What A Day! - May18, 2012

Money flowing out of the market Thursday was more than 4 times the average daily 20 DMF change. The market is oversold on all counts which is first and foremost a warning of a very strong downtrend that will require a very strong buy signal to reverse. We’ll need to see many confirmations before feeling comfortable with long positions for more than a day-trade.
Selling was relentless and IWM breached systematically all 3 daily floor support levels failing to break and hold above intraday VWAP except for a few minutes early in the day. It closed below Quarterly S1 (75.90) near the sensitive 200-day moving average (75.26) which is also the 38.2% Fibonacci retracement since the October 2011 lows.
The most comfortable place to hide now is in cash and the IWM robot is refusing to enter secondary short positions at this stage. The trailing stop (77.81) was lowered below the initial entry price of 78.10 guaranteeing a winning initial trade. It is good to see that our models are becoming a little more reliable now that the market referee has resolved its whipsawing contradictions with clear and severe penalties against the complacency camp.

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With its impressive morning star candle bounce (on daily charts) supported by money flow plus absolute and effective volumes, GDX may be starting the bottoming process required to reverse the extremely strong downtrend. The intraday pattern was the reverse mirror image of IWM with all 3 daily floor resistances broken and support from VWAP. We’ve often been trapped by such behavior lately and the irony would be that, now that we are disgusted and skeptical, it could obviously work this time!

The EOD GDX robot cannot find enough edges to enter a new long position and is also discouraging any RT short entries in case of an intraday signal change. Anyway, if I were long (I’m in cash) I would repeat my stop strategy from the last long discretionary trade that worked rather fine and would exit today in case of a daily close below Thursday’s closing VWAP (41.26). A decisive breakout above Thursday’s highs (41.96) and Quarterly S2 (41.95) is the next required development for seeing higher highs and higher lows forming an uptrending channel on the 30-minute timeframe. I would then buy on weakness keeping Thursday’s VWAP (41.26) as my initial stop.
Billy

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