Very Early Buy Signal- November 29, 2011

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Last week, the robot settings were uncertain about market direction but were certain that the neutral backdrop would be resolved quickly by a big move up or down. Clearly, yesterday showed the way northbound for the start of a strong rally full of potential.

The 20 DMF model issued a buy signal with the Overbought/Oversold indicator closing above -90 with a strongly positive money flow for the day (165% above average).

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It all happened in the last minute and the move was not supported by HFT algorithms as detected by the cumulative TICK indicator.

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The most logical interpretation of the divergence is that long term large players (20DMF) took advantage of the short term players (HFT & cum TICK) selling pressure to accumulate their positions at what they consider to be a good VWAP for the nascent uptrend. In other words, small and short term players faded the gap, while large and long term players were not afraid to buy into strength. The big surge of large buy orders at the close is also typical of EOD algorithms used by institutions when the day’s action confirms a buy signal from their strategies.

The strong bullish reversal of the IWM robot LT/ST settings do confirm an objective buy signal for his own strategies into a high probability trade.

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This confirmed buy signal is coming a little too early for my taste since there are 8 days left on the “number of days before a buy signal” chart.

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This signal is also coming a little too early from a daily stages analysis viewpoint, since the buy signals that worked best in the past were confirmed by a reversal from an oversold percentage of stocks in accumulation and mark-up stages. But it is in the area where such reversals always happened in the database history.

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A good protection against the early signal is that the buy signal from the 20 DMF will be canceled if the OB/OS indicator closes once again below -90 and the robot will turn back in cash on the sidelines if it happens. A second fail-safe stop will be active once the OB/OS indicator closes above -70. Any new close below -70 would trigger a “back in cash” signal. These fail-safe mechanisms are based on backtesting of past failed rally attempts.

The 3:1 Reward-Risk ratio for the multi-pivots is setting the buy limit for today at 68.74. This limit could be hit after a first minor pullback due to the resistance from the 50-day moving average (70.06) and monthly pivot (70.36), at the lower boundary of a very strong floor resistance cluster. The initial stop at 64.91 is just under weekly S1 (65.21), independently of the fail-safe stops discussed above. The GDX robot is still neutral and in cash. Yesterday’s bounce did not reverse the short mode of the Precious Metals Sector’s money flow.
Billy

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