Windows-Dressing and Volatility - January 31, 2012

The IWM short position made some progress Monday, and the stop can be trailed down to 81.27. However it is far too early to claim victory. The gap down was bought early by large players and the 20 DMF closed strong. Like most previous weeks, a successful early shake-out test of the fresh Weekly pivot (78.97) and 5-day VWAP (78.98) and above the (65,5,30 min) volatility stop (78.43) is becoming the norm before resuming the uptrend. That’s a good reason to keep position-size light and wait for a short signal from the 20 DMF MDM before turning aggressively short.

The traditional end-of-month windows-dressing tactics could provide an opportunity for a new secondary entry at a limit of 79.85. The strength ratio between the first resistance cluster (12) and the first support cluster (5) hints at a limited potential for an easy and fast move upwards. But a simulation of the new February monthly floor levels starting tomorrow would actually change the strength ratio into 9:7 instead of 12:5. If Monday had been the last day of January, the advised short limit entry would have been 80.08.

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The main factor supporting GDX is the decrease in volatility. It tightens the floor clusters making them easier to be exceeded one by one. An assault attempt at the 200-day moving average (57.42) looks imminent, but profit-taking by large players intensified at the close yesterday, contrary to the 20 DMF. This leaves us 1.40 day away from a sell signal. A big increase in volatility is required now for a simultaneous Short signal.
Billy

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