Ouch !

The Qs made considerable progress this past week, climbing off the 20DSMA and almost making it to the 200DSMA. Today's action however, completely reversed that gain. We'll look at some of the interesting nuances of Friday's intraday chart tomorrow within the context of the weekly update. Although volume was not particlularly high today, the virulence to the downside certainty was. When the NYAD opens at .13 you know the prospects for an up day are pretty low. . . and today's performance is about as low as it goes. Even with today's whack job, the Qs are not oversold however, so the next support level at 42.15 is looming. If that leg gets broken and we continue down through the February lows, and then to the January lows, the inverted current W pattern has a lot of air beneath it before the next support level . . . as I have mentioned in several previous weekly updates. . . which is around 36.

Qs consolidate

Qs trading today was notable for the lack of pivot hits. Today's volume was almost identical to yesterday's so no tell there, but considering that both the open and the close were dead on the PP and yesterday's high provided heavy overhead resistance, we're likely to see some short term weakness coming in. As tomorrow is Friday, that will only contribute to the bear weighting. Afterhours, Dell is down .50 and the Qs, presumably in sympathy, are also off to S1. . so the probability of a weak open tomorrow is high.
I've noted before that when the Qs fail to hit at least the first level of pivots (R1 or S1) (inside day behavior) the pivots inevitably get hit the next day. For intraday traders these pivots provide a good baseline target once initial momentum is identified.

Ultra Shorts

This is a follow up to this week's posts on the XLF, QQQQ and XLB. I was paging through the latest issue of FUTURES magazine and noticed a full page ad from Proshares listing 35 ultra short ETFs they now offer. Some of the ETFs have pretty thin volume and, as a result have .10-.15 spreads. The X2 short SMN (basic materials) on the other hand, has a .01 spread and trades .5M shares a day, as opposed to 10,000 daily shares a year ago. The X2 short DUG (oil and gas) currently trades 3-4M/day on penny spreads. A year ago it was trading 5,000 shares a day. Check out the full list and particulars at http://www.proshares.com/ . . . they've got something for every market, including China, Japan and the usual index suspects.

Deconstructing the XLB

This is the final of 3 ETF studies this week. I included the XLB for a number of reasons that make it an attractive trading vehicle. Primary is the increase in volume and options open interest liquidity over the past year. The XLB currently averages 12M shares a daily and although the open interest is dwarfed by titans such as the Qs and XLF, there is good liquidity. One significant drawback of the XLB options for short term traders is the typical .10 - .15 Bid/Ask spread. As a result, limit orders are always advised, trying to hit the midpoint. If your platform has a built-in Black-Scholes calculator, you can figure the fair value and use as a limit value.
For XLB intraday trades the 8 minute bar parabolic SAR and 20 MA provide good triggers, and like many of the higher volume ETF's it responds well to the pivots.

The XLB is unique in that 10 companies make up 70% of the net assets. There are some interesting longer term correlated pair trades that can be set up using the XLB components and I'll look at a few of these in later posts.

The XLB put/call distrinution looks completely different that the Qs or the XLF, as the puts outnumber the calls by over 5:1. With the XLB's currently at 42.77 and the bulk of puts at the 38-41 strikes my suspicion is that these are largely short put positions looking to pick up premium decay. At the same time, the lack of open interest in the forward strikes indicates little short term optimism of the sector.

Finally, the short interest chart . . . and frankly, this is a bit of a surprise. The XLB's pay a dividend - currently .81, so if you're short through ex-div then you pay for it. I thought maybe the high short interest might be the result of some long call/short stock strategies, but the thin call open interest suggests otherwise. Also note that the short interest chart goes back to 2003, when the XLB was at 18 and trading 350,000 shares a day. Maybe there's just a lot of suspicion about the sector, but basic materials have a unique feature . . . they are finite and, like waterfront property, are limited resources. No need to get into a discussion of supply side economics or micro versus macro economics here. . . suffice to say the world's population is growing and everybody wants more stuff. It's the perception that counts.

The last 3 charts were sourced through http://www.schaeffersresearch.com/streetools/indicators/equity_oi_config.aspx

The posts this week on the XLF, Qs and XLB are, of course, just my subjective opinions and interpretations of the historical data. The intent of the blog is simply to stimulate dialogue and original thinking on the part of the readers and to help them develop their own perspectives and tactics for prospering in a trading environment.

Comments and alternate explanations of the charts and data are always welcome.

Deconstructing the QQQQ

This is a continuation of yesterday's post on the XLF. Today we look at the Qs, my favorite trading vehicle, and some of the characteristics of that unique ETF. Below are the top ten components, which comprise almost 50% of the Qs asset base. As a daytrader of Qs options, I always maintain a separate live ticker watchlist of AAPL, RIMM, MSFT, INTC and EBAY. There are reasons why I don't look at the other components, but I'll discuss that reasoning in a later post. This unique thing about the Qs in this economic environment is that there is no exposure to the at risk financials and housing, and although stocks like PAYX clearly have financial links, their contribution to the Qs asset base is largely muted.

The current put/call ratio is higher than that of the XLF, suggesting the short term expectation for more downside. The open interest configuration displayed below indicates 1.4 puts for every call, a fairly substantial skew. The anomaly of 112,000 calls at 60 (current Ask = .01) is strange since the calls chain down to 53 are .01-.02. Maybe Adam can shed some light on this.

The interesting part comes with the short interest chart shown below. Since the Qs pay no dividend, a short position is free from that added liability. And since Qs options trade in $ 1 dollar strikes with typical .01 spreads (except when volatility steps up and then .02-.03 is not unusual), the ability to fade the Qs has few consequences relative to a long position. So why the decline in shorts relative to open put interest?

The last 3 charts were sourced through
http://www.schaeffersresearch.com/streetools/indicators/equity_oi_config.aspx , a free reference site that offers a multitude of indicators, tools and reference data.

I suspect the answer to the declining shorts question lies in the growth of the QID and the QLD, the X2 ProShares Ultra Short and X2 Ultra Long ETF spinoffs of the Qs. As can be seen from the charts below, QID volume has grown the past 17 months from nothing to a current daily average of 35M shares. Likewise with the QLD, other than the scale of it's growth has been more subdued. I suspect that the decline in Qs daily volume has been offset by the growth in QID and especially QLD volume as traders seek a better leverage. Spreads on the QID and QLD are typically .01 to .02 but when the market gets rolling, these things move like lightning and it's often trickey to get good limit order fills. I prefer to trade the Qs options, for a variety of reasons which I have noted many times on this blog. The Qs respond well to a variety of intraday technicals. . . they stick to the pivots like glue, and can be tracked reliably in 5, 8 or 10 minute bars with the MACD, RSI, CCI and the parabolic SAR..

They recently rolled out options on the QID and the QLD, although the QID option spreads are typicaly .15 -.30 and the spreads on the QLD options are .25-.50 (and are thinly traded) so I have absolutely no interest in them as a short term trader.

I'll add some additional statistical studies on the Qs, QID, QLD relationship in the coming days. Also see Saturday's weekly Qs update post for more background.

Deconstructing the XLF

There's been considerable blog chatter regarding the XLF lately so I thought it would be interesting to see what's going on with the ETF.
Below is a breakdown of the XLF top holdings:

What I find interesting here is that both the put/call ratio and the price are ratchetting down together. Typically you would expect to see a divergence at the bottom so the implication is that big money still has reservations about the sector.

Here are the exact numbers for the open interest configuration, showing an almost perfect bell curve of distribution and suggesting the prevalence of non-directional plays. Below is a chart of the last year's short interest. A look at the right side panel historical data for the past 14 months shows the precise change in attitude towards the XLF.

The last 3 charts were sourced through

http://www.schaeffersresearch.com/streetools/indicators/equity_oi_config.aspx , an excellent free reference site that offers a multitude of indicators, tools and reference data.

The XLF does offer a number of attractions for both active traders and longer term traders. It actually pays a dividend (currently .87) (not good for short positions) and both daily volume and option open interest have exploded over the last 8 months, with daily volume typically over 100M. The daily range is often 2% and on momo days as much as 7-8 %, so the swings are there. As with the weekly Qs update posted on Saturday, the 50 DSMA is providing major overhead resistance for the XLF, so I'd be reluctant to get too frisky with this thing to the upside until that line is broken. Since the XLF is currently below the 20 DSMA, and has been for most of February, this is the first line of resistance to overcome. There are probably some longer term correlated pairs trades here: (long GS, short C), but I'll leave that to my readers to discover.

Intraday however, tradng prospects improve considerably as the XLF responds well to various 5 minute bar indicators such as the pivots (my favorite), the MACD, Woodies CCI and a number of other technicals. I actually prefer to trade the options because of their $1 strike increments, penny spreads for most strikes, quick fills and 5-10% daily float of the near ATMs.

Qs Weekly Update

The weekly 3 linear regression study (above) shows the Qs continuing to hug the lower LR30 channel band, with little indication of momentum towards a mean reversion. As long as the Qs continue this downslope pattern, the risk reward favors the short side and unless you've never read this blog before you know the mantra. . ."sell the rallies".

The daily 3 LRs study is ambiguous, at best. Everybody and his brother has been talking up the emerging triangle formation of the market, so I won't bother repeating it here. The entire month of February has displayed this relatively narrow (but volatile) range and I missed a good opportunity to lay on a 44 butterfly early in the month. So be it. As noted above, given the current volatility, I'm loathe to commit even short term to my favorite premium decay stategeries, preferring instead to manage risk by simply daytrading the pivots and fading the rallies. No overnights for now.

This cute litle chart of the NDX (QQQQ) % bullish is another way of loooking at the current consolidation, with the 50 DSMA providing a good reference point for validating any real change in trend, if and when it occurs.

I also find the declining number of NDX stocks above their 200 DSMA to be supportive of the continued downside trend. Once again the February consolidation is evident and once again the 50 DSMA has served as overhead resistance. At the same time, the current chart looks suspiciously like a bottoming pattern. And so I ratchetted down a notch to the chart below:

This is the number of NDX stocks above their 50 DSMA and this chart actually looks rather bullish, with the current trend headed upward towards the 200 DSMA and again, the February triangle is clearly evident.

As a closing reference point I checked on the current performance of MSFT, INTC and the $SOX. Friday's close was indicative of what's going on with these market titans. MSFT was down .42 and INTC was down .48 while the $SOX finished up .45 (keeping in mind that the $SOX is at 351 and MSFT is at 27.68).

Now chart reading is an art, not a science, and therefore subject to the subjective interpretation of the the viewer. . . so one man's sell signal may easily be another man's buy signal. But, in these last 3 charts I see not so much a bottoming pattern as a ledge pattern . . . and if the stocks fall off that ledge (and they will most likely fall as a group), then the next stop is a ways down. For further arguments in support of this technical position I suggest a rereading of the VIX/ VXN post on Thursday. That's a hint of possible things to come.

I hope I'm wrong, but I prefer to be prepared for the worst.

Freaky Friday

Top window is compliments http://www.tradingday.com/ This is a free/fee site with some handy tools for both technical and undamental analysis.

Once the Qs failed to break resistance midday at S1 it looked like a sure thing for a decline to S2 although volume was suspiciously thin. The fact that it was Friday and a fade into the close was expected added fuel that that fire. The Qs actually did hit S2 at 14:55, but it was an immediate reversal. And then the last 30 minutes kicked in on parabolic voloume with a news goose. Short covering at the S1 level . . .perhaps, and Monday's tape will likely tell the tale. My short term view of the market remains unchanged and tomorrow's weekly update will look at the Qs, the SOX and the XLF.

A different perspective on the VIX and VXN

A lot of blog chatter recently has centered on expectations for the VIX. Two of my favorite checkpoints are http://vixandmore.blogspot.com/ and http://adamsoptions.blogspot.com/

My current market expectations for the VIX can best be shown on the above charts, which are the 3 linear regression studies (30,11,3) of the weekly bars of the VIX and the VXN (Nasdaq). In both cases the index is currently under the LR30 lower channel line. Since the typical behavior of the indices is mean reversion, this suggests VIX 34 is a likely next cycle target. The LR11 channel shows the consolidation range the VIX has been displaying for the past 4 months with a mean of approx 23 (current reading=24.70). Ditto the arguments for the VXN, which actually looks like it could sustain an even larger move to revert to the mean.

With both the VIX and VXN weekly cycle technical indicators getting ready to turn up, the implications for the markets are decidely negative. . .hence my ongoing reluctance to adopt any long positions. Although there are clearly bullish winners every day, I'm not a stock picker but prefer to dabble in the relative safety of the indices. . . and from that vantage point I maintain my intraday sell the rallies strategery.

More on the NYAD tattletale

Here's a little 12 day chart of the 60 minute bars of the Qs and the NYAD, showing the relationship between the high bar NYAD open and the subsequent fade down in days 1,4,5,6,8,9,10 and 12. This is not a bullish pattern, as 8 of 12 days showed followup weakness.

Then, here's a little item posted through the Doc's twitter talk that's worth a careful read: http://news.yahoo.com/s/ft/20080219/bs_ft/fto021920081334359078;_ylt=AozoX8V3CwKFRV6c_RfR1f0E1vAI

The AROON

Here's one way to help resolve the question of whether a stock is trending or oscillating.

Some comments on the AROON by Worden Bros. (TC2007):

The Aroon indicator was created by Tushar Chande in 1995. The Aroon Up line measures the strength of the uptrend by measuring the number of periods that have passed since prices reached the highest high in Period + 1 points on the chart. The Aroon Down line measures the strength of the downtrend by measuring the number of periods that have passed since prices reached the lowest low in Period + 1 points on the chart.
Interpretations
“The main assumption underlying this indicator is that a stock’s price will close at record highs in an uptrend, and record lows in a downtrend.” - Investopedia.com
“Chande states that when Aroon(up) and Aroon(down) are moving lower in close proximity, it signals that a consolidation phase is under way and no strong trend is evident. When Aroon(up) dips below 50, it indicates that the current trend has lost its upward momentum. Similarly, when Aroon(down) dips below 50, the current downtrend has lost its momentum. Values above 70 indicate a strong trend in the same direction as the Aroon (up or down) is under way.” - StockCharts.com
“…when a stock's closing price is equal to the highest price over the given period, the Aroon up will have a value of 100, which indicates that the time it has taken for the stock to reach its highest price has elapsed 100%, indicating a strong uptrend. In addition to extreme values, transaction decisions can be based on instances when the two lines cross. For example, when the Aroon up crosses up through the Aroon down, the stock is said to be in a new uptrend and should experience some upward momentum.” – Investopedia.com
“The Aroon Oscillator signals an upward trend is underway when it is above zero and a downward trend is underway when it falls below zero. The farther away the oscillator is from the zero line, the stronger the trend.” - Investor/RT
“…the age-old problem for many trading systems is their inability to determine if a trending or trading range market is at hand. Trend-following indicators such as MACD and moving averages, tend to be whipsawed as markets enter a non-trending congestion phase. On the other hand, overbought/oversold oscillators (which work well during trading range markets) tend to overreact to price pull-backs during trending markets—thereby closing a position prematurely. The Aroon indicator attempts to remedy this by helping you determine when trend-following or overbought/oversold indicators are likely to succeed.” - Paritech.com

The Aroon is available on StockCharts and Ninja Trader plus a slew of FX platforms(I don't do FX). It's probably available on other platforms (not on Schwab). Seems to work best on the indices and the big caps. I like an 18 setting for the Qs. Adjust accordingly for other stocks/ETFs depending on cycle length.

Another fade

This was a classic Open fade setup that I've mentioned many times before. The only chart you need to look at is the NYAD. When it opens in R16 turf, or anything above about R4, and then fades in the first 5 minutes. . .YOU NEED TO GET SHORT, or if you're long you need to get out.
Generally speaking if the NYAD fade continues past 6:38 -6:42 PST the odds strongly favor continued downside follow through.

With the Qs opening above R2, and then failing to hold at R1, the afternoon collaspse was pretty much a forgone conclusion. I didn't expect a fall all the way to S2, but we got within striking distance before a litle strength came in at the close. Afterhours the Qs were up .20, but as of this posting the Globex NSDQ100 was -75 so tomorrow's open might not be positive.

This was a wide range daily bar, running all the way from +R2 to S2 (almost) and today's action does nothing to alter the prognosis for the Qs that I posted on Saturday . . .

Qs put/call ratio

For those wanting to pursue the put/call indicator on other stocks or ETFs, check out http://www.schaeffersresearch.com/streetools/indicators/equity_oipcratio.aspx
This is a free site with links to other fine free info and tools provided by Schaeffer Research.
For instance, look at the ratio for XLF relative to the Qs. And the difference between AAPL and RIMM is interesting. My focus tends to be on the divergence of price and open interest, as there will typically be a reversion to the mean, but here are many other ways to utilize this data.

Qs Weekly Update

Charts top to bottom:

Monthly, weekly, daily 3 LRs studies.

% bullish NDX (QQQQ) Daily bars

See chart notes on right side panel for indicator details.

It's hard to find a bullish tone in any of these charts as virtually all time frames are downtrend. The weekly chart, in particular, shows a lack of buying and this week's negative doji does not look encouraging.

The daily bars are coming off the upper LR30 channel band and the technicals are negative.

I hate to be a broken record, but the down side looks like the game to play. Relative volume and open interest in the options supports the short side as the interest buying call options is far outpaced by the puts. Unless you are a real contrarian, this is either a time to stand back or trade small. If we do get a real wash out day below the January lows, that may be the time to do some cherry picking. Until then, caution is advised.

Today's musical interlude from the Top. Nothing quite like em live. http://www.youtube.com/watch?v=2MrK9-6LEpE&feature=related

Price down, volume down

Volume was very subdued for an expiration Friday, (170M yesterday, 100M today) and there was little buying enthusiasm until then last hour. If you can get a 5 minute TICK chart up you'll notice that each time the TICK hit R1 (approximately 800), the market would reverse down. Now the general working theory in that when the TICK pops through the upper pivot or hits readings of 800+, that this is often a good time to buy as it reflects imminent buying power and a likley upward trend. Not today, and not yesterday either. I've got a little audio alert set for my platform that beeps when the TICK hits 800. It went off quite a few times today, and except for the last 60 minutes, that hight TICK signalled an immeidate downturn.

The markets continue to move in lockstep. Looking at the top chart you are hard pressed to say wheich is which without looking at the headers. The Qs have retraced back to 43.60, which was the lower support earlier in the week, and that last hour buying is of little consequence, as a lot can happen between now and Tuesday. Remember the last 3 day holiday?

Tomorrow I'll run the weekly Qs update and include a new TS chart with the DeMark daily indicator, which has been a pretty good cycle indicator for the Qs and the IWM.

Qs back off resistance

The Qs resistance level of 44.80 proved to be unbreakable today and a likely scenario is a quick retreat back to the 43.10 level. Failing support at that level, I believe a retest of 42 is imminent. The markets moved today in lockstep, with only 2 (very marginal) winners in the Dow. Both the NYAD and the TICK were decidedly negative most of the day with the TICK closing at -650 and the NYAD at .28. With the long weekend approaching, I'm doubtful of any rally until next week.

Bottoming or bull trap?

Some interesting developments today. The Qs have have reached the 44.80 resistance level that I suggested in Saturday's post. So now what?

The upper 4 chart daily study of the Qs, IWM. SPY and DIA shows all 4 indices breaking out (to the upside) of the LR30 channel upper band. At the same time, virtually all the technical indicators are upslope (bullish), although most are rapidly approaching overbought levels (bearish). Although the TICK PP pivot today was 276, the TICK spent more time below the pivot than above it. In addition, the NYAD hung right on the PP pivot for the last 4 hours of the session, suggesting that buying breadth was not particularly enthusiastic. With the markets closed Monday, it will be interesting to see if the longs can sustain strength into Friday's close and a 3 day weekend.
My overall market view is still bearish, as I see more emerging short setups than long setups.

If we do get renewed buying Thursday and Friday morning, the next resistance level is a buck away at 45.75 . . . at which time the Qs will be significantly overbought.

Nice little reality check from Phil today on the mortgage bailout plan. Check out the right side of Phil's site for some insights into potential XLF trades.