IWM On The Sidelines - July 19, 2011

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Today, both IWM and GDX have an IBD RS rating of 67 while exhibiting totally opposite short term behaviors. IWM remains in daily late accumulation sub-stage, while GDX started its first day of daily strong mark-up stage yesterday. Now is probably the best of all times to allocate your funds equally in the two non-leveraged robot ETFs. If you use double leverage, 1/3 GDX and 2/3 UWM is the optimal mix for the long term, while use of triple leverage with TNA doesn’t require investing in GDX for maximizing long term risk-adjusted returns. But remember that the more leverage you use, the higher the risk for painful drawdowns.

The 20DMF came very close to issuing a short signal yesterday and is less than one hair of issuing one today. As I wrote earlier, this can be interpreted as a “stay in cash” signal for today. The new IWM robot long entry of 79.76 is 2.15% below Monday’s close and 2.8% away from current pre-market quotes, so the robot is actually forcing us to wait on the sidelines today.

If today’s likely gap up reverses with a negative 20 DMF into the close, then the short signal will be issued and the robot will try to enter short at a 3:1 risk-reward ratio tomorrow.

If yesterday’s shake out was a bear trap and IWM acts strong regaining its 50-day moving average (81.88) or better QPP (82.28) with a strong 20 DMF, tomorrow’s long entry will be somewhere within or above today’s first resistance cluster. In that case scenario, we may witness another of these “from failed moves come fast moves” scenario that would be worth the patience of staying on the sidelines today.

If IWM drifts lower near our long entry price, but the 20 DMF is positive, then large players are still in accumulation mode and 79.76 is an optimal entry price near the next strong support cluster including the 200-day moving average (78.96).

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For those who added or entered a new position yesterday at 82.69 with a stop at 80.93, they just need to keep that stop today. For a discretionary early exit of that late entry, I would focus much more on the intraday 20 DMF evolution than on any specific floor level. As long as the 20 DMF remains positive today, you can hold the position whatever the choppiness . MPP (81.62) looks like a line in the sand for the clusters, but I would personally discretionarily exit only after a decisive breakdown similar to yesterday’s and on very weak intraday 20 DMF and/or cumulative $TICK. The bear trap scenario can win and your last long entry would be very good in the near term.

The GDX robot trade is maturing into the heavier cluster resistance that starts at WR1 (61.46) up to SR1 and QR1 (62.12). We’ve seen that GDX seems to be controlled much more professionally than usual and now that every blog and newsletter is screaming to their retail public to buy gold and silver miners, expect the large players to start distributing part or all of their positions while GDX is approaching the resistance cluster. That’s why I still view new long entries as increasingly risky, while holders of the initial GDX robot are sitting in a comfortable cushioned sofa to withstand any potential pullback near WPP (58.38). The total support/resistance clusters strengths or floor buying/selling pressures ratio remains very bullish at 37: 21 and an intermediate term breakout above SR1 and QR1 is a high probability from the multi-pivots perspective.
Billy

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Billy,

I'm still struggling a bit about how best to use the TICK indicator. For instance, yesterday the market was selling off hard in the morning but bottomed early afternoon and proceeded to gain strength in the last hour. Did the TICK give one an advance read on this? Should one look at this in a divergence sort of way (lower price on the index but less negative TICK number indicates a point where one might enter, etc.)?

Could you elaborate a bit on how you use it?

Thanks very much.

[QUOTE=adam ali;14831]Billy,

I'm still struggling a bit about how best to use the TICK indicator. For instance, yesterday the market was selling off hard in the morning but bottomed early afternoon and proceeded to gain strength in the last hour. Did the TICK give one an advance read on this? Should one look at this in a divergence sort of way (lower price on the index but less negative TICK number indicates a point where one might enter, etc.)?

Could you elaborate a bit on how you use it?

Thanks very much.[/QUOTE]

Adam,
It is extremely simple. I use cumulative $TICK as a detector of buy and sell programs.
Here is a 10-day minute by minute chart with the half-day, full-day and 10 hours averages. These averages have been arbitrarily chosen after observing that they were reliable for trend-following.
When the cumulative TICK stays above the ½ day average, the buy programs are on.
When below, the sell programs are on. When there is a reversion to the average, there is a pause in the programs that ususally resume on the ½ day average or reverse (from buy to sell or from sell to buy). It closed yesterday right on the average, so look today if it falls back down (sell programs on) or crosses the average upward (buy programs on) after he open.
Don’t make it complicate when it is so nice and easy!
Billy

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Keep it simple - agreed. Thanks.

[QUOTE=Billy;14834]Adam,
It is extremely simple. I use cumulative $TICK as a detector of buy and sell programs.
Here is a 10-day minute by minute chart with the half-day, full-day and 10 hours averages. These averages have been arbitrarily chosen after observing that they were reliable for trend-following.
When the cumulative TICK stays above the ½ day average, the buy programs are on.
When below, the sell programs are on. When there is a reversion to the average, there is a pause in the programs that ususally resume on the ½ day average or reverse (from buy to sell or from sell to buy). It closed yesterday right on the average, so look today if it falls back down (sell programs on) or crosses the average upward (buy programs on) after he open.
Don’t make it complicate when it is so nice and easy!
Billy

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Hi Billy,

I understand from above that you use the cum tick above and below the 1/2 day average for the general condition of buying and selling programs. How do you use the full day and 10 hour averages along with this ?

Thanks in advance.

Trev

[QUOTE=manucastle;14919]Hi Billy,

I understand from above that you use the cum tick above and below the 1/2 day average for the general condition of buying and selling programs. How do you use the full day and 10 hour averages along with this ?

Thanks in advance.

Trev[/QUOTE]

Trev,
The ½ day average is the most reliable intraday and overnight in the absence of significant gaps. When wider gaps do occur, the full day average becomes the most important after the open until the ½ day average holds again as S/R.
When the 10-hour average is broken, it is very often the confirmation that all programs have reversed course.
On the chart below, you can see that confirmation occurred around 1:45 PM on Tuesday after failing to do so at 11:00 AM.
You can also read the averages alignments like any other moving averages-based trend following system with the typical “bow-tie” pattern at inflection points. Just remember that gaps can distort the reading. In fact, Cumulative $TICK is behaving much like an EV chart that also omits gaps.
Billy

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[QUOTE=Billy;14923]Trev,
The ½ day average is the most reliable intraday and overnight in the absence of significant gaps. When wider gaps do occur, the full day average becomes the most important after the open until the ½ day average holds again as S/R.
When the 10-hour average is broken, it is very often the confirmation that all programs have reversed course.
On the chart below, you can see that confirmation occurred around 1:45 PM on Tuesday after failing to do so at 11:00 AM.
You can also read the averages alignments like any other moving averages-based trend following system with the typical “bow-tie” pattern at inflection points. Just remember that gaps can distort the reading. In fact, Cumulative $TICK is behaving much like an EV chart that also omits gaps.
Billy

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Thanks very much for you prompt reply Billy.

Trev