The NASDAQ reversal yesterday generated an S-11 Downside Reversal sell signal. This is the first sell signal we have seen since the December 20 follow-through day. These occur when an index makes a 13-week high, closes down on the day and in the lower 25% of the range on above average volume. These usually signal a short term weakness period and can happen at market tops. However 23% of the time an S-11 has been followed in the next two days by a high-volume reversal to the upside generating a B-9 Downside Reversal Buy Back buy signal. So we will watch for this possibility. The future action of AAPL may be telling. The exposure count is now +4 or 90% invested. I did some selling yesterday of laggards in my portfolio, I had been 125% invested. Today I own: KORS, SWI, TDG, BWLD, MELI, GLD, ISRG. With the dollar rallying I may not stay in the GLD position for long. As always the action of leaders and the stocks in my portfolio will indicate future actions. The S-11 sell signal told me that it was time to weed the garden.
We also had a distribution day bringing the total to +3. If distribution climbs to the +5 level additional sell signals will begin to trigger. Five days of distribution would generate an S-3 sell signal. Additional S-4 sell signals can occur at 6, 7 and 8 distribution days in a 25-day lookback period. The normal way the Market School exposure model takes us out of the market is that S3 and S4 distribution (and other) sell signals reduce the exposure count to zero. At any point where the distribution count is full (6 or more) and the exposure count is zero, the buy switch is turned off and we wait for a new cycle to begin.
All of the above is just mental preparation for what might happen. I have no idea which way Mr. Market will take.
