The Real First Day Of The Month Effect - October 3, 2011

[Billy]

Forum Clusters 111003.xlsx

Thanassis and Kostas, his chief project development manager, are here in Belgium to finalize the implementation of the real-time 20 DMF. We had passionate discussions during the weekend about the project, but also about the sore state of economic life in Greece. Discussing in details what has changed for local individual traders and investors really went beyond anything catastrophic I had imagined. Without entering into details, individual traders and investors are now taxed 50% on their trading gains while being “perpetually” prohibited to deduct their trading charges and losses. In practice, it means that traders and investors in Greece have stopped all their activity. In the business world, any entrepreneur still making some profits has to leave 80% as taxes to the state. The net worth of top individuals has often lost 90% of what it would be had they not been Greek citizens. Of course, all of the country’s elite is in the process of relocating elsewhere. Good luck!

As I expected in Friday morning’s commentary, IWM found its low for the day near the stable YS1 (64.40) level. But it happened in the last 4 minutes of trading with a close 10 cents below. This is not significant enough to be a decisive breakdown. I also expected some “first day of the month” bounce before a possible final capitulation leg down. Since then I’ve read the McClellan study on the first day of the month effect that concludes about a true bias in the direction of the prior month’s trend or downward for this Monday. The seasonal “first day effect” bullish bias so often emphasized by the MarketSci blog or by Larry Connors are statistically bullish only because historical data has more months closing up than down!
http://www.mcoscillator.com/learning..._month_effect/

Therefore, YS1 (64.40) is more likely to be the high and strongest resistance for Monday’s trading. Futures are indicating a big gap down at this time of writing, so a new short entry at the limit price of 63.94, just below 64.40, is an excellent short term risk-reward opportunity in case of an intraday bounce. All initial short positions can also safely be held.

The 20 DMF is just entering its oversold level and we know that this often precedes some capitulation sell-off before a buy signal can be issued on the next short-covering rally. The robot rated today’s signal as a “short” instead of a “strong short” setting mostly because of the fresh oversold level.

From a multi-pivot perspective, the potential sell-off could easily reach the new monthly S1 (60.65) within 2 days of trading, because the support floor clusters are 2.5 times weaker than the resistance floor clusters. So be prepared to see spooky headlines news soon about another market crash! If the washout doesn’t materialize for some reason, it is hard to expect more than another choppy consolidation in the next few hours and days. The robot is here to tell us objectively when to cover our shorts and we’ll just wait for this signal to be issued. In the meantime, the trailing stop could be lowered to 68.79 after Friday’s close.



GDX closed last quarter too exactly on the stable yearly pivot (55.19) which was one of the few floor levels to remain unchanged for next week. The GDX robot is indicating a very strong buy signal at the limit entry price of 55.54. The floor clusters are indicating that a bounce to the 200-day moving average (58.32) is now easier to potentially materialize than last week.
Billy

[Andrei]

Hi Billy. We can see from pivots that any meaningful support is still far for IWM, however for SPY it seems that a strong pivot support cluster is just underneath with YS1, MS1 and WS1 quite close. Would you expect at least some kind of consolidation before any move either way?

Thanks.

[Billy]

Hi Billy. We can see from pivots that any meaningful support is still far for IWM, however for SPY it seems that a strong pivot support cluster is just underneath with YS1, MS1 and WS1 quite close. Would you expect at least some kind of consolidation before any move either way?

Thanks.

Andrei, I am trading exclusively IWM and the SPY levels are a distraction and source of confusion.
So, I avoid to look at SPY's levels. But you are right, there is an important support at SPY's YS1 (109.19), 0.68% below Monday's close. But support is only potential support. Floor selling pressure remains much heavier than floor buying pressure for SPY.
Billy