Massacre In Earnest - August 5, 2011

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I truly hope most if not all of you avoided being caught long in this take no prisoners market. We just witnessed one of the biggest daily declines in nearly three years and it was the signature of an emerging roaring bear market. All supports looked like made of clay.

The market is already at a level of long term damage which will require an orderly healing process. Strong reflex rallies will come our way, but likely in a chaotic manner and bound to fail and fool the optimists. Preservation of capital is the priority in this environment and both robots are in cash waiting for fresh strong signals.

Record panic down days like yesterday tend to follow-through on the next day, at least in the morning. This is simply due to massive overnight margin calls and forced selling early in the day. Market makers like to start such a day with weakness and gaps down to kill the trapped overnight prisoners. Then, capitulation usually expires intraday and a powerful bounce is often seen toward the close, sometimes even closing in the green. Expect the job report’s reaction to be engineered to take advantage of the margin calls first.

For IWM, based on multi-pivots levels, I discretionarily expect a low of the day near daily S1 (71.39) or even daily S2 (70.18) before a snap back rally into the close. This is my “best experienced guess” and not a quantified probability. The weekly close level will be very important for Monday’s robot signal and it is better to just watch the show today on the sidelines.

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GDX also took a big hit yesterday, likely another consequence of margin calls on previous day’s portfolio declines. But it is now testing the equilibrium yearly pivot (55.19) as support and this should somewhat attract some professional buyers.
I intend to take most of the day off to be in best shape and state of freshness for my weekend routine and next week’s signals.
Billy

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