November 15, 2010 – 06:55 am EST
After a two and a half month relentless drive higher, finally, the market has experienced some tangible profit taking. This is both healthy and well over due. So far the pull back has been small and controlled but it is important that it remains this way and hopefully with relatively light volume. Lets take a closer look… But first, a hilarious and regrettably accurate explanation of Quantitative Easing:
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****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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All of the influential ETFs finished the week down about 2% although SMH saw the smallest declines and is still up a huge 7.65% over the last month. If we continue to see profit taking and SMH remains comparatively strong then this would be an extremely bullish sign.
Learn more – ETF % Change Comparison
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A Look at the Charts
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A test of $117 is highly likely but a loss of support is not a concern as long as QQQQ holds strong.
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A test of $50 would be fine as long as SMH holds onto $29.
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With this rally built on weak volume SMH must hold onto $29 or we will enter the danger zone (again).
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IWM has so far failed at resistance and has very poor volume flows. Keep in eye on the small caps as a break down here could spook the broad market.
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With strong volume behind the Transports they offer real backing to the long term bullish argument.
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OM3 Weekly Indicator
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The buy signals remain active although they are statistically old. The bear alerts warn that the weekly cycle is in decline.
Learn more – The OM3 Indicator
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TransDow & NasDow
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The Transportation index and NASDAQ remain dominant over the Dow which is a positive sign. Small profits remain on both trades but those profits could quickly disappear with a little more profit taking.
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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 maintain active positions 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
The profit taking we have seen so far is healthy and there is room for plenty more before causing any damage. The key moving forward will be to observe the nature of any further declines. If we see light volume plus SMH and QQQQ holding onto support then we will soon have another great buying opportunity. If not then we must be ready to lock in what is left of the profits from the recent rally.
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.”
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Quote of the Day:
“Identify your highest skill and devote your time to performing it. Delegate all other skills.” – Ronald Brown