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mortiz

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Reply with quote  #1 

Anyone who follows market internals is aware of the missing confirmation of new price highs by the various internals indicators, particularly cumulative breadth and volume tools.

 

There is one money flow tool that has been, in most cases, confirming those indices achieving new recovery price highs, the cumulative $ weighted Up-Down Volume Line ($UD line).

 

The first $UD line example is the S&P Mid Cap 400 basket of stocks (MID). MID made a new recovery price high on Thursday, November 17th.  The MID component $UD line began warning of new price highs on the way with its breakout on November 2nd.

 

 

The S&P Small Cap 600 (SML) $UD line has already whipsawed once across its new highs line, and once again above its previous high.  The SML price is still about seven points from breaking its early August high, and its $UD line is predicting SML will make a new high.  For a valid signal, the SML $UD line must remain above the dashed red line and not fall below the line for more than a day or two.

 

 

The broader based small cap Russell 2000 index (RUT) needs a bit more than 16 points to break its all-time high achieved in early August.  The RUT $UD line behavior is a mirror of the SML $UD line in predicting new all-time RUT price highs. Again, the RUT $UD line must not give much ground below its former resistance, in time or magnitude.

 

 

The large cap S&P 500 (SPX) price finally made a new closing recovery high Friday, November 18th.  The SPX component $UD line gave one day's notice the new price high may be in the works by breaking its $UD line's previous high mark.  Here again, a couple of days in new high territory does not guarantee the index is off to 1300, but it is encouraging the SPX $UD line has confirmed the price breakout.

 

 

The NYSE composite weighted index of common stocks, NYA, is still below its September 2005 high, but its component $UD line has broken to new highs. The traditional weighted NYA price index is a bit less than 0.4% below its all time high.

 

The $UD line in the chart is plotted against the unweighted NYA index, which is 1.6% below its all-time high.  The October decline was far tougher on the unweighted NYA index than the traditional weighted NYA.  The unweighted NYA suffered a 7.3% decline while the weighted NYA lost 5.6%.  Therefore, the unweighted NYA index has more ground to make up than its weighted cousin.

 

Like most of the other indice's $UD lines, the NYA $UD line's breakout still needs to prove this isn't a fluke by hanging tough in any near term correction.  By remaining above its all time high for several days, the NYA $UD line's recent breakout will gain stronger validity.

 

 

The next $UD line is that of the NDX components, and provides the usual fly in ointment by not yet confirming the recent NDX price breakout.  The only solace in the non-confirmation of the NDX price, is its $UD line's batting average of predicting price moves is mixed; note the NDX $UD line will make new highs without the NDX price following suit, and will break support while price will not.  For reliable NDX $UD analysis, it is best to focus on its McClellan related indicators.

 

 

Somewhat off-topic, but one NDX related sentiment tool is suggesting more price upside in the intermediate term.  The below chart is a composite, NAV adjusted asset flow indicator for the Rydex technology, telecom, electronics, and internet sector funds.

 

Despite the new NDX recovery highs, note the degree Rydex traders are ignoring the four primary tech related index funds.  One could point out the tech hot money is focused on the leveraged Rydex NDX funds, but it tough to deny the current lack of interest in these funds.  Until money begins flowing profusely into these funds, it is a reasonable bet the NDX will continue to trudge higher.

 

 

In summary, the $UD indicators for many indices are perhaps stealthily providing signals money is indeed flowing into the components of these indices, confirmation that is not showing up in many of the more traditional volume and breadth indicators.  I feel the odds are good the lack of confirmation of many traditional internals indicators are serving as the wall of worry for the market.  Those of us who study the McClellan indicators and tools such as the $UD data, recognize there is strength beneath the surface, as measured by these internals tools.

 

The caveat now is for the market to be stubborn in giving up much of its recent gains, particularly in its money flow related indicators.

 

FWIW

 

Randy

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jmicou

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Reply with quote  #2 

Since the peak of the % Commercial Open Interest Short, the decline is suggestive that commercials are buying into the market. After the ratio peaked, the market did make its decline.

 

The other tendency of this ratio is that as it rises until it peaks, the markets can rise, too. The idea for this chart was generated by Larry Williams' book, "Trade Stock & Commodities with the Insiders." Not a great timing tool, but giving credence to the suggestion that money is flowing into the US equity markets.

jmicou

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jmicou

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Reply with quote  #3 

Sorry. The chart posted is flawed. Please see this thread for the corrected short only.

http://traders-talk.com/mb2/index.php?showtopic=45014&st=0&p=180875&#entry180875

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mortiz

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Reply with quote  #4 

Johnny,

 

Good to hear from you.  with respect to Larry Williams, you are aware he has a new book out about COT?  I notice you are using the percentage of open interest with the commercials COT data, so I assume you follow Larry.

 

While on the topic of stock index futures commercials positions, Tom McClellan has given permission to post (on TW) an excerpt from Friday's McClellan Market Report.  Here are the McClellans' thoughts on the current stock index commercial's COT positions:

 

 

"The top chart on page 2 shows our composite Commitment of Traders indicator based on all stock index futures. We combine them on a dollar basis, taking into account that the contract specifications make each of these stock index futures worth a different amount. A pessimist might note that the commercial traders have been moving quickly toward the net short side even as the stock market rallies. But our response is, that’s what the commercials do! If you look back at the other rallies in the SP500, you’ll see that this indicator tends to move downward as prices rally, showing that the commercials are abandoning the longs that they accumulated at the bottoms. This is the normal behavior. It only becomes a problem for the rally at the point when the commercials reach an imbalanced extreme position, and given the range for this indicator over the past 5 years, it has a long way to fall before we would say that the commercials are making a huge bet on the bearish side."

 

 

 

 

 

Best Regards,

 

Randy

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jmicou

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Reply with quote  #5 

Randy,

 

Thank you for those kind words. The chart is most appreciated. The two following charts were just put together in response and I have yet to really look at them, much less to go back in time for comparisons.

 

Most respectfully,

 

Johnny

" align=baseline border=0>

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jmicou

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Reply with quote  #6 
The last chart I posted seems to indicate that caution is advised while the SPX is flirting with the five year Fib level around 1252.Not only are the commericals relatively lower in their long positions from the recent highs, but with the charts combined, may have done some selling into the quick rally recently. However, a longer history and closer analysis would be beneficial.

regards,

jmicou

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jmicou

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Reply with quote  #7 

0% Bears:

http://traders-talk.com/mb2/index.php?showtopic=45074

 

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jmicou

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Reply with quote  #8 

Fib/Gann weekly SPX

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dstuart

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Reply with quote  #9 

Randy how does today's analysis relate to your response to Rightfield in regards to u/d volume studies you posted yesterday? My interpretation that "the overhead supply" in the NASDAQ would never be overcome in your life time suggested that there was too much overhead supply to allow the indexes to go much higher from here. Thanks for any clarification you can provide.

 

 

http://forums.technicalwatch.com/tool/post/fib_1618/vpost?id=757116

 

Dennis

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mortiz

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Reply with quote  #10 

Dennis,

 

With regards to the NDX overhead supply, IMHO, I look at the 2000 price bubble in tech stocks as a similar phenomenon to the 1929 bubble with the Dow.  The Dow suffered a 90% decline from the 1929 top to the 1932 bottom, and required approximately 25 years for Dow to exceed its 1929 high. The NDX decline was in the neighborhood of 80%.

 

The NDX may or may not require 25 years to exceed its 2000 high, but I feel the 2000 tech top will go down as one of the great bubbles in market history.  Since I am close to the front end of the baby boomer generation, there is a reasonable probability I will not see those 2000 highs exceeded.

 

The massive overhead supply of NDX dollar weighted UD volume is reasonable evidence in support of the theory.  With many of the NDX components reaching several hundred dollars in price during the 2000 top, the arithmetic behind the $ weighted volume, closing price * EOD volume, tells the story of the supply.

 

In this post, I am merely looking at the intermediate term with regards to money flows across the various indices are telling me at this juncture.  In most indices, the cumulative $ weighted UD volume line leads price in a fairly consistent manner.  The NDX happens to be one of those mavericks whose $ weighted UD volume line does not always provide consistent signals.

 

By the way, the NYSE common stock $ weighted UD volume MCO went to higher high on Monday, likely promising more good new for the bulls going forward.  That MCO has reached overbought levels usually coinciding with ST pullbacks or consolidations, but based upon its pattern over the past four weeks, it is highly unlikely the upside fireworks are over in the IT.

 

Thank you for the good question, and I hope the rambling was somewhat clear (early morning while typing this).

 

Best Regards,

 

Randy-

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dstuart

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Reply with quote  #11 

You answered my question Randy. Thanks for the detailed explanation.

 

Dennis

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