Is It Time To Buy The Commodity, DBC?

The quick answer is, NO.  Why is it too early to move back into the commodity ETF?  Let me count the ways.  First, start with the PnF graph, shown in the first slide.  Today's big drop is shown with a 6 showing up in the right-hand column.  That 6 indicates DBC had another one box drop in June which means we are adding another O in this column.  Supply for DBC exceeds demand so the price continues to drop.  This is definitely a negative signal and is sufficient to keep us from moving back into this ETF.  A bear market is in full force for DBC.  StockCharts is calling this a Triple Bottom Breakdown.

Moving Averages:  Confirming the PnF graph above, the following set of moving averages also tells us to stay away from DBC.  In the first graph we see the price of DBC is well below its 195-Day EMA and the 13-Day EMA is below the 34-Day EMA.  All negative signals.

Shifting down to the second graph, Relative Strength Indicator, DBC moved into the oversold region (17.1) by dipping well below the 30 threshold.  When an ETF moves this far down on the RSI graph, any sign of a turnaround is cause to pick up shares at a bargain.  No turnaround signals are showing up for DBC.

Of less importance, but still confirming the "stay away" condition for DBC is the negative signals coming from MACD and CMF graphs.

When an ETF is this far in the basement, what does one look for as a possible buying opportunity.  1)  I want to see the 13-Day EMA move from below to above the 34-Day EMA.  This indicator will lead our ITARR buy signal.  2) I want to see X's in the right-hand column of the DBC PnF graph.  The bear market for DBC needs to be arrested.  3) The Bullish Percent Indicator (BPI) for the NYSE should show X's in the right-hand column indicating a market reversal.  We could be waiting till the fall for all this to happen. 

What Is The Meaning of Those X’s and O’s?

This morning a question was posed as to the meaning of the X's and O's in the PnF graphs.  One good source of information is StockCharts.  Another excellent source is Thomas Dorsey's book, Point & Figure Charting. The older and less expensive version will work fine.

At the heart of PnF graphing is the law of supply and demand.  When the demand for a stock exceeds the supply, the price will rise.  When I purchased my first diesel Rabbit back in 1976 I paid a premium of $400 above sticker as the demand exceeded supply.  The same law is in effect for stocks and ETFs as ETFs are made up of a basket of stocks.  The X's and O's is a visual way to represent the direction the price of a stock is moving.  Only the price movement is recorded.  Volume is not important when it comes to PnF graphing.

The letter X represents demand and O represents supply.  The key is how the graph shows movement from one column to the next as the X's and O's will alternate depending if demand (X) or supply (O) is in command.  The default setting in StockCharts is the 3-point reversal.  Further, when a stock (or ETF) is priced between $20 and $100, each box on the chart is assigned one (1) point.  If a stock is price between 5 and 20, the box is assigned a value of 1/2 point.  Stocks priced between 100 and 200 are assigned 2 points per box and stocks priced above 200 are assigned 4 points per box.  Most stock prices fall between 20 and 100 so we will use that as our example.

The only way a column can change from X's to O's is by reversing three boxes.  For example, DBC is currently priced around $25 so a $3 reversal (3 one point boxes) is required to move the current column of O's over to an adjacent column of X's.  Fortunately, StockCharts does this free of charge, but it is nice to know a little bit about how the PnF graphs work.

Just another friendly reminder.  The Bullish Percent Indicator (BPI) is measuring the percentage of stocks showing a bullish PnF graph while the individual stock PnF graphs provide a visual picture of the price movement of the stock.  There is a difference although both graphs are made up of X's and O's. 

Curie Portfolio Update: 1 June 2012

Photograph:  Sunrise in Hilo, Hawaii

June is upon us and it is time to update the Curie Portfolio.  Although the Curie is not one of the ITA Risk Reduction model portfolios, I am applying ITARR methods to some of the asset classes as Platinum members can see in the following Dashboard.  Large-Cap Blend is one of the asset classes I am closely tracking.  When the market closed on 5/31/2012, VTI was priced a few pennies above its 195-Day EMA.  I'll not be surprised if VTI is not sold out of a few portfolios when they come up for review this month.

[Read more...]

Bullish Percent Indicator: Six Risk Levels

Readers interested in digging deeper into Point and Figure (PnF) technical analysis will be served by purchasing Thomas J. Dorsey's book, Point & Figure Charting.  His latest edition is available in Kindle format, but I prefer this type of book in hardback as I want to easily bounce from section to section.  That becomes more difficult with a Kindle.

A.W. Cohen is considered the father of the PnF method.  His basic rules for bull and bear markets are quite simple.  If the index is rising in a column of X's and above the 50 percent level, the market is bullish.  Conversely, if the index is declining in a column of O's and below the 50 percent level, the market is bearish.  Right now the percentage is hanging around the 50% market, but the right-hand column is holding O's so the market is bearish.  That is also what the ITARR model is telling us for a number of asset classes.

Earl Blumenthal expanded these two basic rules to six risk levels.  While Dorsey goes into greater detail, I will list the six and then find examples of each so you can see what the PnF charts look like for these levels of risk.

  1. Bull Confirmed
  2. Bull Alert
  3. Bull Correction
  4. Bear Confirmed
  5. Bear Alert
  6. Bear Correction

Bull Confirmed:  The X's in the right-hand column have risen to a higher level the the prior column of X's.  This indicates the bull market is confirmed.

Bull Alert: Not shown in the graph below, but of importance is that this graph is when the action occurs with BPI below the 30% level.  Supply exceeds demand.

The Bull Alert shows up when we see a simple reversal of X's show up in the right-hand column when the BPI was below the 30% level.  Neglect the slope of the line in the above graph.  When the BPI is below the 30% line and we see X's show up in the right-hand column, it is Bull Alert time.  This is different from Bull Confirmed.

Bull Correction:  We have been in a bull market (X's in right-hand column) but now we see O's showing up.  There was a reversal in May as the 5 is our clue.  The overall market condition is still positive as indicated by the positive slope, but the market is making a correction.

Bear Confirmed:  The BPI was above the 70% level, made a downward correction, then reversed to the upside.  However, the latest O's are now below the prior column of O's so the bear market is confirmed.

Bear Alert:  Explanation below.  This alert has been evident for some time.

The above graph is current for the NYSE and it is generating a Bear Alert signal – and has been for some time.  See the 4 at the top of the string of O's in the right-hand column and the fact that those O's began when BPI was above 70%.  What happened is that supply exceeded demand and the number of stocks (within the NYSE) with X's in the right-hand column slipped by 6%.  That caused a reversal from X's to O's and that created a Bear Alert. 

Bear Correction:  The X's in the right-hand column indicate there is increased demand, but the X's will need to climb above the prior column of X's in order to turn this into a bull market.  What is likely to happen is we see another reversal and O's once more begin to show up in the right-hand column.  If this were to continue and drive the BPI below the 30% level, then the probability is such that demand would once more take over and begin to drive the market higher.  Always keep in mind the law of supply and demand.