Back To Neutral – August 30, 2011

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After yesterday’s big gains, the IWM robot found no edge for entering a new position today. The trailing stop on the initial position was raised to 66.19 or 2.62% below the entry price of 67.97. This is the residual worst case risk on the position. As a reminder, after the last backtest runs, we don’t enter new positions on a neutral signal anymore, but the initial position is held.

The floor levels are suggesting that some consolidation centered around the yearly pivot (71.84) is needed for digestion before a decisive assault at QS2 (72.70). A decisive break today below WR1 (71.41) and daily S1 (70.80) would create the risk of an attempt at filling yesterday’s gap. As much as yesterday’s gains were easy in the absence of serious floor resistances, a fall in the same zone could be as easy without serious floor supports! We’ll need to see where large buyers would step in to evaluate their appetite.

With 19.56% or more gains on TNA from the initial entry, here may be a good place to reduce your position size temporarily while the signal remains neutral.

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The GDX robot settings remain as neutral as ever. There is still a lot of hesitancy around SR1 and QR1 (62.12) which should serve as a launching pad for the next run up. A higher high than 64.05 made on August 22 becomes a necessity for a technical confirmation of the uptrend.
Billy

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Pascal and Billy; on 8/23 the IWM LEV was -26,622. Tonight it is -37,909 a drop of 42.4%. What is the significance of this in light of the Robot's long IWM position?
Thank you in advance.
Robert

[QUOTE=brrim;16271]Pascal and Billy; on 8/23 the IWM LEV was -26,622. Tonight it is -37,909 a drop of 42.4%. What is the significance of this in light of the Robot's long IWM position?
Thank you in advance.
Robert[/QUOTE]

Robert,
The LEV on a major ETF like IWM is always distorted by large players’ hedging strategies. This is even more pronounced with IWM due to the lack of liquidity in individual small cap stocks.
Bullish large players in individual small cap names will SELL IWM for hedging their market risk. Bearish large players in individual names will BUY IWM for hedging their inverse market risk.
The weak LEV pattern suggests that large players are now hedging their market risk because they are increasingly more BULLISH on average on the small cap stocks in their portfolio. It is just a suggestion, because impossible to know for sure. The 20 DMF is by far a much more reliable indicator of large players net activity than LEV on IWM, which is misleading most of the time and not a leading predictive indicator.
Billy