Flight Control - May 1, 2012

[Billy]

Although the IWM robot pilot is advising a short position, Pascal and I acting as flight controllers would like to force you to stay in cash today. Over the weekend, I made a research on the correlation between IWM and the 12 sub-stages of market structure. This is part of a much wider project that I’m conducting and I will write an article about it when it is done, but here is an appetizer. I created a correlation score adding up the correlation coefficients times the percent of stocks in each substages. You can see that the score is sitting right around the zero line, meaning that the current market stages structure is completely neutral for the near-term fate of IWM. It is still below its falling 20-day moving average, favoring a bearish trend but looks ready to reverse up easily.

14020

Here is a view of last month’s daily stages evolution and you can see that it is now well balanced between moderate percentages in accumulation, mark-up, distribution and decline stages. The conclusion is that we need to be patient, at least before trading the IWM ETF since it is the only one I used for the correlation study.

14018

From a multi-pivot perspective, the bias remains bullish while IWM is trying to recover its 50-day moving average (81.60) with the confluent support of Monthly (81.20) and Weekly pivot (81.07), above a rising 5-day VWAP (81.07). There is no resistance pressure above the 50 dma before Weekly R1 (83.84).

14017

Due to the LT/ST settings, the GDX robot is still avoiding a new position in spite of the GDX model being in a buy mode. Yesterday’s gap down seems to be linked to a manipulation by a major bank to pressure gold futures just before the cash market opening. Maybe is it the same bank who participated in the strong Precious Metals MF that we witnessed after the morning weakness was over. Manipulation or not, GDX did exactly what we wanted it to do: to bounce nicely on QS1, 5-day VWAP and the old downtrend resistance line with improving MF. All the mid-term bullish biases mentioned yesterday are confirmed; I am discretionarily long NUGT with 2/3 of my maximal position size and will buy the last third on a breakout above the new Monthly pivot (47.11). I’ll keep my initial stop at a daily close below QS1 (45.75).

For RT model followers, please note that the ATR% is allowing again a short position if the PM MF hits 0% - porosity (0.120% today).
Billy

14019

[Wei]

Hi Billy,

"initial stop at a daily close below QS1 (45.75)", this is something you have to execute manually, so it's a mental stop not a hard stop, right?

[Billy]

Hi Billy,

"initial stop at a daily close below QS1 (45.75)", this is something you have to execute manually, so it's a mental stop not a hard stop, right?

Yes, Wei, you need to monitor the trade evolution in RT to follow the discretionary plan. An intraday undercut of QS1 is normally not enough to stop me. It is the reaction to the undercut that matters. QS1 has been chosen as a stop because it is a key mid-term support where buy programs are supposed to kick in if large players want to participate cheaply (below the 5-day VWAP) in the uptrend. They may first go fishing for stops if they have the opportunity to take advantage of an undercut, so a hard stop at or just below QS1 is not advisable. The probability is high there that large buyers will soon come to the rescue. If they don’t come in before the close, then you know that they had no running plan to accumulate around QS1 but perhaps lower at WS1 or YS1 and it is safer to throw in the towel. It is in such situations that I find the RT MF most helpful to gauge institutional activity around an EOD stop.
Billy

[Wei]

Thank you so much for such insightful analysis. Much appreciated!