October 11, 2010 – 06:00 am EDT
It was a week where everything that needed to occur, occurred and the bull remains alive. In our last newsletter we spoke of how important it was for SMH to hold onto $27; due to the large volume divergence the market couldn’t afford to see any real profit taking. Thankfully SMH never got the chance to test $27 and powered on to post some healthy gains.
On a separate topic we have recently released some new research on the Fractal Adaptive Moving Average (FRAMA) that reveals this obscure indicator is more effective than any simple or exponential moving average. Check it out and let me know what you think: FRAMA – Is It Effective?
****Thanks to all those who referred people to this newsletter over the last week. The more readers we have the more services we can provide you.
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ETF % Change Comparison
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IYT, SMH and IWM were the leaders out of the influential ETFs over the last week. This is fantastic news because we like to see these more economically sensitive ETFs leading the market. As long as this pattern continues we must continue to take the bulls seriously.
Learn more – ETF % Change Comparison
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A Look at the Charts
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Poor volume flows continue on SPY but prices also continue to rise. If SMH and IWM falter then expect SPY to really suffer.
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QQQQ also shows a lack of conviction from its volume flows. This makes the continued strength from SMH all the more important.
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A little more and volume flows on SMH will turn bullish which would be a major vote of confidence in the bulls.
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IWM keeps taking one step backwards and two steps forward but is moving in the right direction. Volume needs to pickup though.
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Great to see OBV on the transports near a new high. New highs from IYT backed by volume would be extremely bullish.
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OM3 Weekly Indicator
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‘Strong Buy’ signals with ‘Bull Alerts’ persist across the board.
Learn more – The OM3 Indicator
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TransDow & NasDow
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The NasDow remains on No Signal while the TransDow opened a new position with the Transportation index on Friday. This is positive as dominance from the Transports is an sign of market strength.
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What the TransDow Readings tell us:
The TransDow measures dominance between the DJ Transportation Index (DJTI) and the Dow Jones Industrial Average (DJIA). In a strong market the more economically sensitive Transportation Index should be dominant over the DJIA.
Historically the DJTI has been dominant over the Dow 45% of the time. The annualized rate of return from the DJTI during this period was 18.47% with the biggest loss for one trade sitting at -13.27%. The annualized return from the DJIA during the periods it was dominant over the DJTI was just 4.06% and the biggest loss for one trade was -16.13%. A 4% stop-loss is applied to all trades adjusting positions only at the end of the week.
What the NasDow Readings tell us:
The NasDow measures dominance between the NASDAQ and the DJIA. Using the same theory behind the Trans Dow; in a strong market the more economically sensitive NASDAQ should be dominant over the DJIA.
Historically the NASDAQ has been dominant over the DJIA 44% of the time. Taking only the trades when the NASDAQ is above its 40 week moving average the annualized rate of return was 25.47% with the biggest loss for one trade sitting at –8.59%. The annualized rate on the DJIA during the periods it was dominant over the NASDAQ is just 8.88% and the biggest loss for one trade was –12.28%. A 8% stop-loss is applied to all trades adjusting positions only at the end of the week.
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LTMF 80 & Liquid Q
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Liquid Q remains in cash while the LTMF 80 continues to hold a position in QQQQ that is showing a minor profit.
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Historical Stats:
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How The LTMF 80 Works
LTMF stands for Long Term Market Forecaster. It reads volume flows relative to price action and looks for out performance of volume measured on a percentage basis over the prior 12 months. During a sustained rally the readings will reach high levels (near 100%) making it imposable for the volume reading to always outperform price so any reading above 80% will maintain the buy signal. This system has outperformed the market over the last 10 years but performance has been damaged by some nasty losses. It only produces buy signals and only for QQQQ.
How Liquid Q Works
Liquid Q completely ignores price action and instead measures the relative flow of money between a selection of economically sensitive and comparatively stable ares of the market. It looks for times when the smart money is confident and and can be seen by through volume investing heavily is more risky areas due to an expectation of expansion. This system has outperformed the market over the last 10 years and remained in cash through most of the major declines. It only produces buy signals and only for QQQQ. We will provide more performance details on the web site for these systems soon.
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Summary
Little has changed over the last week apart from the fact that the market is a bit higher. SMH and IWM continue to fuel a market that lacks the backing of strong volume. This is a risky situation that can also result in tidy profits. Remain alert as things could turn bad in short order but until then, enjoy it while it lasts.
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Any disputes, questions, queries, comments or theories are most welcome in the comments section below.
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Cheers
Derry
And the Team @ ETF HQ
“Equipping you to win on Wall St so that you can reach your financial goals.”
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P.S Like ETFHQ on Facebook – HERE
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Quote of the Day:
“Knowing others is intelligence; knowing yourself is true wisdom. Mastering others is strength; mastering yourself is true power.” – Tao Te Ching
In the caption for IYT, I think you mean “their May high” instead of “Aug”, right?
Well spotted, thanks for that!