate the trade and consider standing aside.

Landry suggests that long trades be held until the ETF starts trading back to or below its 20- or 30-day EMA.  That doesn’t mean you should automatically sell there, although taking partial profits is never a bad idea.  Use other technical indicators to confirm the trend is changing.  If you’re still in the ETF and the moving averages reverse to a proper downtrend order, however, exit the trade.

My personal preference is to hold the trade as long as the moving averages don’t reverse into the proper downtrend order.  It’s okay to continue holding the trade if the 10-day SMA falls below the 20-day EMA, as long as the 10 and/or 20 are still above the 30-day EMA.

There’s no sign yet of a rise in rates but if the equity markets bottom out and start rising, it’s likely rates will rise.

The odds are improving for the stock market to make some sort of a rally attempt, or at least a push off of recent lows.  SPY (S&P 500 Index ETF) has successfully held above its 200-day SMA and DIA (Dow Diamonds) has held well above its 200-day SMA, although QQQ (Nasdaq-100) is a little below.

A good indicator for judging market reversals is when the VIX hits its upper or lower Bollinger Band (“BB”) and then reverses.  Developed by Mr. John Bollinger in the early 1980′s, the BBs are adaptive trading bands that consist of three lines drawn around a security – a high band, middle band, and low band.  The middle band typically defaults to a 20-day SMA, although it can be made any value the user wants.  The upper and lower bands are usually two standard deviations above and below the middle band. There are many, many different methods of interpreting the BBs and Mr. Bollinger offers classes around the world in its use.

When the VIX (or any security, for that matter) rises up to the upper BB it tends to pull back to the middle band and sometimes to the lower band.  Remember the following rule of thumb: High VIX = High Fear = Lower stock prices.  When the VIX hits the upper BB and pulls back, that tends to coincide with a bottom which is followed by rising stock prices:

You can see how every time since late January, when the VIX tags its upper BB, within a day or two the SPY bottoms out and rises.  Sometimes the rise is substantial – like in late January and mid-March – and other times it’s minor – like in February and May.  The VIX reversal today was the real deal, however – look at the size of today’s bearish engulfing bar.  So does this guarantee an upside reversal to the stock market?  There are no guarantees in this game but while the market never plays the same song twice, it frequently reuses the same notes.  Whether that is the case again this time is something we will know in the fullness of time.