May 24, 2010 – 08:40 am ET

The bears asserted their authority over the last week and the market closed down at levels south of those seen before the big European bailout.  Apparently a trillion dollars will buy you a good time but not a long time these days.  All of the targets set last week have already been reached or exceeded… so please spread the word about this newsletter if you enjoy receiving it (thanks).

I came across an article by Irish journalist Brendan O’Connor’s who made some brilliant observations in the Sunday Independent about the backwards nature of the bailouts and how they are rewarding those who have been the most irresponsible:

“…there is plenty of money in the world, and yet everybody is up to their neck in debt… maybe it’s time to start again.

Maybe it’s time for not just us to default, but for everyone to default.  They (whoever ‘they’ are) will get over it soon enough and they’ll give us more money to buy stuff from them.

It would be a delinquent thing to do, yes.  But if we’ve learn’t anything from all this, and we haven’t really, it’s that being good gets you nowhere.”

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ETF % Change Comparison

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For the week ending 16th May; IWM was the top performer and SMH lagged behind but over the last week those roles have reversed.  However the total decline from their peaks is similar across the board apart from DIA that has not been hit quite as hard.

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What the % Comparison Table Tells Us:

By comparing the performance of the economically sensitive (SMH, QQQQ, IWM, IYT) and the comparatively stable ETFs (SPY and DIA) we can get an indication of the true market direction. The more sensitive areas of the market tend to be the first to initiate a trend change. For example if DIA and SPY sell off heavily while SMH and IWM (Russell 2000 small cap ETF) sell of mildly or continue moving to new highs then this would be very positive and vice versa.

The ‘Average Rank %’ is calculated by subtracting the % change for each ETF from the maximum % change and dividing it by the range for each period. 1-((MAX(% change all ETFs)-ETFs % Change)/(MAX(% change all ETFs)-MIN(% change all ETFs))) The readings for each period are then averaged. This reading is provided because if one ETF was significantly under/out performing the others then a plain high or low rank would not accurately reflect this.

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A Look at the Charts

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SPY has found support after some sharp declines; this is just the kind of place that consolidation could occur but the bears are still in control.

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If there is going to be a catalyst for QQQQ it will come from SMH and IWM because they have found much more substantial support.

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I like the fact that SMH has done a better job of holding onto it’s 200 day SMA than QQQQ and SPY.  Keep an eye on that RSI for a good exit signal on short term bearish trades.

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If IWM carries on straight through $62.50 then the markets problems have just begun, this appears unlikely however.

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If the transports RSI turns bullish along with SMH’s then new lows would be highly unlikely over the next week.

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OM3 Weekly Indicator

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A deteriorating outlook from the OM3 Indicator.

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How to read the OM3 indicator

The OM3 indicator as with most of our models primarily reads price action and volume. The strong/weak buy/sell signals are self-explanatory. ‘No Signal’ means that the component readings are in conflict and cancel each other out.

The alerts let you know if the cycle is speeding up or slowing down, so when you get at ‘Strong Buy, Bear Alert’ for instance it simply means that the criteria for a strong buy is in place but this weeks cycle reading is weaker (or more bearish) than last weeks reading (the same is true in reverse).

The number of weeks that a signal has been repeated is displayed. Historically a ‘Strong Buy’ signal has lasted for an average of 6 weeks and a maximum of 42 weeks, while a ‘Strong Sell’ has lasted for an average of 4 weeks and a maximum of 16.

This is an indicator not a mechanical trading model. It is useful to assist in analyzing the market but for the best results should be combined with commonsense and support/resistance levels etc.

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TransDow & NasDow

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Most of the profits from the DJT trade have gone now but DJT remains dominant over the Dow.  Surprisingly the NASDAQ has just regained dominance over the Dow which is positive and indicates that the risk level in the market has lowered.

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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 has finally moved to cash after giving back most of the profits from a trade that lasted 245 days.  Liquid Q on the other hand still has an open position in QQQQ but is very close to closing out.

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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

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Much of the market is down 10% or more over the last 28 days and now some major support levels have been found.  There are a few good reasons to believe that these levels will hold over the short term such as:

• SMH only declining 1.82% over the last week.
• Strong buying interest on Friday at support levels.
• Partially oversold conditions.
• The NASDAQ regaining dominance over the Dow.

If the market declines continue through support levels before any consolidation can occur then the market is more unhealthy than even the most bearish have predicted.  A more probable outcome is to see some buying interest over the short term before another downward leg.

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Any disputes, questions, queries, comments or theories are most welcome in the comments section below.

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Derry

And the Team @ ETF HQ

“Equipping you to win on Wall St so that you can reach your financial goals.”

.

P.S Like ETFHQ on Facebook – HERE

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The Devils Dictionary – P

P/E Ratio – The percentage of investors wetting their pants as the market keeps crashing.

Profit – An archaic word no longer in use.

Q

Quantitative Easing – A regulatory approach based on the point in Western movies when the sheriff, having fired all available bullets, in an act of final desperation throws his gun at the bad guys.  See also Inflation, Hyper.

May 17, 2010 – 07:15 am ET

It is amazing what you can buy with a Trillion dollars and the market was up violently on Monday but nothing has really improved from a technical perspective in fact, it has deteriorated.

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ETF % Change Comparison

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IWM had an amazingly good week and advanced over 6% while SMH was the worst performer advancing a comparatively small 1.7%.  Of the 6 influential ETFs, SMH has been the worst performer by every measure including being the first to peak 29 days ago.  This is concerning because the semiconductors tend to show the markets true direction.

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What the % Comparison Table Tells Us:

By comparing the performance of the economically sensitive (SMH, QQQQ, IWM, IYT) and the comparatively stable ETFs (SPY and DIA) we can get an indication of the true market direction. The more sensitive areas of the market tend to be the first to initiate a trend change. For example if DIA and SPY sell off heavily while SMH and IWM (Russell 2000 small cap ETF) sell of mildly or continue moving to new highs then this would be very positive and vice versa.

The ‘Average Rank %’ is calculated by subtracting the % change for each ETF from the maximum % change and dividing it by the range for each period. 1-((MAX(% change all ETFs)-ETFs % Change)/(MAX(% change all ETFs)-MIN(% change all ETFs))) The readings for each period are then averaged. This reading is provided because if one ETF was significantly under/out performing the others then a plain high or low rank would not accurately reflect this.

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A Look at the Charts

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SPY has finally broken the bullish volume trend that has existed since March 2009 indicating that we have returned to a bear market.

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QQQQ ended the week lower than it opened on Monday showing that the enthusiasm for the latest round of easy money is fading.

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SMH is not offering any encouraging signs.

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It is good to see the small caps holding together so well as they are highly economically sensitive but for now best case scenario is likely to be consolidation.

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The Transports also closed the week below Mondays open.  They have performed so well over the last few months which is unusual behavior if we are experiencing a major market reversal.  The maintenance of support at $77.50 will be important if the bulls are to stage a comeback.

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OM3 Weekly Indicator

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Not really decisive signals from the OM3 Indicator but far from healthy.

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How to read the OM3 indicator

The OM3 indicator as with most of our models primarily reads price action and volume. The strong/weak buy/sell signals are self-explanatory. ‘No Signal’ means that the component readings are in conflict and cancel each other out.

The alerts let you know if the cycle is speeding up or slowing down, so when you get at ‘Strong Buy, Bear Alert’ for instance it simply means that the criteria for a strong buy is in place but this weeks cycle reading is weaker (or more bearish) than last weeks reading (the same is true in reverse).

The number of weeks that a signal has been repeated is displayed. Historically a ‘Strong Buy’ signal has lasted for an average of 6 weeks and a maximum of 42 weeks, while a ‘Strong Sell’ has lasted for an average of 4 weeks and a maximum of 16.

This is an indicator not a mechanical trading model. It is useful to assist in analyzing the market but for the best results should be combined with commonsense and support/resistance levels etc.

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TransDow & NasDow

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The Transports remain dominant over the Dow and have outperformed the Dow 8.54% to 2.86% over the last 77 days.  On a negative note the Dow is once again dominant over the NASDAQ, this raises the risk level in the market.

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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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This is positive, both the LTMF 80 and Liquid Q still have open positions in QQQQ.  LTMF 80 however is not far off issuing a sell signal.

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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

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I am at a stretch to find positive things to say about the current market.  There is the fact that the small caps have been holding together comparatively well and the fact that LTMF 80 and Liquid Q still have open trades.  Otherwise, volume flows are bearish across the board, the market is no longer oversold and no one has another Trillion dollar bailout surprise up their sleeve.  The bears are in control and there is nothing apparent that the bulls can do to stop them for now.

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Any disputes, questions, queries, comments or theories are most welcome in the comments section below.

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Derry

And the Team @ ETF HQ

“Equipping you to win on Wall St so that you can reach your financial goals.”

.

P.S Like ETFHQ on Facebook – HERE

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The Devils Dictionary – N

NINJA Loan – No Income No Job No Assets.  A type of loan whose source of repayment is a miracle but when pooled creates a new security of which 80% is somehow rated AAA due to the theory of diversification.  Merton and Miller describe diversification as the only free lunch in the capital markets.  This has now been refined as a necessary condition since without free lunch every one on Wall Street will starve to death.

O

OIBITDA – Operating Income Before Interest Taxes Depreciation and Amortization.  The primary valuation measure used by Bernie Madoff’s accountants.  Currently being reformulated as OYBITDA.

Option – A financial instrument that offers multiple ways of losing money.  If being long vega doesn’t kill you, the decay will.

May 10, 2010 – 07:35 am ET

…And when she was bad she was horrid!  The warning signs of a market tantrum have around for some time now and were clear enough for us to cash up all bullish positions as mentioned in our last newsletter – Cashed Up With A Few Shorts.

April 12, we cautioned “This 2nd wind can create some impressive gains but usually on light volume and when it ends it tends to end in tears… When risk levels are perceived to be low the market is more easily spooked and this tends to lead to sharper and more severe reversals.”

If the last week has been anything it has been a sharp and severe reversal.  If this kind of analysis has been of use to you then please spread the word about this newsletter.  We also identified the beginning of the last bullish leg and shared the analysis we used to do so with you for free.  So please get on twitter, the chat rooms, newsgroups, Facebook, email etc and help us grow.  Thanks.  We are certainly not always right but simply look to work with the probabilities.

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ETF % Change Comparison

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When you stop and look at the numbers they are quite scary.  Don Beasley said that “Market Timing is winning by not losing” and we were certainly able to avoid some significant losses over the last week and lock in some tasty gains.  The more economically sensitive SMH, QQQQ, IWM and IYT are the furthest from their highs indicating that these declines are likely to be more than just profit taking.

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What the % Comparison Table Tells Us:

By comparing the performance of the economically sensitive (SMH, QQQQ, IWM, IYT) and the comparatively stable ETFs (SPY and DIA) we can get an indication of the true market direction. The more sensitive areas of the market tend to be the first to initiate a trend change. For example if DIA and SPY sell off heavily while SMH and IWM (Russell 2000 small cap ETF) sell of mildly or continue moving to new highs then this would be very positive and vice versa.

The ‘Average Rank %’ is calculated by subtracting the % change for each ETF from the maximum % change and dividing it by the range for each period. 1-((MAX(% change all ETFs)-ETFs % Change)/(MAX(% change all ETFs)-MIN(% change all ETFs))) The readings for each period are then averaged. This reading is provided because if one ETF was significantly under/out performing the others then a plain high or low rank would not accurately reflect this.

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A Look at the Charts

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The ‘healthy targets’ set last week have all been smashed in an ‘unhealthy way’ and further volatility is likely.

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QQQQ has broken its long term bullish trend which indicates a bearish trend change.

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Another bearish volume trend from SMH confirming the trend change.

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The small caps volume flows have also turned bearish.

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That’s four out of five with bearish volume pointing towards a return to the bear market.

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OM3 Weekly Indicator

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The OM3 indicator is not strongly bearish with a number of ‘Weak Sells’.

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How to read the OM3 indicator

The OM3 indicator as with most of our models primarily reads price action and volume. The strong/weak buy/sell signals are self-explanatory. ‘No Signal’ means that the component readings are in conflict and cancel each other out.

The alerts let you know if the cycle is speeding up or slowing down, so when you get at ‘Strong Buy, Bear Alert’ for instance it simply means that the criteria for a strong buy is in place but this weeks cycle reading is weaker (or more bearish) than last weeks reading (the same is true in reverse).

The number of weeks that a signal has been repeated is displayed. Historically a ‘Strong Buy’ signal has lasted for an average of 6 weeks and a maximum of 42 weeks, while a ‘Strong Sell’ has lasted for an average of 4 weeks and a maximum of 16.

This is an indicator not a mechanical trading model. It is useful to assist in analyzing the market but for the best results should be combined with commonsense and support/resistance levels etc.

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TransDow & NasDow

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Now this is interesting… On Friday the NASDAQ become dominant over the Dow which is a very bullish sign and the Transports remain dominant over the Dow which is also very positive.  Most of the worst market declines are seen when the Dow is dominant.

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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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Another surprising but positive sign; Liquid Q triggered a new bullish position in QQQQ on Friday.  The signal for LTMF 80 is also still active but on the verge of being closed.  With the market being oversold this could turn out to be a good trade but I see it as too risky.

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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

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Based on my discretionary technical analysis the market has completed a confirmed bearish trend change due to bearish volume flows from QQQQ, SMH, IWM and IYT along with the loss of several support levels.  However in such a volatile market after such harsh declines the possibility of an oversold bounce is good.  In fact looking at the market futures now I see they are well up on news about new bailouts organized for European nations burdened by heavy debt.

I am a big advocate of taking the easy trades and passing on the difficult others.  You don’t have to make many good trades each year as long as you don’t make too many bad ones.  This market is changing so quickly, you need to be very nimble not to get burnt.

If you are still in the market then sit on your hands for now.  There are fresh buy signals from the NasDow and Liquid Q and the market has found several support levels.  As long as the market maintains these levels then there is still hope for the bulls:

• SPY $110
• QQQQ $45
• SMH $27
• IWM $65
• IYT 100day SMA.

Should there be a close below these levels then there is little/no hope for the bull market.

If you are already out of the market then wait until things are more clear before going long or short.  Much of the easy money has probably already gone from the short side and when volume flows are bearish it is a very risky time to go long.

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Any disputes, questions, queries, comments or theories are most welcome in the comments section below.

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Derry

And the Team @ ETF HQ

“Equipping you to win on Wall St so that you can reach your financial goals.”

.

P.S Like ETFHQ on Facebook – HERE

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The Devils Dictionary – M.

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Mark To Model – The use of a mathematical model to value complex securities, such as CDOs.  “The combination of precise formulas with highly imprecise assumptions can be used to establish practically any value one wishes” – Ben Graham.  Particularly useful to investors who wish to delay the recognition of a loss.

Market Correction – The day after you buy stocks.

Moody – State of mind after a just-issued security gets downgraded fro AAA to CCC

May 03, 2010 – 02:10 am ET

Last week I warned that “the risk over the short term should not be ignored despite the recent exceptional performance” and the last few days have been a clear indication as to why.  For several weeks now the risk/reward ratio has been slipping away from the bulls and is now not far from tipping into the bears favor.

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ETF % Change Comparison

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SMH was the big loser for the week which is concerning because of the influence it has over the NASDAQ, while IYT made a new high on just Thursday.  From a longer term perspective is is good to see the Small caps (IWM) and the Transports (IYT) with the top performance ranks because they are both highly economically sensitive.

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What the % Comparison Table Tells Us:

By comparing the performance of the economically sensitive (SMH, QQQQ, IWM, IYT) and the comparatively stable ETFs (SPY and DIA) we can get an indication of the true market direction. The more sensitive areas of the market tend to be the first to initiate a trend change. For example if DIA and SPY sell off heavily while SMH and IWM (Russell 2000 small cap ETF) sell of mildly or continue moving to new highs then this would be very positive and vice versa.

The ‘Average Rank %’ is calculated by subtracting the % change for each ETF from the maximum % change and dividing it by the range for each period. 1-((MAX(% change all ETFs)-ETFs % Change)/(MAX(% change all ETFs)-MIN(% change all ETFs))) The readings for each period are then averaged. This reading is provided because if one ETF was significantly under/out performing the others then a plain high or low rank would not accurately reflect this.

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A Look at the Charts

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Over the short term SPY is likely to encounter profit taking but it can suffer from some considerable weakness before breaking its long term bullish volume trend.  QQQQ will give a better indication of the true direction of the market moving forward.

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If QQQQ breaks its long term volume trend then it will be very difficult for the bull market to continue.  The next two weeks will be crucial as an indication of the bulls strength.

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I will be keeping a close eye on SMH’s volume trend for confirmation of direction moving forward but for now it remains bullish.

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If we see profit taking from here then it is inevitable that IWM will break its bullish volume trend.  If this break is confirmed by SMH also doing the same then you would be wise to become very defensive with your positions.

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It is difficult to have a negative view of the market over the longer term when the transports are performing so well and on such healthy volume.  Hopefully this is an indication that any profit taking will not evolve into a trend change.

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OM3 Weekly Indicator

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The OM3 indicator has issued its first ‘Bear Alert’ in 11 weeks which is not surprising after a week of declines on a overbought market.

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How to read the OM3 indicator

The OM3 indicator as with most of our models primarily reads price action and volume. The strong/weak buy/sell signals are self-explanatory. ‘No Signal’ means that the component readings are in conflict and cancel each other out.

The alerts let you know if the cycle is speeding up or slowing down, so when you get at ‘Strong Buy, Bear Alert’ for instance it simply means that the criteria for a strong buy is in place but this weeks cycle reading is weaker (or more bearish) than last weeks reading (the same is true in reverse).

The number of weeks that a signal has been repeated is displayed. Historically a ‘Strong Buy’ signal has lasted for an average of 6 weeks and a maximum of 42 weeks, while a ‘Strong Sell’ has lasted for an average of 4 weeks and a maximum of 16.

This is an indicator not a mechanical trading model. It is useful to assist in analyzing the market but for the best results should be combined with commonsense and support/resistance levels etc.

.

.

TransDow & NasDow

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No change here, the Transports remain dominant over the Dow and the Dow remains dominant over the NASDAQ.

.

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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The LTMF 80 still has an active trade on QQQQ while Liquid Q remains in cash.

.

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.

.

.

Summary

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If IWM, SMH and QQQQ break their bullish volume trends then we are likely to see some significant profit taking.  In such case, depending on your investing time frame you would be wise to at least become very defensive with your positions.  The declines so far have not been enough to warrant bearish positions on the broad market but they have been enough to encourage me to cash up all my bullish positions and take a few select bearish trades.

It is always a good idea to keep an eye on market action and have a defined plan of attack for each possible scenario but over the next few weeks I urge you to be particularly attentive.

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Any disputes, questions, queries, comments or theories are most welcome in the comments section below.

.

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 We have been doing a lot of research recently on the performance of common technical indicators across a 16 global global markets going back to 1989.  Over the years I have found most of the popular indicators of little use and want to reveal which ones (if any) actually add value over a buy and hold approach.  I will be publishing the results so let me know if there is something you would like us to test.

P.P.S Like ETFHQ on Facebook – HERE

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.

The Devils Dictionary – L.

.

Leverage – The act of turning your problem into our problem.  In theory, any gains from leverage are offset by a commensurate increase in risk.  In practice, this theory is ignored.

Liquidity – A vogue term which provides an aura of financial sophistication to its user, as in, “an excess of liquidity drove the market higher, today” or “a lack of liquidity drove the market lower, today.”

Loser’s Game – The recognition that investors, in aggregate, are engaged in a zero-sum game – one person’s gains are equal to another’s losses, less the cost of transactions.  Those who make fewest mistakes and have the lowest management expenses end up winning the loser’s game.  The irrefutable consequence of this finding is that institutional funds should be largely invested in low-cost index funds.  It is a tribute to the marketing power of the Wall Street that this isn’t the case.

Lucky Fool – A person who owes his success to luck rather than skill, but is unaware of the fact.  As it takes several decades of performance data for statisticians to distinguish luck from skill in the investment game, the number of lucky fools on Wall Street must always remain indeterminate.

April 26, 2010 – 08:45 am ET

Well I was simply wrong about the markets ability to see new highs so soon and that is all there is to it.  I underestimated the strength of the rally and was very surprised to see things moving higher with such vigor over the last week.  Short term weakness has been a likely outcome for a while now but the market has refused to see anything of the sort.  This is very frustrating for those still sitting on the sidelines and pleasantly surprising for those of us reaping the benefits.

.

ETF % Change Comparison

.

As you can see all of the influential ETFs except SMH are sitting at new peaks.  SMH was the worst performer over the last week but the best over the last two weeks.  It is nice to see IWM, IYT, SMH and QQQQ with the highest performance ranks as this shows the more economically sensitive areas of the market are leading it higher.

.

What the % Comparison Table Tells Us:

By comparing the performance of the economically sensitive (SMH, QQQQ, IWM, IYT) and the comparatively stable ETFs (SPY and DIA) we can get an indication of the true market direction. The more sensitive areas of the market tend to be the first to initiate a trend change. For example if DIA and SPY sell off heavily while SMH and IWM (Russell 2000 small cap ETF) sell of mildly or continue moving to new highs then this would be very positive and vice versa.

The ‘Average Rank %’ is calculated by subtracting the % change for each ETF from the maximum % change and dividing it by the range for each period. 1-((MAX(% change all ETFs)-ETFs % Change)/(MAX(% change all ETFs)-MIN(% change all ETFs))) The readings for each period are then averaged. This reading is provided because if one ETF was significantly under/out performing the others then a plain high or low rank would not accurately reflect this.

.

.

A Look at the Charts

.

The RSI remains bearish on SPY but all other indications are strong particularly over the longer term.

.

You have to go back to the 90s before you find rallies that look like this one.  Volume flows are strong but new short term bullish trades are just too risky.

.

I will be keeping a close eye on SMHs ability to maintain its volume trend and bullish RSI but for now all signs are positive.

.

This rally just takes your breath away, it is easy to make money when the market is behaving like this.  As with SMH I will be keeping a close eye on IWMs volume trend and RSI.  The fun will be over eventually.

.

IYT continues to confirm the strength of the bull market and has very strong volume flows.

.

.

OM3 Weekly Indicator

.

All indications remain bullish here but these buy signals have been active for two months now which makes them statistically old.

.

How to read the OM3 indicator

The OM3 indicator as with most of our models primarily reads price action and volume. The strong/weak buy/sell signals are self-explanatory. ‘No Signal’ means that the component readings are in conflict and cancel each other out.

The alerts let you know if the cycle is speeding up or slowing down, so when you get at ‘Strong Buy, Bear Alert’ for instance it simply means that the criteria for a strong buy is in place but this weeks cycle reading is weaker (or more bearish) than last weeks reading (the same is true in reverse).

The number of weeks that a signal has been repeated is displayed. Historically a ‘Strong Buy’ signal has lasted for an average of 6 weeks and a maximum of 42 weeks, while a ‘Strong Sell’ has lasted for an average of 4 weeks and a maximum of 16.

This is an indicator not a mechanical trading model. It is useful to assist in analyzing the market but for the best results should be combined with commonsense and support/resistance levels etc.

.

.

TransDow & NasDow

.

The Transports remain dominant over the Dow and have doubled the Dow’s returns during the last 56 days.  The Dow is dominant over the NASDAQ and has about matched the performance of the NASDAQ over the last 42 days.

.

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.

.

.

LTMF 80 & Liquid Q

.

LTMF 80’s trade on QQQQ remains open and is showing a return of almost 20% while Liquid Q remains in cash.

.

Historical Stats:

.

.

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.

.

.

Summary

.

The longer this rally defies gravity the more impatient, emotional people are going to jump on board and ultimately this will lead to a sharper and more painful pull back.  There are currently no bearish indications long term but the risk over the short term should not be ignored despite the recent exceptional performance.  Be decisive and only take action when you have probability on your side.

.

Any disputes, questions, queries, comments or theories are most welcome in the comments section below.

.

Derry

And the Team @ ETF HQ

“Equipping you to win on Wall St so that you can reach your financial goals.”

.

P.S Thanks to those who shared their thoughts on the Goldman Sachs ‘fraud’.  Bill Fleckenstein wrote an exceptional article called Goldman-deal gamblers knew the score.  He makes some great points including:

• “Among professionals, the fact that somebody else has a different opinion usually isn’t enough to change one’s viewpoint.”
• “Let’s say the housing market hadn’t melted down… can you imagine the SEC today suing Goldman Sachs because it hadn’t disclosed to Paulson that the buyers had picked some of the securities?”
• “If the SEC really wants to get at the culprits of this deal, it ought to go after the ratings agencies, as should Congress.”
• “The SEC also ought to consider pursuing the Financial Accounting Standards Board for helping denigrate accounting standards to the point that so much smoke and mirrors could pass for legitimacy.”

Rating Agency Data Aided Wall Street in Deals – Another article worth reading that explains how rubbish investments achieved such high ratings.  It turns out that banks were given the ‘secret formulas’ by the rating agencies so they could start with the answer and work backwards, reverse-engineering their investments for a top rating.

P.S.S Like ETFHQ on Facebook – HERE

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.

The Devils Dictionary – I.

.

Initial Public Offering – An exit route for alternative investment managers who expect the jig is up.

Insider Trading – Just good research.

Institutional Investor – Investor who’s now locked up in a nuthouse.

Investment Bankers – Financiers who find clever and original ways to put their own interests before those of their clients.

Investment Banks – Wall Street firms that find clever and original ways to bring the financial system to the brink.

April 19, 2010 – 12:05 pm ET

Dear Investor,

Sorry, we are running late today due to a data feed problem but all is back up and running now (touch wood).  Living at this end of the world that means staying up all night… you are welcome 😉

Over the last week there were some very interesting developments:

The first one was Intel reporting its net income in the first quarter had nearly quadrupled from 2009 and that the big jump in spending had predominantly come from companies, not individuals.  When businesses are experiencing improved conditions and anticipating growth they must invest in new technology to capitalize on it.  This investment takes time to produce a return but because semiconductors are at the front of the business cycle they are the first ones to benefit.  That is why the news not only lifted Intel (INTC) but gave the entire market a significant boost.  If you have ever doubted the influence that semiconductors have over the market then doubt no more.

The 2nd major development was Goldman Sachs getting charged with fraud.  The SEC alleges that Goldman marketed CDOs that hinged on the performance of subprime mortgage-backed securities and failed to disclose to investors that hedge fund Paulson & Co. was betting against the same CDOs and influenced the selection of securities for the portfolio.  While this does sound morally questionable is it really fraud?

Lets say I ran a hedge fund and was bearish on the Passion Fruit Industry.  I could go out and help an institution put together a security for me to sell short.  If my research and timing was correct then I would profit but there is also the risk of being wrong in which case I would take a loss.  The institution what helped create the security is simply making a market, finding buyers and sellers.  The opinion of those who influenced the portfolio selection is irrelevant because if investors do their own research and don’t like a security then surely they won’t risk their money in it?  When Warren Buffett sold 4.5 billion dollars worth of put options should the buyers have been informed who the counterparty was?

If anyone committed fraud then what about the rating agencies?  The CDOs in question were class A-1 notes rated AAA by S&P and Aaa by Moody.  Let me know what you think.  Assuming the allegations are true did Goldman commit fraud or is this just an example of the heartless reality of capitalism?

.

ETF % Change Comparison

.

Last week I warned that “When risk levels are perceived to be low the market is more easily spooked and this tends to lead to sharper and more severe reversals.”  Most of the gains for the week were on the back of the INTC news while on Friday the SEC charge spooked a complacent and overbought market causing it to sell off heavily as you can see by the ‘% from peak’ numbers.

What is great to see is that for the week SPY and DIA lagged behind while SMH and ITY advanced 5.85% and 3.22% respectively.  This is not the type of behavior that you tend to see at major market reversals.  This is how a bull market behaves.

.

What the % Comparison Table Tells Us:

By comparing the performance of the economically sensitive (SMH, QQQQ, IWM, IYT) and the comparatively stable ETFs (SPY and DIA) we can get an indication of the true market direction. The more sensitive areas of the market tend to be the first to initiate a trend change. For example if DIA and SPY sell off heavily while SMH and IWM (Russell 2000 small cap ETF) sell of mildly or continue moving to new highs then this would be very positive and vice versa.

The ‘Average Rank %’ is calculated by subtracting the % change for each ETF from the maximum % change and dividing it by the range for each period. 1-((MAX(% change all ETFs)-ETFs % Change)/(MAX(% change all ETFs)-MIN(% change all ETFs))) The readings for each period are then averaged. This reading is provided because if one ETF was significantly under/out performing the others then a plain high or low rank would not accurately reflect this.

.

.

A Look at the Charts

.

SPY actually dropped 1.59% on Friday and further profit taking over the short term is likely.

.

It won’t actually take much for QQQQ to break its bullish volume trend.  But if that happens then it will need to be confirmed by a loss of support and failure in other areas of the market particularly the semiconductors.

.

For months SMH has been one of the holes in the long term bullish argument but suddenly it is showing life again.  If we see profit taking over the next few weeks but SMH can hold onto $29 and maintain its bullish volume trend this will indicate the market is very strong.

.

What goes up must come down and profit taking on the small caps is highly likely.

.

The transports continue to receive impressive volume, a very good sign long term.

.

.

OM3 Weekly Indicator

.

No signs of weakness here.

.

How to read the OM3 indicator

The OM3 indicator as with most of our models primarily reads price action and volume. The strong/weak buy/sell signals are self-explanatory. ‘No Signal’ means that the component readings are in conflict and cancel each other out.

The alerts let you know if the cycle is speeding up or slowing down, so when you get at ‘Strong Buy, Bear Alert’ for instance it simply means that the criteria for a strong buy is in place but this weeks cycle reading is weaker (or more bearish) than last weeks reading (the same is true in reverse).

The number of weeks that a signal has been repeated is displayed. Historically a ‘Strong Buy’ signal has lasted for an average of 6 weeks and a maximum of 42 weeks, while a ‘Strong Sell’ has lasted for an average of 4 weeks and a maximum of 16.

This is an indicator not a mechanical trading model. It is useful to assist in analyzing the market but for the best results should be combined with commonsense and support/resistance levels etc.

.

.

TransDow & NasDow

.

The Transports remains dominant over the Dow and have doubled the Dow’s return over the last 49 days with 12.36% vz 6.72%.

.

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.

.

.

LTMF 80 & Liquid Q

.

The LTMF 80 remains on a buy signal for QQQQ after 210 days.  Liquid Q has no signal.

.

Historical Stats:

.

.

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.

.

.

Summary

.

New strength seen from the semiconductors is very bullish and long term indications remain positive.  However over the short term I would be very surprised to see new highs and tangible profit taking is highly likely.

.

Any disputes, questions, queries, comments or theories are most welcome in the comments section below.

.

Derry

And the Team @ ETF HQ

“Equipping you to win on Wall St so that you can reach your financial goals.”

.

P.S Thanks to the 20 people who shared our article on Herd Mentality around Facebook

P.P.S Become a fan of ETFHQ on Facebook – HERE

.

.

Breaking NEWS

Bank Run in Switzerland

.

The bank run in Switzerland last week was kept mostly secret from the worlds media but this exclusive footage was captured from my brother in-laws iPhone.  Some are saying that it was actually very bullish behavior – VIDEO

April 12, 2010 – 02:45 am ET

Dear Investor,

Thanks for your recent questions and complements.  It is nice to hear that you are enjoying our reports.  Please spread the word so that the community of readers can grow and also please direct your questions to the comments section so that others can benefit.

In the last report we said “longer term indications remain positive making bearish positions risky”.  Since then we have seen a great example of why it is so important to trade in the direction of the prevailing volume trend.  For the last few weeks we have been anticipating short term weakness and did see a slow down for a period.  But, bit by bit the market has been moving higher and in the last few days it has done so with more vigor.

.

ETF % Change Comparison

.

IWM (Russell 2000 small cap) and IYT (Dow Transportation Index) were the top performers over the last week while SPY and DIA lagged behind.  Having the comparatively economically sensitive IWM and IYT leading is good to see.

All of the ETFs we track made new highs this week apart from SMH which continues to be a drag on the market.  It finished up 1.65% but all of the gains were achieved on Monday and have dwindled ever since.  The broad market in comparison gained strength throughout the week and into Fridays close.  The NASDAQ can’t get far without support from the Semiconductors and the market can’t get far without the NASDAQ so continue to keep a close eye on how this develops.

.

What the % Comparison Table Tells Us:

By comparing the performance of the economically sensitive (SMH, QQQQ, IWM, IYT) and the comparatively stable ETFs (SPY and DIA) we can get an indication of the true market direction. The more sensitive areas of the market tend to be the first to initiate a trend change. For example if DIA and SPY sell off heavily while SMH and IWM (Russell 2000 small cap ETF) sell of mildly or continue moving to new highs then this would be very positive and vice versa.

The ‘Average Rank %’ is calculated by subtracting the % change for each ETF from the maximum % change and dividing it by the range for each period. 1-((MAX(% change all ETFs)-ETFs % Change)/(MAX(% change all ETFs)-MIN(% change all ETFs))) The readings for each period are then averaged. This reading is provided because if one ETF was significantly under/out performing the others then a plain high or low rank would not accurately reflect this.

.

.

A Look at the Charts

.

It looks like SPY has moved into part 2 of the rally that began in mid Feb.  This stage of a rally is usually violent and unpredictable so opening new short term positions is too risky.

.

QQQQ has been performing well on strong volume.  Enjoy it while it lasts but if you are not already in the market then now is a time for patience.

.

$VXN (CBOE NASDAQ 100 Voltility Index) moved to its lowest level since July 2007 this week.  $VXN is a measure of how much ‘time’ is selling for on NASDAQ 100 options and is a function of the risk traders perceive to be present.

When risk levels are perceived to be low the market is more easily spooked and this tends to lead to sharper and more severe reversals.  Because $VXN is so low and SMH is under performing on bearish volume it is important to remain cautions.

.

IWM has also had weak volume recently.  It will be important for the small caps to continue to perform well if SMH is not going to provide leadership to the broad market.

.

Unlike, SPY, SMH and IWM, the Transports (IYT) have had solid volume flows over the last few weeks.  This is an excellent sign for the long term health of the broad market.

.

.

OM3 Weekly Indicator

.

No signs of weakness here but the average ‘Stong Buy’ signal lasts for 6 weeks so these ones are getting statistically old.

.

How to read the OM3 indicator

The OM3 indicator as with most of our models primarily reads price action and volume. The strong/weak buy/sell signals are self-explanatory. ‘No Signal’ means that the component readings are in conflict and cancel each other out.

The alerts let you know if the cycle is speeding up or slowing down, so when you get at ‘Strong Buy, Bear Alert’ for instance it simply means that the criteria for a strong buy is in place but this weeks cycle reading is weaker (or more bearish) than last weeks reading (the same is true in reverse).

The number of weeks that a signal has been repeated is displayed. Historically a ‘Strong Buy’ signal has lasted for an average of 6 weeks and a maximum of 42 weeks, while a ‘Strong Sell’ has lasted for an average of 4 weeks and a maximum of 16.

This is an indicator not a mechanical trading model. It is useful to assist in analyzing the market but for the best results should be combined with commonsense and support/resistance levels etc.

.

.

TransDow & NasDow

.

The Dow Transportation index remains dominant over the Dow and has significantly out performed it over that time.  The Dow remains dominant over the NASDAQ.

.

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.

.

.

LTMF 80 & Liquid Q

.

Liquid Q remains in cash while the LTMF 80 trade remains open and is enjoying a nice profit of 15.53%.

.

Historical Stats:

.

.

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.

.

.

Summary

.

When there is a lot of momentum behind a mature rally those that have been sitting on the sidelines waiting for a pull back start to jump in as their fear of loss is replaced with a fear of missing out.  This 2nd wind can create some impressive gains but usually on light volume and when it ends it tends to end in tears.

So far, several of the ETFs we track have started to float on light volume but QQQQ and IYT both continue to experience strong volume.  Long term indications remain healthy but the short term outcome during times like these is very unpredictable.

We turned bullish in our February 22 report so hopefully you have been on the gravy train with us and continue to enjoy the ride (while it lasts).  However if you are still sitting on the sidelines then now is not the time to enter the market, there is simply to much uncertainty and risk over the short term.

.

Any disputes, questions, queries, comments or theories are most welcome in the comments section below.

.

Derry

And the Team @ ETF HQ

“Equipping you to win on Wall St so that you can reach your financial goals”

.

P.S If you get value from these newsletters then please spread the word, we grow primarily through word of mouth. Please direct people to ETFHQ.com to subscribe.

P.P.S Become a fan of ETFHQ on Facebook – HERE

.

.

The Devils Dictionary – H

.

Hedge – A line of closely grouped shrubberies; a clever way of adding correlation and volatility risk to one’s portfolio.

Hedge Fund – A lucrative compensation scheme for professional investors, who get to charge roughly 10 times as much as traditional money managers while generating, in aggregate, similar returns.  See Loser’s Game.

House – 1. An abode; an investment.  2. A building constructed on weak financial foundations.  Formerly an asset, now a liability.  See Delinquencies.

April 05, 2010 – 02:07 am ET

.

It was another uneventful week but there have been a few subtle developments; some support has been established, Easter has been celebrated, April has been fooled and there has been a slight shift in leadership.

.

ETF % Change Comparison

.

Last week ended with SPY and DIA at new highs.  This is positive apart from the fact that it is better to see the more economically sensitive ETFs leading the market higher.  Instead we see SMH 2.41% off the high it reached 9 days ago and IYT 1.06% off the high it reached 14 days ago.  This is only a subtle change and not cause for concern but it is different from what we have been seeing for the last two months where typically QQQQ, IWM and IYT have been leading.  It appears as though the market is becoming more cautions which makes short term profit taking more likely.

.

What the % Comparison Table Tells Us:

By comparing the performance of the economically sensitive (SMH, QQQQ, IWM, IYT) and the comparatively stable ETFs (SPY and DIA) we can get an indication of the true market direction. The more sensitive areas of the market tend to be the first to initiate a trend change. For example if DIA and SPY sell off heavily while SMH and IWM (Russell 2000 small cap ETF) sell of mildly or continue moving to new highs then this would be very positive and vice versa.

The ‘Average Rank %’ is calculated by subtracting the % change for each ETF from the maximum % change and dividing it by the range for each period. 1-((MAX(% change all ETFs)-ETFs % Change)/(MAX(% change all ETFs)-MIN(% change all ETFs))) The readings for each period are then averaged. This reading is provided because if one ETF was significantly under/out performing the others then a plain high or low rank would not accurately reflect this.

.

.

A Look at the Charts

.

While SPY has had little momentum over the last three weeks it is impressive to see it inching higher bit by bit.  This consolidation has ended the overbought situation and made it easier to start another bullish leg but profit taking is more likely over the short term.

.

QQQQ could go either way from here but there is nothing to suggest problems with the longer term bullish trend.

.

For the broad market to move higher from here in any meaningful way SMH will have to fuel the rally.  Currently that looks unlikely.

.

From IWM I will be looking for OBV to break out of its triangle accompanied by a loss of or maintenance of support @ $67.50.  This will provide a good indication of market direction over the short term.

.

Volume from IYT is looking good and the slowdown over the last few weeks has been healthy.

.

.

OM3 Weekly Indicator

.

All signals remain bullish here.

.

How to read the OM3 indicator

The OM3 indicator as with most of our models primarily reads price action and volume. The strong/weak buy/sell signals are self-explanatory. ‘No Signal’ means that the component readings are in conflict and cancel each other out.

The alerts let you know if the cycle is speeding up or slowing down, so when you get at ‘Strong Buy, Bear Alert’ for instance it simply means that the criteria for a strong buy is in place but this weeks cycle reading is weaker (or more bearish) than last weeks reading (the same is true in reverse).

The number of weeks that a signal has been repeated is displayed. Historically a ‘Strong Buy’ signal has lasted for an average of 6 weeks and a maximum of 42 weeks, while a ‘Strong Sell’ has lasted for an average of 4 weeks and a maximum of 16.

This is an indicator not a mechanical trading model. It is useful to assist in analyzing the market but for the best results should be combined with commonsense and support/resistance levels etc.

.

.

TransDow & NasDow

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The Dow Transportation Index remains dominant over the Dow and has advanced 6.24% over the last 34 days compared to just 5.83% for the Dow during that time.  Conversely the Dow remains dominant over the NASDAQ, advancing 2.85% while dominant compared to just 1.47% for the NASDAQ.

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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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On Thursday Liquid Q closed the position in QQQQ for a 12.55% profit over 62 days.  The signal remains open for LTMF 80.

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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

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The consolidation over the last few weeks will make it easier for the market to start another leg higher.  However for that to happen with any sort of enthusiasm then SMH will need to be driving the market higher.  Judging by the current volume flows of the semiconductors that is unlikely.  Over the longer term indications remain positive making bearish positions risky.  Any profit taking should be seen as a buying opportunity.

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Any disputes, questions, queries, comments or theories are most welcome in the comments section below.

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Derry

And the Team @ ETF HQ

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P.S If you get value from these newsletters then please spread the word, we grow primarily through word of mouth.  Please direct people to ETFHQ.com to subscribe.

P.P.S Become a fan of ETFHQ on Facebook – HERE

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The Devils Dictionary – G

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GAAP – Generally Accepted Accounting Principles (as opposed to Specifically Accepted Accounting Principles which right there shouts out “Houston, we’ve got a problem!”) GAAP is intended to create consistency in financial reporting for pubic and private companies.  Its vast inconsistencies with regulatory accounting and the IRS tax code is the primary source of investment banking revenues as bankers routinely attempt to exploit, circumvent or create small meaningless yet terribly complex discrepancies that result in arbitrage opportunities of epic proportions. Interestingly the U.S Government itself refuses to adopt GAAP standards and furthermore refuses to issue any useful financial reporting that would tell us how broke we really are.  The main argument for refusing to adopt GAAP standards is that it would require extensive use of scientific notation due to the incomprehensibly large numbers involved.  GAAP has taken on a new culturally significant meaning lately as in the GAAP between the truth and what is really going on.

Greater Fools – Wall Street’s ever expanding clientele.

Green Shoots – 1. The first signs of spring, often clobbered by summer’s heat and autumn’s rain.  2. A sign the economy is falling apart more slowly than previously thought.  Related: Daisies, Pushing Up.  See also Thinking, Wishful.

March 29, 2010 – 08:35 am ET

The strong advance by the market on Monday and Tuesday took me by surprise and the fact that it was lead by the Semiconductors looked very positive.  But by the end of the week most of the gains had been returned.

Really it was a rather uneventful week but without many distractions I have added some new blog posts to elaborate on the philosophies used in these reports.  I hope you find them useful.

• The Dow Theory – Truly timeless writings on Technical Analysis
• Trading Psychology – Part 1, Imperative Foundation For Success
• Herd Mentality – Trading Psychology Part 2
• Group Intelligence – Trading Psychology Part 3

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ETF % Change Comparison

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SMH was the top performer again over the last week and finally closed above its January high on Tuesday although only just.  IYT (Dow Transportation ETF) on the other hand peaked last Thursday and was the only one of the influential ETFs to finish the week lower.

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What the % Comparison Table Tells Us:

By comparing the performance of the economically sensitive (SMH, QQQQ, IWM, IYT) and the comparatively stable ETFs (SPY and DIA) we can get an indication of the true market direction. The more sensitive areas of the market tend to be the first to initiate a trend change. For example if DIA and SPY sell off heavily while SMH and IWM (Russell 2000 small cap ETF) sell of mildly or continue moving to new highs then this would be very positive and vice versa.

The ‘Average Rank %’ is calculated by subtracting the % change for each ETF from the maximum % change and dividing it by the range for each period. 1-((MAX(% change all ETFs)-ETFs % Change)/(MAX(% change all ETFs)-MIN(% change all ETFs))) The readings for each period are then averaged. This reading is provided because if one ETF was significantly under/out performing the others then a plain high or low rank would not accurately reflect this.

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A Look at the Charts

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Short term weakness continues to be the most likely outcome from SPY although we have now established a base from which the next leg could be launched.

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If QQQQ is to continue moving higher in any meaningful way then SMH will have to rally strongly.  Short term weakness is more likely however.

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I am surprised that SMH has done so well over the last two weeks but the lack of volume behind the move is not a good sign.

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IWM has had enough consolidation to start another bullish leg but that would require a strong rally from SMH.

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Like much of the market ITY continues to indicate short term weakness.

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OM3 Weekly Indicator

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All signals are positive here although IWM has been on a strong buy signal for the last 7 weeks while the average signal lasts for only 6 weeks.

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How to read the OM3 indicator

The OM3 indicator as with most of our models primarily reads price action and volume. The strong/weak buy/sell signals are self-explanatory. ‘No Signal’ means that the component readings are in conflict and cancel each other out.

The alerts let you know if the cycle is speeding up or slowing down, so when you get at ‘Strong Buy, Bear Alert’ for instance it simply means that the criteria for a strong buy is in place but this weeks cycle reading is weaker (or more bearish) than last weeks reading (the same is true in reverse).

The number of weeks that a signal has been repeated is displayed. Historically a ‘Strong Buy’ signal has lasted for an average of 6 weeks and a maximum of 42 weeks, while a ‘Strong Sell’ has lasted for an average of 4 weeks and a maximum of 16.

This is an indicator not a mechanical trading model. It is useful to assist in analyzing the market but for the best results should be combined with commonsense and support/resistance levels etc.

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TransDow & NasDow

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The Dow Transportation Index remains dominant over the Dow while the Dow remains dominant over the NASDAQ.  It would be better to see the NASDAQ regain dominance.

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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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Both LTMF 80 and Liquid Q remain on buy signals for QQQQ.  Internal readings from Liquid Q have weakened and it would not take much to trigger a sell signal.

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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

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Over the last two weeks the market has seen enough consolidation to start a new leg higher.  But for that to happen SMH would have to be the one leading the market.  The more likely outcome is further weakness over the short term.  There are currently no indications that anything more sinister is brewing so any declines should be seen as buying opportunities.

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Any disputes, questions, queries, comments or theories are most welcome in the comments section below.

.

Derry

And the Team @ ETF HQ

.

P.S Thank you for sharing this newsletter, we grow primarily through word of mouth. Please direct people to ETFHQ.com to subscribe.

P.P.S Become a fan of ETFHQ on Facebook – HERE

.

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The Devils Dictionary – F

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Fees – The raison d’etre of Wall Street.  The means by which wealth is transferred from its owners to those entrusted to manage it.  See investment banks, private equity, hedge funds, rating agencies, money managers, etc.

Financial Engineering – Whereas conventional engineering seeks to take weak structures and make them solid, financial engineering aims at the opposite.

Fitch – What you say to your dog after you throw the bone of the last steak your family will eat for the foreseeable future.

March 21, 2010 – 08:30 pm ET

Over the last two weeks the market has been moving rather predictably.  But due to ‘Mother Market’ having a twisted sense of humor (or perhaps simply due to being female) her times of predictability are commonly followed by periods that defy logic.

Last week I said that things looked a bit overcooked and there has since been a definite slow in momentum.  The short term technical picture has deteriorated although on a positive note the semiconductors did shown signs of life.

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ETF % Change Comparison

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IWM was the most over cooked of the ETFs that we track so it is not surprising to see it was the worst performer over the last week.  SMH finished the week as the top performer although it is yet to break through the high it set 70 days ago and was hit hard on Thursday and Friday.  Still, the fact that SMH produced some buying interest is a good sign.

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What the % Comparison Table Tells Us:

By comparing the performance of the economically sensitive (SMH, QQQQ, IWM, IYT) and the comparatively stable ETFs (SPY and DIA) we can get an indication of the true market direction. The more sensitive areas of the market tend to be the first to initiate a trend change. For example if DIA and SPY sell off heavily while SMH and IWM (Russell 2000 small cap ETF) sell of mildly or continue moving to new highs then this would be very positive and vice versa.

The ‘Average Rank %’ is calculated by subtracting the % change for each ETF from the maximum % change and dividing it by the range for each period. 1-((MAX(% change all ETFs)-ETFs % Change)/(MAX(% change all ETFs)-MIN(% change all ETFs))) The readings for each period are then averaged. This reading is provided because if one ETF was significantly under/out performing the others then a plain high or low rank would not accurately reflect this.

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A Look at the Charts

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Little has changed over the last week although short term weakness from SPY looks even more likely.

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It will be interesting to see where QQQQ will find support.

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SMH is the only one of the ETFs that we track to still have a bullish RSI.  If the market is going to defy gravity and keep heading higher before any consolidation then SMH will have to be the driver.

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IWM couldn’t keep going up forever without taking a breather.

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Another impressive week from IYT (Dow Transportation Index ETF).  It is very unlikely that IYT could perform like this if the market was about peak.

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OM3 Weekly Indicator

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All positive signs from the OM3 indicator.

.

How to read the OM3 indicator

The OM3 indicator as with most of our models primarily reads price action and volume. The strong/weak buy/sell signals are self-explanatory. ‘No Signal’ means that the component readings are in conflict and cancel each other out.

The alerts let you know if the cycle is speeding up or slowing down, so when you get at ‘Strong Buy, Bear Alert’ for instance it simply means that the criteria for a strong buy is in place but this weeks cycle reading is weaker (or more bearish) than last weeks reading (the same is true in reverse).

The number of weeks that a signal has been repeated is displayed. Historically a ‘Strong Buy’ signal has lasted for an average of 6 weeks and a maximum of 42 weeks, while a ‘Strong Sell’ has lasted for an average of 4 weeks and a maximum of 16.

This is an indicator not a mechanical trading model. It is useful to assist in analyzing the market but for the best results should be combined with commonsense and support/resistance levels etc.

.

.

TransDow & NasDow

.

The Dow Transportation Index remains dominant over the Dow while the Dow remains dominant over the NASDAQ.  I wouldn’t read too deeply into this.

.

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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Positions remain open on QQQQ from both LTMF 80 and Liquid Q.  Internal readings are also strong.

.

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.

.

.

Summary

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Everything looks quite simple at the moment.  Longer term indications are positive but short term weakness is likely.  If profit taking occurs how severe it will be is not clear.  However as long as SMH stays above $26 then any pullbacks by the broad market should be good buying opportunities.  Remember though, the market is in a constant state of change so just because current risk levels appear low is not excuse not to be prepared.

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Any disputes, questions, queries, comments or theories are most welcome in the comments section below.

.

Derry

And the Team @ ETF HQ

.

P.S Thank you for sharing this newsletter, we grow primarily through word of mouth.  Please direct people to ETFHQ.com to subscribe.

P.P.S Become a fan of ETFHQ on facebook – HERE

.

.

The Devils Dictionary – D

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Dead Cat Bounce – Originally a trading floor term for false bottom stock price movements but since the Madoff Fiasco it now describes a new phenomenon of mass coordinated suicide by disgraced yet honorable felines of soon-to-be felons.  It is unclear whether a Jonestown style cool-aid is being secretly absorbed at grooming parlors by cats of hedge fund operators faced with massive investor redemptions making it clear to the cats that the party is over or whether it is totally instinctive similar to homing pigeons who can travel thousands of miles with out a guidance system.

The are several reports, most likely fictitious, of cats unsuccessfully trying to convince their owners to do the honorable thing with them.  It is interesting to note that attempted cat suicide has a statistically significant survival rate when the leap occurs from the 9th – 17th floors of residential buildings.  This is due to the cat’s automatic bladder evacuation reflex that occurs in this range of fall.  Ruptured bladders are the primary cause of death of falling cats and nine floors seems to be just enough time to empty their bladders while above 17 floors the laws of physics take over.

This phenomenon will likely result in a financial arbitrage opportunity where 9 – 17th floor apartments will trade at a premium and a new financial security is rumored to already be in the works known as the CBO or Cat Bounce Option.

Downgrade – A reduction in the quality of a credit rating.  Normally occurs after the deterioration of fundamentals, but before the event of a default.  This action protects the reputation of the rating agencies but not the wealth of bondholders.  See subprime.

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E

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EBITDA – Earnings Before Including Terribly Dubious Activities.  Antiquated use was Earnings Before Interest Taxes Depreciation and Amortization.  One of several measure of earnings power of a firm for purposes of valuation.