May 09, 2011 – 09:10 am EDT
It was a nerve testing week for many people as the market took back some of its recent gains. I have seen dozens of headlines from different Gurus recently saying that the market has peaked and that the inevitable implosion is imminent. While an implosion may be inevitable there are few signs that it is going to happen just yet, lets take a closer look…
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ETF % Change Comparison
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It was unfortunate to see such a big tumble from IWM (Small Caps) over the last week but becuase SMH and IYT put on such a comparatively good show there is no immediate cause for concern. If the heavy declines had also been seen on SMH then it would be a sign of trouble but instead they are likely to be nothing more than healthy profit taking.
The Semis (SMH) and The Transports (IYT) remain very close to their recent highs and are the furthest from their lows 51 days ago. This is the behavior of a healthy market.
Learn more – ETF % Change Comparison
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A Look at the Charts
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No damage done by SPY, volume leaves much to be desired however.
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Volume on QQQ is flat out ugly but there has been no loss of support yet and SMH is looking good.
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OBV is at a new high and I expect the prices to follow.
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Small caps have been hit comparatively hard but still no loss of support.
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The Transports continue to look very strong; great price action backed with strong volume.
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OM3 Weekly Indicator
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Mostly Buy signals and Bull alerts; no warning signs here.
Learn more – The OM3 Indicator
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TransDow & NasDow
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TransDow – The Dow Transportation Index remains dominant over the Dow and the position in the Transports is showing a small loss after one week.
NasDow – The Dow is still dominant over the NASDAQ after 147 days and the NasDow remains in cash.
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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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LTMF 80 continues to hold a position in QQQ that is showing a profit of 2.87% after 42 days. Liquid Q remains in cash.
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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 QQQ.
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 QQQ. We will provide more performance details on the web site for these systems soon.
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Summary
The overbought situation that existed last week has now been alleviated and no technical damage was caused in the process. It is unfortunate that the small caps were hit comparatively hard but because SMH held together so well and the Transports are near new highs the bull market appears to remain on track. Right or wrong I have been buying into the weakness and we will soon see if that was a wise move or not.
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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Quote of the Day
“Life is a checkerboard,and the player opposite you is TIME. If you hesitate before moving, or neglect to move promptly, your men will be wiped off the board by TIME. You are playing against a partner who will not tolerate INDECISION!” – Napoleon Hill
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