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Strong Buy Signal From The IWM Robot - August 24, 2011
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Yesterday both HFT programs (as detected by cumulative TICK) and large players (as detected by the 20DMF) were aggressively buying, causing a massive short-covering rally fueled by fresh institutional accumulation. IBD labeled the day as a follow-through day and resumed its market call as “market in confirmed uptrend”. Dr. K’s market direction model switched back to cash from a sell signal.
Mike, Jerry and other experienced practitioners of CANSLIM are likely right to expect a FTD failure due to the obvious total absence of leading stocks in sound bases. This is not a rally to buy individual stocks, but a “junk-off-the bottom” rally where the best choice is to buy the market indices that were battered down the most during the decline. Small caps (IWM) certainly do qualify as a group of recent oversold underperformers.
We are aware that this may be a “suckers rally” and we agree with technical experts that the market should have undercut first the August 9 lows to hit the stops into a final capitulation. Well, it just didn’t happen (yet?) this time and Mr. Market is clearly in a different mood as he likes to fool the too obvious technical scenarios and plans.
What really matters for the IWM robot is that, after gauging the ST/LT probabilities for all expected outcomes from its various strategies, it issued a strong buy signal at the close and the first one since the 20 DMF issued its own premature “stage 1” signal from oversold on August 15. The stage 2 signal was issued yesterday with the 20 DMF closing above its average. Taken all together, the buy signal was strong enough to try to initiate a new long position as early as today without waiting for the stage 3 – number of days- confirmation.
The buy entry limit (67.97) is sandwiched between QS3 (68.12) and SS3 (67.70). If the rally lasts a few more days above QS3, we would be forced to raise the buy limit entry to 68.74. A pullback closing below SS3, would give an entry limit of 65.23. This gives you an idea of the possible entry limits in the coming days since we suggest to size in progressively into the position. Indeed, there is an elevated “worst case” risk of 8.40%, the distance to the stop level (62.26).
This far away stop is due to the extreme surge in volatility and to the fact that our last backtests optimized the initial stop on long positions to be much wider than previously. This initial risk is counterbalanced by the fact that the robot could very quickly reverse back into a cash position after a 20 DMF failure, limiting potential loss on the the downside.
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I was certainly too bullish on the multi-pivot outlook for GDX yesterday, and this ETF confirmed once again that it doesn’t really care about classic floor levels. The buy signal for today is still very neutral and I will mostly comment the floor levels when we see stronger signals in the future.
Billy
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