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Sigue_Lideres

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Posts: 67
Reply with quote  #1 

Hi all,

 

I added more on the long side today based on a continuation of the relative strength in smallcaps, the lastest spurt of which started on 09Mar. It's been my main rudder lately through all the technical cross currents.

 

(i've attempted to attach a chart)


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mortiz

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Reply with quote  #2 

Hi SL,

 

Welcome to Technical Watch and thanks for the RUT RS status update.

 

While on the RUT topic, it may be useful to take the pulse of RUT sentiment, breadth, and money flows.

 

Remaining in the spirit of relative strength, below is a chart of the unweighted RUT average divided by the traditional weighted RUT.  The weighted distribution of RUT components is not skewed toward a few larger stocks like some indices, but nonetheless, there are subtle differences between the weighted and unweighted RUT. Since mid-February, the weighted RUT version has been slightly stronger than the unweighted RUT.

 

However, the choppy nature of the RS decline suggests the RUT component universe in its aggregate continues to show periodic life, and is making yet another assault on its controlling resistance line.  A clean break of the R-line would be an indication RUT would have the energy for another robust upmove.

 

 

The RUT component AD McClellan Oscillator (MCO) reached a nice, but not too oversold level last week (-64), and has since rebounded to -21.  Its next objective is the controlling R-line, then the zero line.  To muster a sustainable rally, the RUT AD MCO must find its way above the zero line and remain for a few weeks.   A failure to exceed the zero line next week, will likely result in a lower price low than posted last week, setting up a divergence in the AD MCO wrt price before charging to new price highs.

 

 

The RUT AD McClellan Summation index (McSum) remains in positive territory (currently at +233) since the latter half of November, 2005, a testimonial to the strong liquidity in the small caps.  However, nearly five months above its zero line is quite a feat, and time will tell if the indicator will need to regroup below zero prior to gaining sufficient energy for a robust upmove.  Note how the important +500 line and controlling R-line continue to stop the RUT McSum from really taking off to the upside.

 

 

On the RUT money flow side, next is the $ weighted Up-Down volume ($UD) MCO.  For RUT, I prefer using the $UD indicators rather than the traditional UD volume tools, due to many very low priced RUT components with large daily volume that can skew the volume indicators either direction.  The $UD indicators provide a "fairer" balance between the low, medium, and higher priced components with respect to distorting influences by some of the high volume, low priced issues.

 

Like the RUT AD MCO, the $UD MCO achieved a nice, but not "too" oversold posting of -65 last week.  Extreme oversold MCO postings in the RUT MCOs, lower than -85, often result in short swift rallies, but inevitably result in 2% to 5% lower price lows in the coming months. Moderately oversold MCO levels as seen last week, are often (but not always) followed by nominal lower lows in the near term, but set up the classic positive divergences that lead to robust rallies.

 

 

The RUT $UD McSum has remained above its +500 line since November 2005, illustrating the relentless positive net money flows into this group.  As with its AD McSum cousin, several months above +500 is a sign of strength, but also raises the possibility the index internals need a rest.  A break out of its declining flag, in either direction will likely set the price tone for the intermediate term.

 

 

 

Small cap related sentiment indicators are showing signs of uncertainty, and are definitely not in the range typically associated with IT tops.

 

First is the NAV adjusted asset flows of the Rydex Mekros fund, whose price moves 1.5x percentage-wise, relative to RUT.  The Mekros fund is considered the "hot money" vehicle of small cap bulls.  This indicator could be classified in the mildly bullish zone of its range over the past year or so.  A lower reading would be preferable for a sustained price rally, but it has been interesting how skittish the bulls get (assets drop quickly) on any mild decline.

 

 

A little over two years ago, Rydex introduced a small cap inverse, or short fund.  Its asset flow history is not extensive, but the money flows into this fund have been interesting over the past few weeks.  The NAV adjusted asset flows, on both a daily and 10 day MA basis, have recently reached levels second only to the October 2005 price lows.  As observed earlier, this fund has a limited history, but the behavior of the Rydex traders in this fund over the past several weeks sure smells of top picking, possibly just hedging, but it certainly suggests uncertainty in the small caps.

 

 

 

Last is an indicator developed to measure fear or complacency in a given index using the volume of the IWM ETF in both its options and ETF volume.  The indicator is derived by comparing the daily volume of the IWM options and ETF volume against their respective 50 day MAs. I then multiply the two scalar adjusted ratios and smooth the results with a 9 day EMA.

 

The theory behind this indicator, is when volume in the IWM ETF and options increase to higher levels relative to their detrended values, the action flags trader enthusiasm for leveraged IWM positions (usually heavily skewed toward puts) or the very liquid IWM ETF.  For the IWM options, I use the "all exchanges" volume published by the OCC, thus the history of this indicator is limited as well, since the data is available only since late 2003.

 

However, it has done a decent job of identifying fear in the IWM traders. 100 is the neutral value for this indicator, and postings above 150, are usually followed by price rallies of some degree after the indicator rolls over.  The high last week was 164, and is nowhere near the levels seen a some important price lows, but note the August 2004 rally was kicked off a levels comparable to levels achieved last week.

 

 

IMHO, the current configuration of various small cap indicators could be supportive of a price rally from here, but there is a risk of more near term weakness setting up potential nice divergences, and perhaps driving sentiment indicators to more solid extremes. However, any near term weakness will likely be muted on a percentage basis, and continued monitoring of RS and other indicators will provide useful clues in what to expect in that event.

 

Cycle-wise, some respected Hurst cycle analysts are looking for a 20 week nesting of several cycle harmonics in mid-May.  Cycle harmonics nesting can result in noticeable price lows, but have often been points in time where prices rise out of (consolidation patterns), and not necessarily a V-type price bottom.  By following the behavior of the small cap underpinnings, perhaps the action over the coming days and weeks will provide clues of what price patterns the 20-week cycle low will emerge from.

 

FWIW

 

Randy

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Sigue_Lideres

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Posts: 67
Reply with quote  #3 

Hi Randy,

 

You must have a staff to manage and interpret so much information! Impressive.

 

Do you construct and maintain your own composites? The weighted/unweighted RS is a real nice way to look at breadth and it would seem to indicate that the tenative relative strength of the smallcaps is even more tentative when viewed from that perspective (at least when comparing the unweighted smallcaps to other weighted averages). I almost cut back on my long positions on thursday, and probably would have if i'd had your weighted/unweighted chart.

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doc

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Reply with quote  #4 

Very nice work, again, Randy, as usual.

 

The RUT unweighted chart is certainly an eye opener, likely pre-saging a drop into the anticipated mid-May lows. It looks very similar to the Feb-May drop in 2005.

 

I also note a pattern, at least over the time-span shown, where the wt'd index has RS out of the gates of a major low, and after 4-6 wks, the unwt'd index captures the RS.

 

Thanks for sharing it.

 

Doc

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mortiz

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Reply with quote  #5 

SJ,

 

No staff for me, I am just an amateur TA enthusiast with a non-market related day job. The RUT internals data is derived using some software and scripts I developed to scrape the daily price and volume for RUT components as well as many other index components.  There are a couple of commercial sources out there for index component breadth and volume, but I've found they are not diligent enough for my tastes in maintaining up-to-date component lists.  Particularly with RUT, maintaining correct component symbol lists is almost a daily chore.

 

Anyway, the unweighted indices are derived by using the old Quotron (designated as QCHA in Barrons) method, by calculating the daily percentage change of each component, then averaging the composite daily percentage price changes.  The unweighted averages often tell a different story than their weighted brethren, and yes, do provide insights into their daily AD lines.  What the unweighted indices provide above and beyond the breadth numbers, is how much did the advancers (or decliners) move on a percentage basis. 

 

To illustrate, below is the RUT component cumulative AD line, truncated to the August 2004 price bottom for clearer resolution.  The RUT AD line topped out on March 31st, after taking out its August 2005 high, an encouraging event since the small caps in particular serve as liquidity's "canary in the coal mine".  This action suggests there is still plenty of liquidity in the system willing to be parked in the broad-based universe of stocks.

 

Note the RUT AD line fell below its 5% trend (39 day EMA) last week and snapped back to the EMA Thursday.  In addition, the RUT AD line is struggling to find support at the former resistance line across its December 2004 and August 2005 AD line highs.  Recall the distance between an AD line's 5% and 10% trends is the level of its corresponding AD McSum, thus as long as the orange 10% AD trend remains above the black 5% trend, the AD McSum is in positive territory.

 

In contrast, the unweighted-weighted RUT RS line topped in mid-February 2005, suggesting although the smallest troops were still advancing on-balance (per the RUT AD line), their collective percentage price gains were not strong enough to overcome the weighted RUT average on a relative strength basis.

 

As Doc pointed out, the unweighted index behavior is often a pre-cursor to potential weighted price turns going forward.  In addition, the RUT unweighted-weighted RS telegraphs potential trouble ahead for the RUT AD line, the summer of 2005 being one example. The RS line rolled over a couple of weeks before the AD line topped out.

 

 

I'm short on time this morning, but when time allows, an overlay of the RUT RS line and AD line may be of interest.  Anyway, keep stops in place for your positions and all will be well. With OPEX on the horizon, about anything can happen.

 

Doc: when time allows, we need your cycle work posted on TW. With the current climax indicator (CLX) configurations, your cycle work would be very useful in determining the importance of the current offset status.  Later today, I'll post the CLX updates and hopefully gman or cheif will weigh in with their thoughts on that topic.

 

Thanks for your feedback...

 

FWIW

 

Randy

 

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Sigue_Lideres

TW Member
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Posts: 67
Reply with quote  #6 

I've seen other's post (elsewhere) about rotation from small to large caps, but today was the first real evidence that I have seen.

 

Anomalous divergence is suggested by today's spike (the last red histogram bar).


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Sigue_Lideres

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Reply with quote  #7 

The anomalous relative strength in the Qs vs. IWM that I mentioned after thursday's trading was offset by an even stronger anomaly in the opposite direction on friday (the 3rd strongest in over 2 years by my measurements).

The dynamics of this relative strength relationship suggest to me a strengthening of the overall market, with the dow etf nearly keeping pace with the russell 2000. One could, i guess, argue for a "bipolar" market with the techs dragging the smallcaps into stalemate.


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Sigue_Lideres

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Posts: 67
Reply with quote  #8 

Alive and kickin' as far as i can see. I believe that IWM achieved it's high of the day in the 4:00-4:15 lightning round.

 

The last histogram bar suggests the strongest rate of change in the IWM/DWC divergence line since 20Jan. Divergence with dow is not as strong, btw. If the dow is gaining relative strength, it is very slow in developing to date. A little gasoline on the NDX might really ignite a rocket???


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Sigue_Lideres

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Reply with quote  #9 

Relative strength means nothing without internal/absolute strength.

 

I'd venture to say that regardless of the technical criteria used, this was a tough day to call as to whether today's action indicated the beginning of a change in the intermediate term trend or grand buying opportunity. Of the 8 holdings that i sold, only a couple were on what i would call clear sell signals. Most ended the day very close to levels where a reaction might be expected. Case in point, the attached chart of IWM. You could draw trend lines a few different ways to show that the trend held or was broken. I have interpreted the price action (especially when considering volume trends) to indicate that a change of trend is probable. I'll be looking for new buy candidates, though, if there is any reaction/no follow-thru from here.

 

Interested to see how others interpreted today's action.


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Sigue_Lideres

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Posts: 67
Reply with quote  #10 

FWIW, this is what a full-blown intermediate-term sell signal looks like to my momentum anomaly "tape measurer" (the green and red histogram bars). A caveat to this is that selling climaxes look very similar, but usually occur after a longer period of weakness.

 

No predictions how long/far this will carry through, but i ended friday's trading about 25% short. I do expect a scary reaction in the not too distant future and will evaluate at that time whether to add to shorts.


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