Mr. Market was all over the place today – down 1%, up 3/4%, only to close on the up side.  The Dow Industrials eked out a 20 point gain to close at 11,559.95.  The S&P 500 Index rose .23% and the Nasdaq Composite gained .55%.  Treasury bond yields dropped sharply on anticipation of more economic stimulus from the Fed.  Gold and silver continue to recover from last week’s pull back.

Except for some extremely thinly traded ETFs (1,000 – 2,000 shares per day), most ETFs were quiet.  GDXJ, the Junior Gold Miners ETF, rose 3.63% to halt at its 200-day SMA.  AGQ, the leveraged silver ETF, added 3.33%.  UBT, the leveraged 20+ year Treasury Bond ETF, gained 3.26% after pulling back yesterday to its 20-day EMA.  UGA, the Gasoline ETF, was up 2.27%.  Please click on the symbols for details.

MYY, the Short Midcap 400 ETF, set off buy signals on the %b and the R3 swing trade strategies.  The %b strategy has been discussed the past few days in the blog.  The R3 strategy is also discussed in the book, “High Probability ETF Trading,” co-authored by Larry Connors and Cesar Alvarez.

The trading rules for the R3 strategy are also simple:

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

2) The 2-period RSI drops three days in a row and the first day’s drop is from below 60.

3) The 2-period RSI closes under 10 today.  Buy on the close.

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

5) Exit when the 2-period RSI closes above 70.

In a backtest with 20 non-leveraged ETFs from their inception to 12/31/08, there were a total of 700 trades with an average %P/L of 1.24%.  The percentage of winners was 80.7% and the average trade length was 5 days.

Mr. Chris White, developer of the ETF Trading Bandit software which I reviewed in the blog on February 3, walked-forward the testing from January 1, 2009 through August 31, 2010.  His tests showed the R3 strategy had a %Winners of 75.47% with an average %P/L of 1.23%.

I ran a backtest of the R3 strategy on MYY from inception through today’s signal.  It has a %Winners of 80.0% on buy trades, using the aggressive trading rules of buying 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 positive action the past few days 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.

Irene’s bark was worse than her bite and Wall Street breathed easier since lower Manhattan didn’t flood as was predicted.  It was still difficult for many in the industry to get to work today because few commuter trains were running but that didn’t stop the market from turning in a solid day.  The Dow Industrials gained another 254 points to close at 11,539.25.  The S&P 500 Index rose 2.83% and the Nasdaq Composite tacked on 3.32%.  Small-caps were strong today and the Russell 2000 Index added 4.77%.

URTY, the levered R2k ETF, shot up 14.29% to close at its 20-day EMA.  BHH, the B2B Internet HLDR, rocketed 11.76% and closed back above its 20-day EMA.  UYG, the levered Financials ETF, gained 7.79%.  URE, the levered real estate ETF, scampered 6.17% higher.  Please click on the symbols for details.

SKF, the levered short Financials ETF discussed in Friday’s blog, triggered a second buy today using Connors %b swing trading strategy.  Today’s buy was at 70.97 and there is now an average price of 73.92.  The exit will come when the %b closes above 0.80.  Please read last Friday’s blog entry for details.

Today was the first day in over a month that the VIX – the CBOE Options Volatility Index – closed below its middle Bollinger Band (BB).  In the past when that’s happened and the ADX on the VIX is greater than 20, the VIX tends to pull back to the lower BB.  Please see the chart below, which you can make full-screen if you click on it:

Back in mid-March the VIX traded above 31 and the ADX was 28.38 (#1); the VIX proceeded to pull back as the market recovered and by mid-April the BB’s had tightened and VIX hit the lower BB (#2).  By now the ADX was well below 15, however, which indicates the lack of a trend.  Note how the SPY moved sideways to slightly lower before the ADX started to rise and SPY closed below its 50-day SMA.

In mid-June the VIX again hit its upper BB after the ADX was rising, this time to 29.26 (#3).  When the VIX closed back below the middle BB, it also fell to the lower BB but this time the ADX was 28 – 30 (#4).  Note the sharp move higher in the SPY after bouncing along its 200-day SMA.

With the VIX back below its middle BB and the bands tightening, it’s likely VIX will come all the way back to its lower BB.  Should that happen around the time that SPY has risen back to its 50- or 200-day SMA, it could stall and begin another leg lower.   Will it?  The answer to that question is something we will know in the fullness of time.

For a change, not because of the market action but because of Hurricane Irene.  She’s a big ‘un and not to be taken lightly!

Speaking at an annual economic conference in Jackson Hole, Wyoming, Federal Reserve Chairman Ben S. Bernanke offered no plan to provide further stimulus for the economy. When he first began speaking the stock market dropped sharply but shortly thereafter began a recovery that ended with the Dow Industrials gaining almost 135 points, to close at 11,284.54.  The S&P 500 Index rose 1.51% and the Nasdaq Composite climbed 2.49%.  Gold rallied but oil was relatively unchanged despite the fact that 8% of our refining capacity lies in Irene’s path.

UMDD, the levered Midcap 400 ETF, rose 7.74% on 150% of average daily volume.  It is still well below its major moving averages, however.  UGL, the levered gold ETF, climbed 5.91%.  UYM, the levered basic materials ETF, gained 4.85%.  USD, the levered semiconductor ETF, climbed 4.12% on well below average volume.  Please click on the symbols for details.

SKF, the levered short Financials ETF, fired off a buy signal using Larry Connors’ and Cesar Alvarez’ %b swing trade methodology. The strategy is discussed in their book, High Probability ETF Trading.  The %b is one of the components of the Bollinger Bands, developed by Mr. John Bollinger.  It measures how overbought or oversold a security is.  The higher the %b reading, the more likely the asset has moved higher.  The lower the %b reading, the more likely the asset has moved lower.   Ideally, traders want to buy low %b readings and sell high %b readings.

The system is straight-forward.  For long trades:

1) The ETF must be above its 200-day SMA;

2) The %b must close under 0.2 for 3 days in a row.  If this occurs, buy the ETF on the close;

3) Aggressive traders – Any additional day while you’re in the trade, if the %b of the ETF closes again below 0.2, buy a second unit on the close;

4) Exit when %b closes above 0.8.

In a test of 20 ETFs  from their inception date to 12/31/08, the basic (no-scale-in) version had average %P/L was .70%; the average trading days held was 4.2 days; and the average %Winners was 76.5%.  The aggressive version had an average %P/L of .91% and a %Winners of 80.7%.  With SKF, from inception through today the aggressive version had a %Winners of 84% (before trading costs).  Of course, past performance is no guarantee of future results.

The headquarters of Goldman Sachs, located at 200 West Street in Battery Park City, is located in Zone A, putting it at greater risk for flooding should Irene strike the city with force. So is Deutsche Bank’s 60 Wall Street headquarters, and American Express’s office in the World Financial Center.  If Irene is as strong as expected we don’t know how the market will act Monday should these giants be out of action.  Let’s pray for the best, as long as we understand that what the future holds is something we will know in the fullness of time.

Have a safe weekend.

After chopping around most of the day the market rallied in the afternoon on news that durable-goods orders and home prices beat economists’ forecasts.  The Dow Industrials gained just under 144 points to close at 11,320.71.  The S&P 500 Index Index rose 1.31% and the Nasdaq Composite climbed .88%.  Bond yields rose sharply in response and gold tumbled over $100/oz. on speculation that financial markets may be stabilizing.

ZSL, the levered short silver ETF, added another 9.47% as silver followed in gold’s footsteps.  TBT, the levered short 20+ year Treasury Bond ETF, jumped 5.75%.  UYG, the levered Financials ETF, rose 4.98% in part on news from Bank of America that it remains adequately capitalized.  ITB, the home construction ETF, was up 3.57%.  Please click on the symbols for details.

Today was a higher high for IWM, the Russell 2000 ETF.  Yesterday I discussed Dave Landry’s Trend Knockout methodology and explained that a new two-day high would reset the sell short entry price.  That now becomes a tick or two below today’s low of 67.52.  Rather than shorting IWM you could buy RWM, the Short Russell 2000 ETF, if tomorrow IWM trades below 67.52.

You could have taken advantage of today’s sell-off in gold had you been following the PZO/VZO oscillators.  Developed by Waleed Khalil, the Price Zone Oscillator and Volume Zone Oscillator, you can learn more about them by reviewing the June 29, June 30, and July 16, 2010 blog entries.  Both oscillators accurately called the downturn in GLD upon yesterday’s close.  Please click on the chart below , which you can make full-screen by clicking on it:

The PZO chart is on the left and the VZO chart is on the right.  One of the exit rules with the oscillators is that if it closes above +60 (yellow circle in the PZO chart), sell the ETF when the oscillator closes below +60.

A second exit rule is to look for a bearish divergence between the two oscillators.  Here, PZO rose above +60 but VZO did not.  It’s bullish for VZO to lead PZO but bearish for the opposite.  You wait to see if VZO catches up; in this case it never did and both oscillators turned down yesterday.  Between PZO rising above and then falling below +60, and the bearish divergence between the oscillators, those were your confirming exit signals.  Had you sold GLD yesterday you would have saved yourself the $6.28/share it lost today.

Why not go short? Because when the ETF is trading above its 60-day EMA you only want to trade the long side.  GLD is still well above its 60-day EMA.  When the ETF is trading below this EMA you only trade the short side or go long with inverse ETFs.

Volume on the the three major equity indexes was lower today than yesterday.  Rising prices on decreasing volume is not a good thing and we may be looking at the start of another bearish rising wedge.  I won’t be blogging tomorrow so on Friday we’ll see how the week ends up.

Or maybe not?  A magnitude 5.9 earthquake strikes Virginia and is felt all the way up the east coast to New York.  Government buildings in Washington, DC are evacuated and the market rallied 100 points (I’m not making that up).  Cause-and-effect relationship?

The Dow Industrials had its biggest rise in two weeks, rallying 322 points to close at 11,176.76.  The S&P 500 Index popped 3.43% and the Nasdaq Composite rose 4.29%.  Semiconductors were hot but gold and silver were not (for a change).  Oil prices rose but Treasury yields were flat.

SOXL, the 3x levered semiconductor ETF, soared 15.30% but is still deep in the cellar.  TAN, the solar ETF, shined today by rising 9.96%.  ZSL, the levered short silver ETF, recovered 9.54% after falling for days.  DIG, the levered oil & gas ETF, added 8.92%.  Please click on the symbols for details.

Despite all the hoopla today, volume on the major indexes was only about average and well below the volume when the market fell last Thursday and Friday.  A positive is that today’s volume was better than the volume during last week’s rally attempt.

Today set up numerous Trend Knockout (TKO) patterns, among them IWM, the Russell 2000 Index ETF.  Developed by Dave Landry and discussed in yesterday’s blog, here again are the Sell Short rules for TKOs (Buys are reversed):

1.  The ETF you’re watching to short should be in a strong trend, as defined by an ADX >= 30 and +DMI < -DMI.  You can also use rectangular bases that successfully broke out to the downside.  If you’re unfamiliar with ADX or DMI, please read my 8/7/09 blog entry for a complete description.

2. The ETF should make at least a 2-bar high, which becomes the Knockout bar.

3. Go short below the low of 2.

4. Place a protective stop above the high of the knockout bar.  If this is more than 5% away from your entry price, risk no more than 5% of the ETF’s value.

Please review the daily chart of IYM below, which you can make full-screen by clicking on it:

IYM is trading well below its 200-day SMA and the ADX is a very high 45, which reflects a very strong trend.  Not shown is +DMI well below -DMI.  Today’s bar is a two-day high so the entry will be a trade below today’s close, unless the next day or two makes a higher high in which case the sell stop entry price will be reset.

Last week many ETFs formed bearish rising wedge patterns.  Is history going to repeat itself this week?  The answer to that question is something we will know in the fullness of time.

Although the stock market closed in the black, it was well below today’s highs.  The Dow Industrials rose 37 points to close at 10,854.65.  The S&P 500 Index was essentially unchanged (up .03%) and the Nasdaq Composite added .15%.  Gold is through the roof, up 2.1% to close at $1,891.90.  Oil also rose today.

UGL and AGQ, the levered gold and silver ETFs, were big winners today, up 5.12% and 4.69%, respectively.  UCO, the levered crude oil ETF, gained 3.27% but is still badly oversold.  VNM, the Vietnam ETF, rose 2.83% but has run into resistance again at its 20-day EMA.  Please click on the symbols for details.

With the market in a persistent down trend, Dave Landry’s TKO (Trend Knockout) methodology is a good way to jump on a horse while its mid-stream.  TKO’s identify strong trends from which the weak hands have already been knocked out of the market.  By placing your order above or below the market, you have the potential to capture profits as the trend resumes.

As always, you want to buy in the direction of the primary trend.  I recommend long trades only when the ETF is above its 200-day SMA.  Take short trades (or buy inverse ETFs) only when the ETF is below its 200-day SMA.

IYF, the U.S. Financials ETF, is well below its 200-day SMA and offered a nice TKO short opportunity last week.  Here are the Sell Short rules for TKOs (Buys are reversed):

1.  The ETF you’re watching to short should be in a strong trend, as defined by an ADX >= 30 and +DMI < -DMI.  You can also use rectangular bases that successfully broke out to the downside.  If you’re unfamiliar with ADX or DMI, please read my 8/7/09 blog entry for a complete description.

2. The ETF should make at least a 2-bar high, which becomes the TKO bar.

3. Go short below the low of 2.

4. Place a protective stop above the high of the knockout bar.  If this is more than 5% away from your entry price, risk no more than 5% of the ETF’s value.

Please review the daily chart of IYF below, which you can make full-screen by clicking on it:

Last week IYF was trading well below its 200-day SMA and the ADX was in the mid- to high-30′s.  Not shown is +DMI well below -DMI.  August 11th was the first two-day high (2a) but the next day there was a higher high (2b).  The short trigger therefore is below 2b’s low, which occurred on August 18th (3).  You would have entered the short on last Thursday’s open at 46.87.

As of today’s close the trade has gained 2 points or about 4.7%.  Note that IYF closed today just above last week’s support level.  Should that give way it’s likely IYF will drop some more.  Doesn’t mean it will happen, of course, because past performance is no guarantee of future results.

Sir Issac Newton’s first law of motion states: “Every object in a state of uniform motion tends to remain in that state of motion unless an external force is applied to it.”  The market is likely to continue lower until some external event, such as QE3 or improving job numbers, is applied to it.  Whether  that will happen is something we will know in the fullness of time.

Mr. Market fought the good fight today and clawed its way into positive territory before lunch but succumbed to the fears that have plagued traders and investors for weeks: the European debt situation. The Dow sank another 173 points thanks in part to HP, to close at 10,817.65.  The S&P 500 Index fell 1.50% and the Nasdaq Composite slipped another 1.62%.  Bonds were relatively unchanged and gold set another closing high despite pundits saying that bubble is about to burst.

Silver jumped sharply today so AGQ, the levered silver ETF, popped 9.91%.  VXX, the S&P 500 VIX Short-Term ETN, added another 5.26%.  DUG, the levered short oil & gas ETF, rose 3.45%.  Please click on the symbols for details.

QQQ closed below the 50% Fibonacci retracement level on the daily chart, which I discussed yesterday.  This is its lowest close since early October 2010.  The monthly chart is looking very bearish, with QQQ breaking through the support line of a rising wedge.  I discussed bearish wedges in yesterday’s blog.  Please click on the chart to make it full-screen:

The month isn’t over yet so QQQ could recover but a close below support will set up an objective of the wedge height (29.44) subtracted from the breakout price of the support line (around 54.35), for a potential target of 24.91.  The fact that QQQ could not move higher than the 38.2% retracement level adds to my bearish opinion.

My jammed finger hurts like the dickens from this typing so I’ll end the blog here.  A drop down to 25 is 50% below QQQ’s current price.  Can it happen?  Sure can.  Will it happen?  The answer to that question is something we’ll know in the fullness of time.

Enjoy your weekend.

Too much going on to let a jammed finger keep me from blogging.

The market sailed into a perfect storm today: Bad economic reports, more European bank troubles, and rising unemployment numbers.  The Dow Industrials bled 419 points to close at 10,990.58.  The S&P 500 Index and Nasdaq Composite did even worse percentage-wise, down 4.46% and 5.2% respectively.  Oil lost $5/barrel; Treasury yields hit new lows while gold hit new highs; and mortgage rates are at 40-year lows.

VXX, the S&P 500 VIX Short-Term ETN, soared 20.70% while SRTY, the levered short Russell 2000 ETF, spiked 17.83%.  SCO, the levered short crude oil ETF, hit a gusher and rose 13.56%.  SMN, the levered short basic materials ETF, spiked up 11.56%.  Please click on the symbols for details.

SMN was a Connors swing trade selection from last week, going long on Thursday and adding shares on Friday.  It exited both positions yesterday on a close above its 5-day SMA, at 20.84, for a loss of 1% before trading costs.  Too bad it didn’t hang on until today – it closed at 23.25.  There were two other Connors methodologies that went long on Monday at 20.08; they exited today for a 15.8% gain before trading costs.  As you can see, one day can make a tremendous difference so past performance is no guarantee of future results.

The major indexes had formed a rising wedge pattern the past two weeks.  A rising wedge has an upward trend where the lows are rising faster than the highs are rising.  Please review the daily chart of QQQ, below, to see what I mean.  You can make the chart full-screen by clicking on it:

Rising wedges, particularly those that rise on falling volume like QQQ did, are bearish patterns.  Note that the Volume Flow Indicator (VFI) never reached above zero, which is also bearish.  I explained the VFI in detail this Monday.  Once the support line is clearly breached (like today) the forecast target is the distance of the wedge at its widest point subtracted from the breakout price.  That would be August 9th’s high and low (3.15) subtracted from the support level from yesterday (53.85), for a target objective of 50.70.  Today’s low was a little below the objective and the close a little above.

Does this mean the Qubes can’t go lower?  Of course they can…but there’s a reasonable chance they might fight to stay above today’s lows.  Please review the weekly chart, below:

The Qubes last week and this week are holding at a 50% Fibonacci retracement of the move higher since the May 2010 lows.  Note how this also corresponds to the April 2010 highs, which weren’t surpassed until late October 2010.  Note too the bearish divergence between the VFI and QQQ’s price starting in October 2010 – since then the VFI made a series of lower highs while price made higher highs.  I don’t use weekly information like this to make trading decisions but it’s good to have a longer term perspective; you can see the advance started running out of steam (buying pressure) months ago.

I harbor no illusions that the market is at THE bottom.  Another bounce from here wouldn’t be unexpected, however, and could give us another opportunity to get short again.  Whether or not that occurs is something we will know in the fullness of time.