The Dow Industrials closed above 13,000 for the first time since May 2008, adding 23 points to finish up at 13,005.12.  The S&P 500 Index rose .34% and the Nasdaq Composite gained .69%.  Silver was on fire today and oil prices slumped.

AGQ, the leveraged silver ETF, was shining brightly as it rose 8.73%.  SIL, the silver miners ETF, broke out of a mini-cup and handle pattern as it climbed 3.58% and made a 60-day new high.  Please click on the symbols for details.

UCO, the leveraged crude oil ETF, has pulled back 6% from its high last week.  While last week’s action was fodder for the bulls, the weekly chart so far this week shows the action to be a harami bar, a Japanese candlestick that reflects that the strength in the previous candle is dissipating.  Western technical analysts call this an inside bar.  You can see it in the chart below, which can be made full-screen by clicking on it:

A harami bar after a large up (white) candle shows the prior trend may be coming to an end.  While not a strong reversal candle, the fact that last week’s bar couldn’t get through the 61.8% retracement level shows the oil bulls haven’t broken out in downfield running quite yet.  Think of the harami as a brake.

Should oil prices continue to fall and UCO come back below its 50% retracement level (around $44.70), you may want to look at DUG, a leveraged inverse oil ETF or DNO, the unleveraged short oil ETF.

I’ll be off tomorrow so I’ll see you again on Thursday.

That was one of Daffy Duck’s signature lines.  I always liked his character; you knew he was greedy so you knew Bugs Bunny could always get his goat.  Unlike the slicksters in today’s market, who pull the market down hard on the open and then run it right back up a couple of hours later.  Manipulation, anyone?

Heavens, no!

After much huffing and puffing the Dow Industrials closed the day down 1 – Count ‘Em, 1! – point at 12,981.51.  The ol’ bugaboo 13,000 is a tough nut to crack, by jingo!  The S&P 500 managed a slight gain, up 14%, its highest close since 2008.  The Nasdaq Composite rose .08%  Oil prices slipped and reports showed further improvement in the U.S. housing market.

On Friday GAZ, the natural gas ETN, pulled back to its 20-day EMA.  It bounced today and gained 8.56%.  SCO, the leveraged short crude oil ETF, rose 3.78%.  Please click on the symbols for details.

IYT, the transportation average ETF, signaled a buy last Tuesday using the Connors/Alvarez Multiple Days Down (MDD) strategy.  The lower close Thursday added additional shares and the average entry price became $91.81.  A close above the 5-day SMA was the exit signal and that happened today at $92.40.  The gain was .60%, before transaction charges.

SMH, the semiconductor ETF, set off a buy signal last Wednesday in the Connors/Alvarez 3-day high-low strategy.  On Thursday SMH closed lower today so additional shares were purchased.  The average entry price was $34.43 and the exit was a close above the 5-day SMA.  That also happened today, at $34.54, for a .32% gain before transaction charges.

Neither trade is anything to get too excited about although any gain beats a sharp stick in the eye.  I never count my chickens though, because past performance is no guarantee of future results.

Despite the equities market crawling higher, the bond market is acting like it knows something the rest of us don’t.  Long-term Treasury yields are nearing lows set at the beginning of the month.  As a general rule of thumb, bond yields and equity prices moves are well correlated with each other, with both rising and falling simultaneously.

A positive correlation indicates that two assets tend to move in the same direction. A negative correlation indicates a strong tendency for two assets to move in opposite directions. A correlation value of near zero indicates there is very little correlation between the two assets.  The highest positive correlation is 1.0 and the lowest negative (inverse) correlation is -1.0.

The weekly chart below of the SPY (the S&P 500 Index ETF) and $TYX, the 30-year Treasury Bond rate, shows that since 2008 there have only been a few times when the relationship was negatively correlated.  Please click on the chart to make it full-screen, if you’d like to see it larger:

On numerous occasions the two have been highly correlated, with a correlation coefficient as high as  1.0 in late summer 2010.  Although not that high now, the current coefficient of .43 is still significant.

So what is the bond market telling us?  Before answering that question, let’s look at another chart.  The Money Flow Index (MFI) is an oscillator indicator that measures the momentum/strength of money flowing into and out of an asset by evaluating divergences between price and price activity, incorporating volume into its calculation.  As with most oscillators, divergences can identify buying or selling opportunities.

The chart below shows that while the price of SPY has been making higher highs since the beginning of February, the MFI has been making lower highs, a bearish divergence.  Ordinarily, the ETF’s price and the MFI track each other pretty well – look at the action in October – but when MFI makes a bearish diverges from price, watch out:

The yellow ellipses show price and MFI tracking in concert until October 27th, when SPY made a higher high and its MFI made a lower high.  Over the next month SPY pulled back about 10%.  A similar bearish divergence is what we’re seeing now (light blue rectangles) – note the pattern of higher highs in price but lower highs in the MFI.

So, back to the question of what bond yields are telling us now…it seems that the Street is voting with its wallet, heading to the safety of Treasury Bonds.  From what price level will the stock market pull back?  I don’t know but the answer to that question is something we will know, in the fullness of time.

I mean, it was 85 degrees yesterday here in Ft. Worth and the market sure has been in the summer doldrums.  Hard to believe it’s still February.  The Dow Industrials fell just under 2 points on below average volume to close at 12,982.95.  The S&P 500 Index gained .17% and the Nasdaq Composite rose .23%.  Oil prices are gushing higher and closing in on $110/barrel.  The U.S. Dollar continue to lose ground.

UVXY, the leveraged short VIX (volatility index) ETF, gained 7.09%.  RSX, the Russia ETF, rose 4.06%.  Da, Tovarish…it’s back above the 200-day SMA for the first time since the beginning of August.  VNM, the Vietnam ETF, continues to do well and added another 3.15% today.  Our old friend UCO, the leveraged crude oil ETF, was up another 3.08%.  Please click on the symbols for details.

Yesterday’s new swing trade of SMH, the semiconductor ETF, closed lower today so additional shares were purchased.  The average entry price is now down a penny at $34.43.  The exit remains a close above the 5-day SMA, currently $34.64.

With the market so extended without a pullback, I’m sitting on my hands here.  The risk-reward ratio is leaning too far to the risk side for my comfort level.  But I do plan on taking some gains off the table next week, if Mr. Market lets me.

UCO has raced higher “thanks” to the situation in the Middle East and has recouped 61.8% of its drop from last year’s high (May) to the low (November).  Technical analysts consider a retracement of this magnitude typically signifying a change in sentiment from bearish to bullish.  The chart below shows the retracement very clearly, and you can make it full-screen by clicking on it:

Depending upon world events this weekend, oil prices could ease next week and I’d hate to give back profits in this trade.  On the other hand, if UCO’s price holds firm and next week closes higher, a test of the 78.6% retracement level (not shown) just over $56 becomes increasingly likely.

The Chinese have a saying that sounds like a blessing but is actually a curse: “May you live in interesting times.”  The times we are living in are nothing else if not interesting.

Enjoy your weekend.

The Dow Industrials keep flirting with 13,000, closing up 46 today at 12,984.69 with a high of 12,996.08.  The S&P 500 Index gained .43% while the Nasdaq Composite was stronger, up .81%.  Small-cap stocks were on a tear and the Russell 2000 Index gained 1.55%.  Oil topped $108/barrel and silver was strong today.

On a personal note I was glad to read that men aren’t going extinct, scientists assured the world yesterday.

Almost every technical analyst I’ve spoken with or heard from is expecting the stock market to pull back.  Some are looking for a steep decline but most think it will be choppy and shallow.  Sam Stovall, chief investment strategist at S&P Capital IQ, is expecting a 5% – 10% decline.  He says history shows, “If we do get a decline, it’ll be more on the order of a 5% to 10% pullback.”  Stovall also pointed out that eight times since World War II, bear markets have bounced back by 14%, 23% and 32% in the first 3, 6 and 12 months, respectively.

XIV, an inverse VIX (volatility index) ETN, gained 6.53% as volatility decreased.  The VIX is approaching the lows it fell to early this month.  AGQ, the leveraged inverse silver ETF, rose 5.66%.  UCO, the leveraged crude oil ETF, climbed 3.58% as tension continues to rise in the Middle East.  PJP, a pharmaceutical ETF, added 3.37% and closed at a 52-week high. Better living through chemistry!  Please click on the symbols for details.

IYT, the transportation average ETF, signaled a buy on Tuesday’s close in the Multiple Days Down (MDD) strategy.  With a lower close yesterday it added additional shares and the average entry price is now 91.81.  A close above the 5-day SMA – currently 92.70 – will be the exit signal.

Although the trend in semiconductors since last October has been higher, it hasn’t come without some pullbacks.  Another opportunity arose today on a pullback to the 20-day EMA.  SMH, the semiconductor ETF, set off a buy signal in the Connors/Alvarez 3-day high-low strategy.

Described in their book “High Performance ETF Trading,” this strategy goes long when to begin with, the ETF is above its 200-day SMA.  The trading rules are very simple.  Here they are for long trades:

1) The ETF is trading above its 200-day simple moving average.

2) Today the ETF closes below its 5-day SMA.

3) Two days ago the high and low price of the day were below the previous day’s high and low.

4) Yesterday the high and low price of the day were below the previous day’s.

5) Today’s high and low price is below yesterday’s.

6) Buy on the close today.

7) For aggressive traders, buy a second unit if prices close lower than your initial entry price anytime you’re in the position.

Exit on the close when the ETF closes above its 5-day SMA.

Today SMH closed at 34.44 and was below the 5-day SMA.  The chart below shows the set-up.  Please click if you’d like to make it full-screen:

The backtest of the basic (no-scale-in) version on a portfolio of 20 ETFs with longs only from inception through December 31, 2008 had an average %P/L of .66%; the average trading days held was 3.3 days and the average %Winners was 76.9%.  The aggressive version had an average %P/L of .98% and a %Winners of 82.8%.

I backtested the aggressive strategy on SMH from inception through today.  The %Winners was 79.03%.  Should SMH close lower than today’s entry any time before exiting the trade, the system will buy additional shares.

I hate a tease, don’t you?  Will the breakthrough come tomorrow or will it continue being lookey but no touchey?  The answer to that question is something we will know, in the fullness of time.

The S&P 500 Index is thisclose to its 2011 high of 1,370.58.  Today’s high was 1,367.76 but the close was 1,362.21, up .07%.  The Dow Industrials squeaked out a 15 point gain to close at 12,965.69 while the Nasdaq Composite fell .11%.  Precious metals and oil rose sharply on fears Iran may cut off more oil to Europe; oil is approaching $106/barrel.

The natural gas ETN GAZ flared higher today, gaining 18.64%.  It traded well above its 200-day SMA but pulled back to close slightly below it.  The 3x leveraged gold miners Bull ETF NUGT rose 8.56%.  AGQ, the leveraged silver ETF, climbed 6.87% and UCO, the leveraged crude oil ETF, added 4.35%.  Please click on the symbols for details.

Increasing oil prices have been wreaking havoc with transportation stocks and in the past two weeks the Dow Jones Transportation Average has lost 4%.   Pullbacks within a trend offer trading opportunities and IYT, the transportation average ETF, signaled a buy on today’s close in the Multiple Days Down (MDD) strategy.  Described by Larry Connors and Cesar Alvarez in their book “High Probability ETF Trading,” the MDD strategy is simple in concept.  The long entry rules are as follows:

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

2) The ETF closes below its 5-day SMA on the entry day.

3) The ETF must fall 4 of the past 5 days.  This means closing prices were lower than the day before for 4 out of of the past 5 days.  If this happens you buy the ETF on the close of the fifth day (today).

4) Aggressive version – Buy a second unit (scale-in) if prices close lower than your initial entry anytime you’re in the position.

5) Exit on the close when the ETF closes above its 5-day SMA.

The most recent five days are numbered, with Day 3 being the one day there wasn’t a lower close.  Please click on the chart to make it full-screen:

Today’s entry was at 92.16.  The exit will be on a close above the 5-day SMA, shown in light blue.

When Connors and Alvarez backtested the MDD strategy against a group of 20 non-levered ETFs from their inception through 12/30/08, the average %P/L was .50%,  there was an average hold time of 3.3 days, and the %Winners was 73.6%.  The aggressive version had an average %P/L of .82% and a %Winners of 80.3%.

Mr. Chris White, developer of the ETF Trading Bandit software which I’ve reviewed in the blog, ran a backtest on many of the Connors/Alvarez strategies, using the same ETFs and testing the time period from 1/1/09 to 8/31/10. Unlike Connors, Chris tested using an “open-open” methodology that buys and sells on the opening price the day after receiving the signal; Connors used a “close-close” methodology that buys and sells on the close of the day.  Chris’ backtests showed that using the open-open method captures 84% of the gains reported by Connors and Alvarez using the close-close method.

The 2009 – 2010 backtest by Chris on the MDD – Long strategy had a %Winners of 64.58% and an average %P/L of .55%.  The average profit was a little better but the number of winners was a little less than the close-close methodology.

I ran a backtest on IYT using the aggressive version of the strategy, from its inception date through today.  The %Winners was 73.86% (before trading costs), better than Chris’ backtest results.  Of course, past performance is no guarantee of future results.

How much longer will the stock market keep rising?  One of the tenets of Dow Theory is that the Industrial Average and Transportation Average should trend in the same direction.  In the past two weeks the Transports are down 4% while the Industrials have gained .80%.  Will this divergence continue or will the Trannys start moving higher again?  Or the Industrial Average move lower?  The answers to those questions is something we will know, in the fullness of time.

Strong economic date sent the S&P 500 Index to a 9-month high, gaining 1.10% today.  The Dow Industrials rose 123 points to close at 12,904.08 while the Nasapple (err…Nasdaq) Composite was up 1.51%.  Oil prices continue to climb, with March crude prices closing above $102/barrel.

GAZ, the natural gas ETN, continues to bubble by gaining 6.27%.  TNA, the 3x leveraged Small Cap Bull ETF, was up 5.78%.  Yesterday it pulled back to its 20-day EMA and rallied today.  URA, the uranium ETF, was up 4.9% on almost 200% of average daily volume but so far its been unable to get back above its 200-day SMA – the SMA has been resistance for the last three weeks.  UYM, the leveraged basic materials ETF, rose 3.81%.  Please click on the symbols for details.

On Wednesday I discussed how XLB, the basic industries SPDR, signaled a second buy using the Connors/Alvarez RSI 25 strategy.  The initial buy was last Friday when the 4-day RSI closed below 25 and the second buy was Wednesday when the RSI closed below 20.  XLB exited today for a .89% gain.  Nothing to sneeze at for a five day trade but don’t assume it will work this well again because past performance is no guarantee of future results.

On Monday I noted the following: “What happens when the the VIX reaches the upper or lower Bollinger Band (BB) and on a pullback or throwback to the middle BB, fails to close through it?  As a rule of thumb the VIX tends to move back in the direction of the upper or lower BB it tagged.”  That happened yesterday, as seen in the chart below.  You can make it full-screen by clicking on it:

Last Friday the VIX hit its upper BB and on Monday it traded through but closed above the middle BB.  On Tuesday it touched the upper BB again as volatility rose intraday but closed well below.  Yesterday’s action sent the VIX to close above the upper BB and today’s strong up move sent the VIX much lower.  Notably, it’s still above the middle BB.

The steady rise in the equity markets the past two months has been marked by declining volatility.  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, ETFs with higher HV readings have fluctuated more in the past than 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 time to buy is when the HV ratio rises back above 50% (.50).

Although XLB exited the RSI 25 swing trade signal on today’s close it also set off a buy signal using the HV ratio.  Since late November there have been three previous buy signals (blue up arrows) that exhibited sharp price rallies following volatility reverting to the mean:

The horizontal blue line is set at 50% (.50).  The HV ratio for XLB rose today to 56% (.56) after trading well below 50% since early January.  Please keep in mind that that the HV Ratio below .50 does not predict direction, it predicts that large moves often occur out of low volatility situations. For example, with XLB the HV ratio rise back above 50% in July of last year was followed by a multi-month, 30% price decline.

If you’re using a screening platform like TradeStation you can program it to alert you when the HV ratio rises back above 50%.  The HV Ratio is another implement in our toolbox we can use to squeeze a buck or three out of the market.  I encourage you to research the HV Ratio.

I’ll likely be out tomorrow afternoon so enjoy your three-day weekend.

Happy Valentine’s Day, readers!

The market showed a lot of love today in the final 30 minutes, with the Dow Industrials rallying from an 80 point deficit to close up 4 points at 12,878.28.  The S&P 500 Index slipped .09% and the Nasdaq Composite squeaked out a .02% gain.  What caused the rally?  Beats the heck out of me but a Barron’s Online columnist gives his reason: “[S]tocks surged to nearly flat on the session as traders passed around reports of something or other out of Greece that was interpreted more favorably than the Greek something-or-other that had spurred trader caution earlier in the day.”  Makes sense to me….

Got GAZ?  If so, you did well today – the natural gas ETN gained another 10.69%.   Although the daily volume on NIB is very low (30,000 shares), today being Valentine’s Day I’ll mention that the cocoa ETN turned in a sweet 5.08% rise.  VXX, the short term S&P 500 VIX ETN, added 3.69%; it was much higher during the day but pulled back in the closing half-hour as the market rallied.  SMN, the leveraged short basic materials ETF, rose 3.29%.  Like VXX, it too was turned back after rising to its 20-day EMA.  Please click on the symbols for details.

The natural resource sector has done pretty well so far this year and XLB, the Materials SPDR, has done better than most.  It’s primarily composed of companies involved in such industries as chemicals, construction materials, containers and packaging, metals and mining, and paper and forest products.  Last Friday it signaled a buy using the Connors/Alvarez RSI 25 swing trade strategy and today it purchased additional shares.  Published in their book, High Probability ETF Trading, RSI 25 is a simple strategy that waits for the 4-period RSI to drop under 25.  The trading rules are as follows:

1) An ETF is trading above its 200-day simple moving average.

2) The 4-period RSI closes under 25.  If it looks like that will happen, buy on the close.

3) Buy a second unit if at any time while you’re in the position the 4-period RSI closes under 20.

4) Exit when the 4-period RSI closes above 55.

In the backtest they did for the book using 20 non-levered ETFs from inception date through Dec. 31, 2008, the RSI 25 strategy on long trades had an average %P/L of 1.06%.  The average number of days the trade was held was 6.2 days and the % Winners was 76.7%.  The aggressive version of the strategy (which buys additional shares when the RSI closes below 20) was 1.48% and the % Winners was 82.2%.

Mr. Chris White, developer of the ETF Trading Bandit software which I’ve reviewed in the blog, ran a backtest on many of the Connors/Alvarez strategies, using the same ETFs and testing the time period from 1/1/09 to 8/31/10. Unlike Connors, Chris tested using an “open-open” methodology that buys and sells on the opening price the day after receiving the signal; Connors used a “close-close” methodology that buys and sells on the close of the day.  Chris’ backtests showed that using the open-open method captures 84% of the gains reported by Connors and Alvarez using the close-close method.

Using the original close-close methodology, Chris’ backtest showed the basic RSI 25 had an average %P/L of 1.32%.  The average number of days the trade was held was 7 days and the % Winners was 79.47%.  Using open-open, the average %P/L was 1.31%.  The number of days the trade was held was unchanged and the % Winners was 77.37%.

I backtested IYB with the RSI 25 from inception through today using close-close and the % Winners was 71.58%.  This is little lower than both Connors and Chris’ backtests on the 20 ETFs.

Last week I quoted market analyst Tom McClellan forecasting a few months of choppy to lower prices starting this month.  So far he’s spot on.  Will the chop continue or will the market start heading lower?  The answer to that question is something we will know, in the fullness of time.