ETF HQ Report – Conflicting Internals Continue

September 20, 2010 – 01:45 am EDT

Well I have no problem in admitting when we are wrong and at this point it certainly looks as though we may have been wrong about the market heading for new lows.  Last week we said that if SMH can close above $26 and IWM above $65 then things would need to be reassessed.  These two milestones were achieved early on in the week so it is time to start taking the bulls seriously.

****Thanks to all those who referred people to this newsletter over the last week. The more readers we have the more services we can provide you.

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ETF % Change Comparison

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It was very positive to see SMH advance a huge 6.14% over the last week, it is basically playing catch up.  If we see a pull back over the coming week and SMH is hit more lightly than the broad market then this should be used as a buying opportunity and vice versa.

Learn more – ETF % Change Comparison

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A Look at the Charts

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SPY is saying that the market is very unlikely to break through resistance.

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QQQQ says that we are in the grips of a healthy bull market and QQQQ holds more weight than SPY.

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As long as SMH holds above $26 or declines less than the broad market moving forward then the bulls must be taken seriously.

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While IWM holds above its 200 day SMA the bulls have the upper hand.  Below this level declines are likely to accelerate.

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If the Transports can break through to a higher high it will be a very positive sign for the broad market.

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OM3 Weekly Indicator

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All the ETFs are on their third week of ‘Strong Buy’ signals apart from SMH which remains on a ‘Strong Sell’ but has recieved a ‘Bull Alert’.  Historically the average ‘Strong Buy’ signal has lasted for 6 weeks.

Learn more – The OM3 Indicator

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TransDow & NasDow

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The Transports remain dominant over the the Dow and the TransDow is showing a small profit after two weeks in the Transportation Index.  The NasDow remains in cash.

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What the TransDow Readings tell us:

The TransDow measures dominance between the DJ Transportation Index (DJTI) and the Dow Jones Industrial Average (DJIA). In a strong market the more economically sensitive Transportation Index should be dominant over the DJIA.

Historically the DJTI has been dominant over the Dow 45% of the time. The annualized rate of return from the DJTI during this period was 18.47% with the biggest loss for one trade sitting at -13.27%. The annualized return from the DJIA during the periods it was dominant over the DJTI was just 4.06% and the biggest loss for one trade was -16.13%. A 4% stop-loss is applied to all trades adjusting positions only at the end of the week.

What the NasDow Readings tell us:

The NasDow measures dominance between the NASDAQ and the DJIA. Using the same theory behind the Trans Dow; in a strong market the more economically sensitive NASDAQ should be dominant over the DJIA.

Historically the NASDAQ has been dominant over the DJIA 44% of the time. Taking only the trades when the NASDAQ is above its 40 week moving average the annualized rate of return was 25.47% with the biggest loss for one trade sitting at –8.59%. The annualized rate on the DJIA during the periods it was dominant over the NASDAQ is just 8.88% and the biggest loss for one trade was –12.28%. A 8% stop-loss is applied to all trades adjusting positions only at the end of the week.

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LTMF 80 & Liquid Q

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The LTMF 80 opened a new position in QQQQ at Fridays close.  This trade has a 50% probability of being profitable but the average profit is 12.5% and the average loss is 3%.  Liquid Q remains in cash.

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Historical Stats:

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How The LTMF 80 Works

LTMF stands for Long Term Market Forecaster. It reads volume flows relative to price action and looks for out performance of volume measured on a percentage basis over the prior 12 months. During a sustained rally the readings will reach high levels (near 100%) making it imposable for the volume reading to always outperform price so any reading above 80% will maintain the buy signal. This system has outperformed the market over the last 10 years but performance has been damaged by some nasty losses. It only produces buy signals and only for 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

The conflicting market internals that have characterized the crab market of the last 4 months continue.  It has been a very challenging time and our main portfolio is only up 25% YTD on margin.  But with the S&P 500 up only 0.94% over the same time; it could be worse.

Over the last week the bulls have proved that they need to be taken seriously despite continued uncertainly.  The fact that SMH has been so late to enter the recent rally is real cause for concern but the positives can’t be ignored.  The market is due for a pull back although it can’t really afford to suffer much of a retrace at this point.  It is important that IWM holds above its 200 day SMA and SMH above $26.  Below these levels there is a high risk of a major market failure.

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

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Cheers
Derry

And the Team @ ETF HQ

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

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P.S Like ETFHQ on Facebook – HERE

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Quote of the Day:

“Bad ideas is good.  Good ideas is better.  No ideas is terrible.” – Lenny Baum