October 04, 2010 – 02:40 pm EDT
Sorry for the delay with this weeks newsletter, I was out at the beach all day Monday (NZ Time) and when I had almost finished writing the newsletter the internet went down. Since then the new week has gotten off to a rocky start. Here is the report as written about 10 hours ago:
The market didn’t achieve much over the last week but on a positive note it didn’t do any damage either. There is however a significant volume divergence that has become obvious and in a fledgling bullish reversal volume flows should be healthy across the board. The fact that they are not is a real cause for concern.
****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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This is positive – IWM up 1.30% and SMH up 0.62% while QQQQ is down 1.31%. Also SMH and IWM are now the furthest from their recent lows. This pattern must continue if the bull is to manage a second leg to this rally.
Learn more – ETF % Change Comparison
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A Look at the Charts
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The volume divergence is clear and must not be ignored. While SPY is making a higher high OBV is near to a lower low.
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QQQQ also has a bearish volume divergence and will need continued support from SMH to hold together.
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It would be exceedingly bad news if SMH closes below $27, and will most likely mark the return to the crab market.
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IWM is actually looking the best of the bunch and hopefully it can continue to lead the market higher. It must maintain that bullish volume trend.
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A rally from IYT would do wonders to support this market and the volume flows of its component stocks are very strong. A close below $80 would be bad news.
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OM3 Weekly Indicator
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‘Strong Buy’ signals with ‘Bull Alerts’ persist across the board.
Learn more – The OM3 Indicator
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TransDow & NasDow
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The NasDow remains on No Signal while the TransDow indicates that the Dow is dominant over the Transports. Historically the market has been very unproductive under these conditions.
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What the TransDow Readings tell us:
The TransDow measures dominance between the DJ Transportation Index (DJTI) and the Dow Jones Industrial Average (DJIA). In a strong market the more economically sensitive Transportation Index should be dominant over the DJIA.
Historically the DJTI has been dominant over the Dow 45% of the time. The annualized rate of return from the DJTI during this period was 18.47% with the biggest loss for one trade sitting at -13.27%. The annualized return from the DJIA during the periods it was dominant over the DJTI was just 4.06% and the biggest loss for one trade was -16.13%. A 4% stop-loss is applied to all trades adjusting positions only at the end of the week.
What the NasDow Readings tell us:
The NasDow measures dominance between the NASDAQ and the DJIA. Using the same theory behind the Trans Dow; in a strong market the more economically sensitive NASDAQ should be dominant over the DJIA.
Historically the NASDAQ has been dominant over the DJIA 44% of the time. Taking only the trades when the NASDAQ is above its 40 week moving average the annualized rate of return was 25.47% with the biggest loss for one trade sitting at –8.59%. The annualized rate on the DJIA during the periods it was dominant over the NASDAQ is just 8.88% and the biggest loss for one trade was –12.28%. A 8% stop-loss is applied to all trades adjusting positions only at the end of the week.
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LTMF 80 & Liquid Q
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Liquid Q remains in cash while the LTMF 80 continues to hold a position in QQQQ that is showing a minor profit.
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Historical Stats:
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How The LTMF 80 Works
LTMF stands for Long Term Market Forecaster. It reads volume flows relative to price action and looks for out performance of volume measured on a percentage basis over the prior 12 months. During a sustained rally the readings will reach high levels (near 100%) making it imposable for the volume reading to always outperform price so any reading above 80% will maintain the buy signal. This system has outperformed the market over the last 10 years but performance has been damaged by some nasty losses. It only produces buy signals and only for QQQQ.
How Liquid Q Works
Liquid Q completely ignores price action and instead measures the relative flow of money between a selection of economically sensitive and comparatively stable ares of the market. It looks for times when the smart money is confident and and can be seen by through volume investing heavily is more risky areas due to an expectation of expansion. This system has outperformed the market over the last 10 years and remained in cash through most of the major declines. It only produces buy signals and only for QQQQ. We will provide more performance details on the web site for these systems soon.
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Summary
On a positive note SMH and IWM continued to advance over the last week while the broad market consolidated. This is exactly what we want to see in a strong market. The problem is that there is a major volume divergence on SPY and QQQQ suggesting that the market is weak and soon to experience some profit taking.
If SMH closed below $27, volume flows turn bearish on IWM and the RSIs turn down then the profit taking is likely to become a return to the crab/bear market. It is too early to go short just yet and I would love to see a short squeeze defibrillate some volume behind the bulls but that appears unlikely.
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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:
“The challenge of leadership is to be strong, but not rude; be kind, but not weak; be bold, but not a bully; be thoughtful, but not lazy; be humble, but not timid; be proud, but not arrogant; have humor, but without folly.” – Jim Rohn