IWM and GDX Robots - September 19, 2011

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Now that the bids from maximal sadistic options market makers will vanish from the tape, we can expect that floor players and their algorithms will safely follow the path of least resistance until the Fed announcement this week. As amply discussed here, floor strength progress was pathetic last week for IWM in spite of 5 consecutive days of gains. The new week opens with a very bearish 44:18 total resistance/support cluster ratio and with an extremely bearish 31:5 first resistance/support cluster ratio.

Weekly pivot (69.97) might be the first consolidation area waiting for the FED news, but most likely QS3 (68.17) should be tested due to the resistance/support imbalances. IWM would then be below the potential limit buy entry (68.74) in case of a robot signal switch from short to long.

In other words, yes, the last IWM robot trade has been frustrating: it gained initially +6.27% before losing it all and more, flirting with our trailing stop (72.20). This should remind us that profits on the short side usually come fast , seldom last and one should not hesitate to book profits early on the leveraged portions of short positions. Now that the market offered the robot a second chance entry at the initial limit price while keeping its ST/LT bearish edges, let’s stick to the plan. Odds remain largely in favor of a winning short trade and so far the robot’s optimal trailing stop has proved to be very helpful in managing risk and avoiding premature exit.

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At the time of writing, I had not updated my multi-pivots QQQ and SPY charts yet as I have found them most disturbing and misleading recently for trading IWM. I’m not sure I will update them at all. To me, IWM is currently the least manipulated index and its multi-pivots clusters are the best picture of the true underlying conditions of the overall market. Multi-pivots are increasingly reliable for IWM since Labor Day as it is the most convenient hedging vehicle and small-cap basket for active large professional traders. SPY and QQQ are vehicles for the passive and slow risk-adverse herd of lazy portfolio managers who are mandated to be long large liquid stocks at all times. The least I look at SPY and QQQ, the better I trade my discretionary leveraged IWM positions. Experience has taught me to ignore sometimes the distraction from what everybody else is focusing on, and now is one of these times. We couldn’t build attractive robots for SPY and QQQ and duplicating the IWM robot signals on them was very disappointing on average. IWM has a life on its own, so let’s stick with the real thing!

The GDX robot remains neutral for new entries. However, the floor picture indicates that the successful retest (after some shaky undercut) of SR1 and QR1 (62.12) has now the potential to launch GDX up to SR2/QR2 (69.65) rather easily, well before the end of the third quarter as it is only 2-days of ATR away. The only serious floor selling pressure will start around MR1 (66.64).
Billy

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Billy,

I understand your thoughts about the SPY/QQQ. I, for one, would still ask, however, that you continue putting the SPY/QQQ charts up on the sight once a week - with the admonition that one should pay most attention to the IWM.

Thanks as always.

The biggest different between IWM and the others is the way it's constructed. IWM selects about 650 stocks out of the Russel2000 index based on fundamentals. As such, it is not cap weighted and not a true "index" in the classical sense. Rather, it is a picture of fundamental-breadth activity and would be the most influenced by real traders in its underlying stocks. I note that rather frequently my own fundamental selections will appear in IWMs top 10 holdings, even though they are small caps.

In other words, it gives a balanced picture between index traders and real "buy and hold" investors -- for a better snapshot of the market as a whole.

[QUOTE=adam ali;16832]Billy,

I understand your thoughts about the SPY/QQQ. I, for one, would still ask, however, that you continue putting the SPY/QQQ charts up on the sight once a week - with the admonition that one should pay most attention to the IWM.

Thanks as always.[/QUOTE]

Adam,

I will post them the next time I'll have them updated. If they are so important to you, I can't understand why you don't keep your own updated version. I simply have no use for them right now and won't lose my time with that chore.
Billy

Billy,

No worries if it's a hassle. I can't replicate your charts and I find them quite clear and useful.

Thanks.