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Labor Week Ahead - September 6, 2011
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[B][I]“Rather than continually confronting the market on its own inscrutable terms, stop and ask yourself what you know, whether what you know is enough to act upon, and how you are relating to it. Maybe it is a period when the market’s personality conflicts with yours, or something in your extra-market life is hampering your ability to view stock action objectively, or, simply, perhaps it’s a time when the market’s course isn’t clear to anyone. Then it is best to step aside. You owe it to yourself to find out exactly how ready and able you are to play, because it’s yourself you end up playing against.”[/I][/B]Justin Mamis
As I write this message, the Russell 2000 index futures are down 5.15% from last Friday’s 4:00 PM ET close. On Friday’s close, the LT/ST settings (as per the IWM robot page) were giving the following short selling expectations and probabilities from IWM’s closing price: Expected 3D gain: 4.3% from the previous day's close, with a win ratio of 76.9%. So, even if futures were to rebound heading into Tuesday’s open, this Labor Day weekend was enough to suppress any edge that could have been provided by the suggested optimal robot setup. The consequence is that in all likelihood the limit short entry price will never be hit today and the robot will stay in cash.
Technically, IWM is now trading pre-market in the 65 price area, equivalent to a new retest of the August 9 and August 22 lows or just above the second support cluster area that encompasses the most important YS1 (64.40) floor level. I expect that the professionals and market makers algos will initially buy around YS1, because IWM is once again extremely oversold under QS3 (68.17) and SS3 (67.70) which are statistically supposed to limit 95% of all extreme moves in this 3rd quarter and second semester of 2011.
QS3 and SS3 statistical values reliability is mostly valid if the market remains in a long term uptrend or in a long term sideways trading range. But the high percentage of the statistics violations recently is increasing the odds of a transition to a long term bear market. A subsequent failure of YS1 (64.40) to act as support would confirm that a new bear market downleg has started in earnest. Floor levels-based algos will most likely become erratic since there are very few floor levels left to serve as target references : WS3 (60.62), MS2 (55.24) or YS2 (50.56) could all mark intermediate lows of the move after a panicky explosion of volatility and speed of trading with high volumes.
Whatever the next big move, the robot should help us first to preserve our capital thanks to its stringent floor-based setup requirements before an entry. Trades – long or short- will only be entered at the optimal entry prices and today is certainly not such a day. The robot is a proactive trader rather than a reactive one. Its job is to enter only high reward-risk trades. That’s it. This should not prevent you from being discretionarily reactive if you are so inclined. But be aware that improvisation seldom beats the self-discipline and lack of emotions from a robust system.
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Here are the SPY and QQQ updated charts for your review. For SPY, QS3 (115.39) and SS3 (113.87) are essential long term floor supports with an ultimate tolerance down to YS1 (109.19).
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For QQQ, QS2 and SS2 (both 50.95) and Yearly pivot (50.40) are the key LT floor supports to watch closely.
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The GDX floor outlook is the exact opposite of IWM and the GDX robot trade is a fine diversification from IWM. The strong uptrend is confirmed by all measures. The confluence of WR1 (66.45) and MR1 (66.64) may initiate the next ST pullback before an assault up to SR2 and QR2 (69.65). Although the GDX robot settings remain very neutral for initiating a new position, the buy limit of 63.25 today is just an undercut away from the new weekly pivot (63.80) and would be a great buying opportunity from a multi-pivot perspective.
I wish to thank here all members who kindly sent me private messages and mails for encouraging me to take a good rest this weekend!
Billy
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