September 27, 2010 – 05:07 am EDT
It was another great week for the market. Previously we said that the bulls had the upper hand as long as SMH held onto $26 and IWM its 200 day SMA. These levels were tested on Thursday and acted as the launching pad for a monster jump on Friday that was lead by SMH. Yes the Semis have been playing catch up and on Thursday they showed great strength by advancing while the majority of the market was down. Seeing SMH showing leadership to the upside like this gives real validity to the recent rally.
But it wasn’t all good, volume in many areas was lacking and several of the influential ETFs are yet to break above their July highs. Lets lake a closer look:
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ETF % Change Comparison
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The transports have been rather sluggish which hasn’t helped the position we held in IYT but QQQQ and SMH lead the way higher over the last week which is just fantastic news. When you look at the “% From Bottom” you can see that the leaders are almost in order from left to right. This is exactly what we want to see off market bottoms: the economically sensitive leading the economically stable.
Learn more – ETF % Change Comparison
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A Look at the Charts
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The lack of volume is a concern but the higher high is great news. If QQQQ keeps going then SPY will follow.
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QQQQ didn’t have much volume behind the big move over the last week but SMH has the fuel to sustain this rally.
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It was make or break for SMH but $26 held strong and with it now above the 200 day SMA; $29 is a real possibility. If that occurs then it will provide the fuel that the broad market needs to make some major technical victories.
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It will be important for IWM to break past the July high this week if the rally is to continue.
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It’s unfortunate that the Transports remain so sluggish but keep an eye on IYT. If the market continues higher and the transports get left behind then a major sell off will not be far away.
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OM3 Weekly Indicator
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Finally all of the ETFs including SMH have moved to a ‘Strong Buy’ signal. With most of the signals having been active for four weeks this rally is getting statistically mature.
Learn more – The OM3 Indicator
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TransDow & NasDow
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The Dow has become dominant over the Transports and the position we held has been closed for a small 2.19% profit, the TransDow is now in cash. The NasDow also remains in cash as there is no clearly dominant index between the Dow and 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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After 7 days the LTMF 80 position in QQQQ is showing a profit of 3.27% and remains open while 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
We identified this rally a month ago as just short term strength; underestimating it due to the fact that it was not backed by participation from SMH. Now for the second week we are seeing SMH lead the market higher and because the semis are so far behind the broad market they have a lot of catching up to do. With many other areas of the market running out of steam hopefully SMH will provide the fuel that is needed to sustain this rally a little longer. That will help IWM and IYT to make a higher high before the inevitable pull back that is on the way.
If we see a pull back this week then the previously identified support levels of $26 on SMH and the 200 day SMA on IWM must hold or this entire rally will have been nothing more that a giant fake. As always stay alert!
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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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Quote of the Day:
“If you’re a chartist but don’t understand psychology, then those charts won’t do much for you” – John C. Lee AKA The Chart Addict
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