Looking Forward by Looking Back

For a period of time Guppy Multiple Moving Averages captured my imagination and I spent a godly amount of hours analyzing them. One of the main problems I now realize I had at the time was content sans context. While I understood the core nature of trend trading and what it represented, I was lacking a deeper understanding of market mechanics and the relationship between complete set ups and being able to act upon them. As a result I was looking for some magical transformation in my knowledge yet still ended up in a desert using sandpaper as a map. 

 

Over the past two weeks I've been revisiting old notes in order to see what progress I have made. At times I find myself utterly absorbed trying to take the next step I neglect to stop and look around and take a gander at the view. Lately I've found myself repeating a number of the same steps but I'd never know because the scenery is full of dunes and the wind keeps sweeping away my foot prints. Considering this I found it necessary to get my bearings and review.

 

The basis of GMMA analysis is tracking two types of market participants through moving averages, the traders and the investors. The traders are represented by the 3, 5, 8, 10, 12, and 15 EMA while the investors are represented by the longer term 30, 35, 40, 45, 50 and 60 EMA. Based upon the moves of these averages, the underlying sentiment of these two groups can be analyzed by their interaction. A core interpretation of this relationship from the traders perspective is whether or not the investors are supporting the move as indicated by the separation between these two groups of averages, and the separation of the longer term averages themselves as well as the support shown by the longer term averages when the shorter pull back into them.

GMMA Trend Velocity

One of the techniques of GMMA is the Trend Volatility Line, which I've dubbed Trend Velocity Line. Darryl Guppy explains the mechanics of this on his website.  Using these basics, I would move day by day across various charts and document the number of days it would take the 30 EMA to catch up in price to the 15EMA, and the separation and compression of the longer term averages. Additional notes I took were the pull back zones, pinpointing entry signals based upon price breaking the previous peak of the 3 EMA. As much as I tried to make this work at the time, I never quite could. In retrospect, I can now see that I had a full trading system to implement, but I also realize there were some fundamentals lacking in my play book to make something like this work for me. 

Currently one of the market structures I've been studying is momentum. With a clearer understanding of the mechanics and measurements of momentum I decided to take another gander using the NASDAQ since 07/27. I've illustrated key periods of interaction between the traders and investors and how I would now interpret this action. There are four zones where the traders made rally attempts and in each zone the interaction of the investors is telling. 

NASDAQ GMMA Analysis

 

Rally Attempt 1 shows a bounce by the traders, but this quickly fails as the fastest EMAs, the 3 and 5 period barely align to the upside before breaking down.

Rally Attempt 2 shows a crossing of the short term EMAs and price begins to enter into the range of the investors, which in the theory of GMMA analysis are important because it is their buying that ultimately supports the move. In this zone these longer term averages begin to show some support as evident by the flattening of the 30 and 35 EMAs, but not enough as this rally break fails. Further, the short term EMAs did not have a full cross over and realignment to the upside suggesting this attempt has a high probability of failure.

Rally Attempt 3 shows price breaking above the longer term averages and also shows them beginning to compress and flatten out indicating that the there may be some support showing up here from the investors. The velocity of these longer term moving averages is also beginning to slow in this area.

Rally Attempt 4 shows a confluence of price above the longer term averages, a complete alignment of the shorter term to the upside, and further flattening and compression of the longer term averages. As of 10/21/11, these averages are beginning to cross over themselves and realign to the upside.

GMMA Separation Count

Another way of looking at this is the rate of change of the longer term averages as represented by the difference between the 30 and 60 day EMAs. The peak separation was 106 and from there I've jotted at 5 day intervals the separation of these. Additionally, I plotted the number of days it takes the 30EMA to catch the 15 EMA price- between 08/12 this took 6 trading days. On that date I draw a trend line down to where the 15 EMA is and from that price draw a trend line across the chart. As can be seen, this lines has stood for 43 trading days without breaking.

Some other key factors that have become clearer in revisiting some of my old notes and applying it to my studies of underlying market breadth is that the signals given by the the GMMA have been in time with the other indicators I use. The Stock Bee Market Monitor that I use signaled bearishness on 07/27 and the following day the GMMA crossed to the downside. 

MM Bearish Signal

 

Comparing the GMMA to the $BPNYA, the $BPNYA gave a Bull Alert on 10/11, the GMMA crossed to the upside on 10/18, and the $BPNYA gave a Bull Confirmed signal on 10/10. Again, this signal is in line during this period at least. And the Market Monitor I use also indicates bullishness.

MM Bullish Signal

In placing my former thoughts through a sieve of current context I'm attempting to create continuity and bridge some gaps that I had at the time and some of which I continue to have.  In some ways what I thought at the time isn't much different then what I think now and this has both positive and negative connotations.  By taking time to review I can more clearly see where I am dog paddling, where I am swimming, and where I am drowning. More importantly I view this as a process of demystifying tools and indicators to avoid the trap of looking for something special when there are more significant areas where energy should be directed.  All three tools are closely correlated in their timing and each have limitations, but the greater limitation is not being able to do anything about the signal.

Bull Snort

$BPNYA

The $BPNYA has given a bull alert signal.  For further foundation, visit Stock Charts

Be Afraid!

In 1637, a theorem was penned in the margin of Arithmetica-- Fermats Last Theorem. Over the next three centuries the brightest minds on this planet took up the gauntlet and attempted a proof.  If something postulated in the margin of a book in a language understood across the globe regardless of one's mother tongue took over 300 years to prove under rigorous testing and became accepted, exactly how is a problem like the world economy with specific interest to each country going to be resolved in short term, and by politician to boot?

  

We can't solve problems by using the same kind of thinking we used when we created them

--Albert Einstein

That politicians can accomplish anything is stupefying enough, but that they can actually do anything about the world economy, something they have repeatedly shown to be inept at and without expertise of, and in many cases actually participants in destabilizing, is pure silliness. In addition, the belief that the scale of the world economy can be simplified by man into a theorem that can be scribed into the margin of a book to be proved verges on hubris.

That being said, the cover of the recent Economist in a few words, 'Be Afraid' , emblazoned upon space small enough to be in a margin does speak of a proof understood by market participants- contrarianism. In many ways this makes sense because if the belief is that politician have the solution, what exactly is the expertise of these journalist and editors to make such bold claims to begin with? Astute market participants have noted through empirical evidence that when the head lines of major magazines and news papers become apocalyptic in tone about the economy, the market tends to disagree. 

Economist 10/01/11 Cover

 

Taking this into context, I return to where my thoughts left off. Last week I posted a few charts and noted the precarious position of the Russell sitting at the bottom of the range formed since August. Having clipped this low twice in a week and having a recent close below it, I believed there was a high probability this low would break. At the lower end of the range I placed an oval followed by three question marks because even with the weight of evidence suggesting a break to me, nothing is certain. On Monday the low was broken with a convincing 5%+ drop in for the session. A follow through on this was what I expected as the speculative line of least resistance suggested further cascading, however this is not what transpired; and while a pause the following day was not out of the question, a 6.41% pop completely bamboozled me and carried price straight back into the range. 

Russell 2000 10/07/11

On a weekly chart, the SP-500 broke the bottom of its range as well yet finished with a close in proximity to the upper third of the move. I've chosen not to extend the boundaries of the range I defined four weeks ago because I did not want to simply highlight the complete price range into obscurity, but rather emphasize the price move in context over time.

SP-500 Weekly

Looking over the landscape this week what is patently obvious by now is that this is an exceptionally volatile range bound market, with Grand Daddy Dow having 4 moves of 1%+ over the week while Uncle Russell had moves of -5.8%, 6.42%, 1.46%, 2.38%, and -2.61%. With Tuesday commencing earnings season and a couple of key companies reporting thereafter, an important catalyst is in play. Good earnings may turn focus away from the news events that have been a driving force behind the market these past few months. If this begins to look like a poor earnings season, those 3 question marks might be removed..

The Other Side of the Penny

FinViz Top 5

Over time I've looked at the Top 20 Morningstar Industries price percentage change over one month for clues relating to investor sentiment. Every coin has its flip side, and after looking at the recent list and being unable to make it past 5 that have had ended up positive, I thought about flipping the coin and looking at the bottom 20.

FinViz Bottom 20

Discounting the first slot, Music & Video Stores which is basically Netflix, the 2nd and 3rd slot are worth highlighting. Copper and Aluminum are used as barometers of economic health and noting that they have led the pack to the downside is something worth paying particular attention to. On October 11^th earnings season kicks off with Alcoa's announcement and considering the current environment, this is an important catalyst to be aware of.

 For further research, a recent article regarding copper from the Economist

Ruh-Roh, Again?

2011 is the year of the rabbit, but it may as well be known as the year of the range as well. With the exception of the final leg up through January and the ferocious sell off of late July, the market had been oscillating within a consistent range from February onward before cracking on July 27^th.  As exemplified by the following chart of the SPY, the rapid sell off from late July finally settled down on August 8^th where the lowest close printed followed by range with high volatility.

SPY Year to Date

 

Returning to a previous chart I've (posted), 

SP-500

the SP-500 on a weekly time frame continues within the price range boxed at the time. From the perspective of Weinstein this is clearly stage 4 with price below a declining 30 week moving average and from the perspective of Wyckoff it remains to be seen if this is redistribution before another leg of mark down. On the chart I make a note at the bottom of the range, “If range breaks... Speculative Line of Least Resistance.” For an explanation of this I turn to Edwin Lefervre's classic Reminiscences of a Stock Operator:

 

This experience has been the experience of so many traders so many times that I can give this rule: In a narrow market, when prices are not getting anywhere to speak of but move within a narrow range, there is no sense in trying to anticipate what the next big movement is going to be—up or down. The thing to do is to watch the market, read the tape to determine the limits of the get-nowhere prices, and make up your mind that you will not take an interest until the price breaks through the limit in either direction. A speculator must concern himself with making money out of the market and not with insisting that the tape must agree with him.

Therefore, the thing to determine is the speculative line of least resistance at the moment of trading; and what he should wait for is the moment when that line defines itself, because that is his signal to get busy.

While the major indexes are still boxed in their range, one significant index is not, the Russell 2000.  The Russell has closed under its August 8th print on 09/22 and again on 09/28.  Having pierced this close twice and considering that indexes are a lagging indicator to begin with, this portends more down side looming on the horizon; and as the Russell also has a characteristic of being a leading index, being one of the first to break the range carries additional weight.  While it is not up to me to determine the limits of these get-nowhere prices, another mark down period is looking highly probably and preparing for such would be prudent.

Russell 2000 09/30

 In addition, however one wishes to define a bear market: a key index below a 50 or 200 MA, below a 30 week MA, down 20%+, the Russell clearly fits all of these definitions so it is also important to keep in perspective that a range in a bear market will exhibit different behavior tendencies than a range in a bull market.  Any thoughts I had that this is going to be a simple correction have been dismissed.  It's important for me to recognize this if only for the simple fact that it helps me study this market in its proper context and cater my learning towards what it is expressing upon me and not what I want it to be doing based upon what I am studying.