Surprise, Surprise! - July 28, 2011

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[B][I]“Event Risk” markets are the hardest to trade or position but you probably don’t need me to tell you this. Even the HFTs don’t have algos programmed for something like this but they’re busily programming it now.[/I][/B] Dave Fry

The debt ceiling crisis is beginning to act like an elephant in a porcelain market and the first lines of defense have been badly damaged. What a double surprise to discover this morning that both robots are telling us to still try staying long as if they were seeing some mahout coming to the rescue. At least, they tell us that the better probabilities are on the long side, with a relatively strong buy signal for IWM! Of course, random spooky headline news are not part of their algorithms and let’s hope there is no black swan waiting to replace the pachyderm.

Surely entering a new long position in IWM today at a limit price of 80.14 makes perfect logic from a multi-pivot perspective. It would only be 0.85% above the strong institutional support from the 200-day moving average (79.46 and rising daily) and only 0.4% above WS2 (79.82) which contains statistically 66% of extreme weekly down moves. If the market direction model had turned short, the robot would not allow for a new short entry lower than 81.50 and a short term bounce to both the monthly pivot (81.62) and the 50-day moving average (81.73) looks like a credible scenario under “normal” conditions.

But I must stress that the setups look much less rosy for SPY and QQQ as you may see on the charts below. We’d like to see both trading and closing today somewhere within their first resistance clusters to facilitate a bounce in IWM.

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Although a new entry in GDX at a limit price of 58.99 has almost zero LT/ST edge, here too the setup looks excellent from a multi-pivot approach. The ETF is sitting right on a first strong cluster support including the 200-day moving average (57.94) and WS3 (57.57) which statistically contains 95% of extreme weekly down moves. Both the first and total support/resistance ratios (15:6 and 39:26) are now in favor of the bulls and GDX has had a remarkable track record of respecting these ratios edges recently. If we had a confirmed short signal, the robot would have entered at the open today, while the multi-pivots could not find a 3:1 selling short reward-risk ratio with an entry below 61.08. Just like with IWM, this at least suggests a likely short term bounce.

Risk-adverse traders may prefer to stay in cash until the debt outlook clears up, or reduce their position sizes, but the robots are programmed to take reasonable risks that they can manage and they will go ahead with the setups.
Billy

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