January 17, 2011 – 06:35 am EST
In our last newsletter we spoke of an imminent breakout stating that “A close by QQQQ above $55 and IYT above $93 would be very bullish and likely mark the start of another leg to this rally.” Both of these resistance levels were broken that Monday and the market has strongly rallied ever since. Lets take a closer look…
**Please excuse the absence of a newsletter last week, it is summer here in New Zealand and I had an unexpected extension to my holiday. Also welcome to our new readers! We grow by word of mouth so thanks for spreading the word.
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ETF % Change Comparison
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New highs almost across the board are a great sign. Also you can see that SMH is back leading the market, this gives further validity to the recent leg of the rally.
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Learn more – ETF % Change Comparison
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A Look at the Charts
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Volume is still not as strong as it should be but the price action from SPY remains strong.
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The close by QQQQ above $55 saw the start of the breakout and has been backed by strong volume.
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SMH is hugely overbought but its fantastic to see the Semis charging ahead so strongly.
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IWM needs to see OBV moving higher to confirm the price action.
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With weak volume and sluggish price action, IYT is unlikely to be a market leader.
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OM3 Weekly Indicator
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Strong Buy signals remain active after 20 weeks. I can’t recall a time in the last 5 years that they have lasted so long.
Learn more – The OM3 Indicator
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TransDow & NasDow
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The Transports remain dominant over the Dow which is a positive sign and the TransDow position in DJT remains active. 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 is showing a profit of 19% and the position on QQQQ remains open. Liquid Q is still 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
It is great fun when the market can do no wrong like this but don’t lose sight of the risks. The danger comes to those who have been sitting on their hands and realize that they have missed out on an epic rally. The rest of us are sitting on healthy profits but now is not the time to be jumping on the band wagon as the risks of a sudden pull back are very real. For now however, let the good times roll.
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 clock is running. Make the most of today. Time waits for no man. Yesterday is history. Tomorrow is a mystery. Today is a gift. That’s why it is called the present.” – Unknown