Weekly Market Briefing - February 25, 2013 [Archive]

Billy

02-26-2013, 02:36 AM

Well, the example for a short entry in IWM worked for perfection! Please don’t expect me to be “so” right every time! This kind of declining (price and RS) 5dma setup always works better when we have the simultaneous opportunity to fade a gap up in a risk-off environment. I could have been wrong on the risk-off assessment but also missed the trade if the decline started at the onset without touching the 5dma first. In such cases, a discretionary decision to adjust the trading plan is necessary and will depend on your conviction and experience.

Note that this is the second time in 4 trading days that IWM closed deeply below daily S3 (it also happened last Wednesday). Statistically, S3 (89.97) is expected to be exceeded on a down day only 5% of the time and when it does, it means that market makers are refusing to play the stats and to launch their buy programs. When they do so, they usually have good reasons and it pays to follow them. Yesterday was a large POMO buy day but it feels almost like if the fresh liquidity was used after 2:15 pm to launch sell programs and to “invest” in short positions! Could this be the start of a new paradigm and has Big Ben ever thought the market could divert the use of liquidityand make QE counter-productive?

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The end result of the day was that all of the best timing models issued a sell or short signal by the close, including the Effective Volume 20 DMF, Dr. K’s Market Direction Model and IBD’s Big Picture’s “Market in correction”. With the existing profit cushion on the position, it is advisable and easier to hold the position for a while, even without an immediate downside follow-through.

Finally here are two comments that I share 100%:

"Can you say "safe haven"??? Treasuries were up big, the yield on the ten year sank almost 5% while gold was taking back 21 dollars from what it lost last week. The U.S. Dollar was very strong today as well. So, what happened? Well, the Italian election is coming to an uncertain outcome where Silvio Berlesconi's Centre-Right party has more local support that many thought it did. Just pull up today's chart for the Italian 10 year. It will blow your mind. The risk-off move turned into a route late in the day. Energy, transports and financial stocks were hit the worst, but this was broad based. Of the major indices, the Russell 2K took the most punishment as small caps led the way. Volume, though not very high, was high enough to think that there may be some conviction here. We'll see a lot of macro over the rest of the week, and the sequester will steal the headlines, but bear in mind, Ben Bernanke will testify in front of the Senate tomorrow and in front of the House on Wednesday. So the only guarantee this week is going to be volatility." - Stephen J. Guilfoyle - http://www.sarge986.com/market-wrap.html

"It has been a while since we've had a day this ugly. In fact, the last time we had a reversal this big was back in June 2011. On Nov. 14, 2012, we had somewhat similar action and that marked the end of a three-month downtrend. Unfortunately, the action today definitely does not look anything like a bottom. There was outright panic into the close and you can bet there are some stuck longs who are going to be looking for exits in the next few days. This action is a classic reversal. We were warned last week that the topping process was starting and then had an oversold bounce Friday. That led to a gap-up open this morning and that was the invitation to sell. Last week's lows were easily breached and, most notably, the selling pressure continued all day and accelerated into the close. It now looks like we have moved to a full-fledged 'correction. If you haven't already taken some defensive steps, it is not too late to do so. What always happens as the market begins a correction is that there will be a multitude of bulls in the media telling us that this is a buying opportunity. They will go on and on how you have to rush in and buy before things bounce. While I tend to agree that a correction is a healthy event that will provide new opportunities, there isn't any big rush to jump in. We need to let stocks find support as they continue to shake out the overly optimistic. I can't say I'm unhappy to see this sort of action as it is what we need for better trading down the road. The key is to make sure you stay safe while it plays out." - James DePorre - http://realmoney.thestreet.com/articles/02/25/2013/classic-reversal

Billy