 The ETF Authority for Monday, June 16th, 2003 Volume 2, Issue #24 Published weekly on Sunday evening, The ETF Authority is a short-term swing trading newsletter that can help you profit from some of the most heavily-traded securities on the market -- exchange-traded funds (ETFs). *Please
Note: This
is a fee-paid, subscribers-only newsletter.
Any republication or retransmission of this web page or any of the
contents herein is expressly prohibited. Click on the link below to
subscribe to this newsletter today... We urge all readers to print out this
newsletter each week for maximum benefit... (1.) MARKET SUMMARY There is still no outright sign that the market has topped, so I would be very careful about jumping on the bear bandwagon just yet. However, the big picture risk is far greater to lower prices than it is to higher prices. Still, volume remains stronger on up days than it does on down days. Overall, in the short term I expect to see continued
consolidation, which is why I favor small short positions. Yet the larger
trend is still positive for most ETFs. Bond-market-related ETFs were among the frontrunners last week. The 20+ Year Lehman U.S. Govt. Bond iShares (TLT, $97.18) jumped +3.2%, making it the best performer for the week. However, the market is clearly nervous. Many sectors and indices are overbought and need to correct. One sentiment survey of analysts and traders turned bearish last week. Usually these types of surveys are taken as contrary indicators, but this short-term one sometimes gives early signals and is a good contrary indicator when it is at extremes. ECONOMIC ANALYSIS Other data were pretty rotten. Weekly jobless claims remained high, producer prices fell, and consumer sentiment tumbled, which was not expected. Next week sees mostly second-tier data. Of note will be industrial production and capacity utilization due at 9:15 AM on Tuesday. These numbers are expected to be flat to down. Do not forget that a week from Wednesday the Fed makes its next rate decision. Fed fund futures imply a 62% probability of a 50-basis-point rate cut. Fed fund futures have an excellent record of calling rate moves up to two days prior to the meeting, so next Friday's close in the July futures will be very important. The Fed does not like to go against market expectations, though I am not sure they're willing to go 50 basis points this time around (that would take the Fed funds rate down to 0.75%). WHERE DO WE GO FROM HERE?
http://www.StreetAuthority.com/subscribe-etf.htm Below you'll find a table of weekly performance data for all ETFs that I track for this newsletter...
(3.) ETF RELATIVE STRENGTH MONITOR (Note: If you're a first-time reader or you are otherwise unfamiliar with our proprietary ETF Relative Strength Monitor, then please click here for a brief description.) Last week I warned that a number of sectors were overbought, with Biotech and Technology leading the way. The Nasdaq Biotech iShares (IBB, $73.11) managed a small gain, but this fund hit our sell recommendation when it gapped higher at the open on Thursday. Biotech funds remain overbought, and now hold two of the top three positions in our ranking criteria. The Japan WEBS (EWJ, $7.19) hold the number two spot on our list. My only concern there is that the U.S. dollar might rally, but the very long-term picture strongly favors Japanese stocks relative to U.S. equities. Although EWJ is overbought, I will be looking for a pullback to enter into longs there for the very long term. Bond market funds rose off the bottom of our relative strength list last week, with the long-end fund, TLT, being the best performer among all of the ETFs we track for this newsletter. I would have expected that to happen in a down market, but with a Fed rate cut forecast and money flowing out of tech stocks, it was not surprising to see the debt markets outperform. Fixed-income ETFs are likely to tread water next week. I expect stocks to move lower, but I am not yet convinced that this will be anything more than a correction. Here is this week's ETF Relative Strength Monitor...
S&P 500 Model Portfolio We turned things around last week, as IBB reached our target sale area, helping our portfolio to a +1.12% gain while the broad market barely budged and the technology sector sank. It is a bit nerve wracking to be holding a short in the strongest sector out there, but IBB did not even come close to its prior high on Thursday. This keeps me confident that the fund will experience another leg lower before I need to worry about a bullish run higher. And, if stocks start to tank instead, then this overbought sector is likely to severely underperform the market. Remember, IBB is up +49.27% in the most recent 13-week period!
I trailed our stops on The Energy SPDR (XLE, $24.94) closely last week and they were hit, so we closed the trade for a +4.24% gain. However, lower prices remain likely there. Our Dow Diamonds (DIA, $91.58) long trade remains in decent shape. Unless stocks slide precipitously, the calls we sold against the position should be executed, leaving us flat there. Time value helped a good deal on that trade last week. Remember -- the calls expire on Friday. If I see a huge reversal lower, then I may close this position via a News Flash during the week. If stocks still look to be in okay shape, then I might sell calls against a new long in DIA (which has outperformed the S&P 500 since I took the position on). Note that assuming we are called on DIA, then by the end of this week our model portfolio will only be in cash, plus the short trade in IBB (if I make no other mid-week adjustments, that is). The long DIA position is just about perfectly hedged, barring a collapse in stock prices. This week's instructions are:
MODEL ETF PORTFOLIO
POSITIONS CLOSED LAST WEEK
SELL SHORT 300 SHARES OF THE ENERGY SPDR (XLE, $24.94)
ON A BOUNCE One ETF, which we had held long in our model portfolio until last week and now offers a better risk/reward ratio, is The Energy SPDR. XLE topped out last week at $25.80 after jumping more than +20% from last winter's lows. Oil prices fell sharply after making a new high on Thursday, bouncing off channel support on Friday. I doubt that black gold can exceed that recent peak. XLE nearly reached a long-term and a short-term channel resistance. RSI had a very minor divergence at last week's high and Welles Wilder's ADX (see our special educational section below) is at nosebleed levels.
Reasons to short this fund:
******************************************** SELL SHORT 300 SHARES XLE AT $25.27, BUT DO NOT SELL ABOVE $25.55 TARGET: $24.33 Assuming a short sale at $25.27 and
a close at $24.33, the profit potential is $282 from this trade, or +3.7%. (6.) CONTINUED GUIDANCE ON PREVIOUS TRADES SELL SHORT 100 SHARES iSHARES
RUSSELL 2000 INDEX FUND (IWM, $89.64) ON A BOUNCE My recommended sale price was at $91.70 and IWM topped out at $91.61 last week before moving sharply lower. Although there is certainly room for another two points lower, the risk/reward no longer favors shorting IWM here and now. (7.) SPECIAL EDUCATIONAL BONUS: UNDERSTANDING THE DIRECTIONAL MOVEMENT INDICATORS This is actually a suite of indicators meant to measure whether or not the asset under study is in a trending mode. It is a fairly slow indicator and one must be careful in applying it because it takes time to adjust to market moves. Whipsaws are possible, and in fact likely if the market is in a wide trading range. The components of the index are: DIRECTIONAL MOVEMENT (+DM and -DM) -- This indicator represents the largest part of today's move that is outside the previous day's range. So, for example, if yesterday's price range was 18-22 and today's is 17-24, then +DM is two and -DM for the day is zero. On an inside day, there is no directional movement. This system does not care where the close is, so in the example above, even if the close was on the low, the directional movement is considered to be positive because the largest part of today's range is above the previous session's range. Note that -DM is always positive, so if today's range is 17-20 and yesterday's was 19-19 1/2, then -DM is two and +DM is zero. DIRECTIONAL MOVEMENT INDICES (+DI and -DI) -- This indicator is computed by using the daily +DM and -DM discussed above and taking a ratio with the daily true range. The daily true range is the largest of the following: The absolute value of: A. The distance from today's high to today's low. What the true range does is adjust for gaps by, in essence, adding them back into today's trading range. We then compute today's +DI and -DI as the ratio of the DM's to the daily true range (TR), so: +DI =+DM/TR and -DI = -DM/TR This indicator tells you how powerful today's move was in comparison to the day's range. On a day in which prices gap higher and close at the high, that day's +DI would be 1.00. Remember, on an inside day, both DI's will be zero, and if there is positive directional movement, then there can be no negative directional movement. SMOOTHED DI's -- These are computed by taking a 14-day moving average of the individual DI's (exponential moving averages are preferred, but it does not make that much of a difference). DIRECTIONAL INDICATOR (DX) -- This is the ratio of the difference between the smoothed +DI and -DI and the total directional movement. That is: DX = [+DI(14) - -DI(14)] / [+DI(14) + -DI(14)] Note: +DI(14) is the 14-day smoothed positive directional movement index and -DI(14) is the 14-day smoothed negative directional movement index. These are the standard numbers. AVERAGE DIRECTIONAL INDEX (ADX) -- This is just the smoothed DX (again, typically a 14-day exponential smoothing factor). -------------- WHAT DOES ADX TELL YOU? Alexander Elder, in his book Trading for a Living suggests going with the trend whenever ADX breaks from a low level and from beneath both directional lines and then ratchets up four points -- this is a sign that a new trend is starting. He also warns that when ADX is above both DI lines, then the trend is ahead of itself. He suggests getting out of a trade when ADX turns lower from such a position. I mostly use ADX to see the direction of the three lines as compared to the current trend. When ADX starts to turn from an extreme level, then that can be a warning of a change in the trend for the next several months. ADX is never a determinant in my thinking because it is such a slow-moving indicator, but I do use it to see how well my larger Elliott Wave counts fit with the indicator. In addition, I often use it to confirm other technical ideas. If you look at the chart for XLE in this week's trade, then you will note that ADX is very high (at 47.02) and is off very slightly from its high. Also, note that ADX sits at higher levels than +DI and –DI (the next panel down). This, coupled with the move off channel resistance, momentum divergences, and the other items I listed are what led me to short that ETF. Thanks again for reading this week's issue, and good trading in the week ahead!
|
||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| ABOUT OUR
EMAIL POLICY You are receiving this email because you visited StreetAuthority.com and subscribed to our premium ETF AUTHORITY service. This newsletter is sent out only to paid subscribers and limited-time free-trial members. If you feel you have received this issue in error, or if this email was forwarded to you without our express written permission, please contact us by visiting our web site at the link below. We sincerely hope that you benefit from your subscription to our
premium ETF AUTHORITY service, and we’re willing to do
whatever it takes to keep you as a satisfied customer. If at any time you
would like to contact us (for example, to make a recommendation or to
inquire about your account), you can do so by visiting our web site at ADVERTISING INFORMATION ===================================== DISCLAIMER The information contained herein does not constitute a representation by the publisher or a solicitation for the purchase or sale of securities. Our opinions and analyses are based on sources believed to be reliable and are written in good faith, but no representation or warranty, expressed or implied, is made as to their accuracy or completeness. All information contained in this report should be independently verified with the companies mentioned. The editor and publisher are not responsible for errors or omissions. StreetAuthority receives no compensation of any kind from any companies that may be mentioned in our newsletters or on our web site. Any opinions expressed are subject to change without notice. Owners, employees and writers may hold positions in the securities that are discussed in this report or on our web site, but are barred from trading any of these securities seven days before and after the initial publication of this report in accordance with our company policies. (c) Copyright 2003. StreetAuthority LLC and Poser
Global Market Strategies Inc. |
