Reader Q & A: How Do I Use The ETF Cutline Table To Make A Buy Decision?

Reader Joe had the following question in regards to the best use of the ETF Cutline tables:

I’ve been reading your material and was wondering how far past the cutline into the positive do you go to initiate a buy?  Or do you then just put those ETFs on your radar and use other criteria to decide?  Thanks for the help.

Let me first point out again, that the real value of the ETF Cutline concept is at the beginning of a buy cycle when just about all equity ETFs are gathering momentum and are crossing the cutline (long-term trend line) to the upside.

With this bull market being over 2 years old, all worthwhile equity investment decisions have been made and much has played itself out. However, there are still isolated sectors/countries, which are crossing to the upside now after having rotated back and forth during this buy cycle.

Yes, you can and should use the cutline crossing as a sign to initiate a buy for new money. However, there are a few things you need to consider.

Just because an ETF crosses its trend line to the upside does not make it an automatic buy. Volatility in the market place is critical and needs to be considered.

If you have been reading the cutline report for a while, you will have noticed that occasionally an ETF has dropped from its +20 position to -20 within a week. That’s what happened to EWJ in the 5/13/2011 Cutline report.

How can you avoid getting caught in a whipsaw like that?

While there is no way to avoid this type of scenario 100% of the time, there are a few things you can do to put the odds of success in your favor before placing a trade.

First, make sure that the ETF you are considering has moved above its trend line by at least 1% and has stayed above this level for 3 trading days.

Second, you want to make sure that all momentum numbers are in positive territory. That means the percentages in the 4 wk, 8 wk, 12 wk and YTD columns should show positive numbers, which automatically makes the M-Index a plus number as well.

Third, ideally you want the reading of the DD% column (DrawDown percent) to be 0.00% or as close to it as possible. The 0.00% tells us this ETF has reached a new high and shows stronger upward momentum as opposed to one with a -6.50% reading, which means that this ETF is close to triggering its 7% trailing sell stop.

If you look at last Thursday’s High Volume Cutline report and review the numbers above the yellow line, you’ll notice that only one ETF currently fulfills these requirements. That ETF is PGF (we have no holdings), and I have commented about it in the report.

That’s the process I go through when evaluating prospective buys. It’s the same approach you should use when looking at Thursday’s StatSheet. The information is the same, it’s simply presented in an easier to read format to better indentify new ETF investment opportunities as they occur at the cutline.

About Ulli Niemann

Ulli Niemann is the publisher of "The ETF Bully" and is a Registered Investment Advisor. Learn more
This entry was posted in Reader feedback and tagged . Bookmark the permalink.

Comments are closed.