Perplexing? – October 17, 2011

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[B][I]“Low-volume “floater” rallies like we’ve seen over the past nine days are often perplexing as investors can’t make progress testing short positions into the rally and they can’t find anything in an optimal buy position. No worries, we just let the rally do what it’s going to do until the situation evolves or clarifies to the point where our methodology will allow us to go long, or simply come back in on the short side again when the time is right.”[/I][/B] Gil Morales – The Gilmo Report, October 16, 2011.

This quote is a message from one of the best discretionary traders in the world but could as well have been given by our mechanical robots. The robots methodology currently doesn’t allow us to go long or to come back in on the short side. And so let’s wait in cash until the time is right again with high probability setups and edges. No need to feel frustrated or perplexed, feel disciplined and relaxed instead!

Unlike most money managers, the robots are not chasing bonuses and are not afraid of missing out on the performance front with the IWM robot up +18.89% since being online versus -13.54% for IWM buy & hold over the same period. And the GDX robot is up + 19.18% versus -1.66% for GDX buy & hold. If the robots indicate a real advantage to take a ride with the performance chasers, we’ll ride along, but they are neutral now and could as well soon give us permission to fade and short the move. Once again, let’s wait until all is clear and loud! These are dangerous times to trade on non-quantified guesses and bets.

On IWM, the first resistance cluster has a strength of 24, equal to the total strength of the two support clusters (9 + 15). The path of least resistance remains strongly tilted to a pullback near the 50-day moving average (68.33) or even near the monthly pivot (67.14) over the next two days. Only very bullish news catalysts could prevent this to happen. The quarterly floor levels have been very precise for marking turning points all year long and the potential resistance at quarterly pivot (71.25) and yearly pivot (71.84) must be anticipated most seriously as possible opex week turnaround levels.

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On GDX, we have the same situation as the first resistance cluster from the 200-day moving average (58.09) to the 50-day moving average (60.06) has a strength of 26, also the total of the two support clusters (14 +12). A pullback to yearly pivot (55.19) will be much easier to achieve than testing the 50-day moving average over the next two days.
Billy

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