November 01, 2010 – 06:20 am EDT
The market was flat over the last week but there was one major development… SMH violently broke through resistance and finished the week 3.65% higher. This took me by real surprise but is a very bullish sign and does now mean that we can get away with seeing some profit taking without killing the bull. Over the short term however profit taking is becoming more and more likely.
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ETF % Change Comparison
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SMH is now over 21% off the low it set 59 days ago which is twice the move of DIA. Now the transports are less than 1% from making a new high, if they can do this then it would be a very bullish sign.
Learn more – ETF % Change Comparison
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A Look at the Charts
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Can the grind higher continue? Momentum is slowing but prices are yet to take a step back.
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Well out in new high territory and with SMH playing catch up; QQQQ is gaining credibility for its longer term prospects.
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Again I underestimated this market but the recent action from SMH is a very bullish sign.
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Volume on IWM is particularly weak and further suggests short term weakness.
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If the Transports breakout here then expect yet another leg to this rally.
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OM3 Weekly Indicator
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The OM3 Indicator has issued its first ‘Bear Alerts’ in 7 weeks further indicating that the market momentum is slowing but all buy signals remain active.
Learn more – The OM3 Indicator
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TransDow & NasDow
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This is a positive development; the NasDow indicates that the NASDAQ has taken dominance over the Dow and opened a new position in the NASDAQ on Friday. The TransDow continues to maintain a position in the Transportation index and is showing a small profit.
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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 remains in QQQQ and is showing a tasty little profit of 8.73% after 42 days while Liquid Q has just opened a new position in QQQQ.
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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
This market is far from perfect and should be treated with skepticism. We have been looking for excuses to sell but they never really came… the market has just kept grinding higher. Now with SMH breaking out and fresh buy signals from some of our models the longer term prospects are looking much better. Over the short term however we are due for a test of support.
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Any disputes, questions, queries, comments or theories are most welcome in the comments section below.
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Happy Halloween
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:
“Watch your thoughts, for they become words. Choose your words, for they become actions. Understand your actions, for they become habits. Study your habits, for they will become your character. Develop your character, for it becomes your destiny!” – Unknown