Robots And The Turnaround Tuesday On Steroids – October 5, 2011

[Billy]

Forum Clusters 111005.xlsx

Yesterday’s unexpected close above yearly S1 (64.40) invalidates my commentary of yesterday about a bearish trend-following environment. An oversold market that rallies sharply on strong money flow is a bullish event. The fact that it happened with a 6.23% gain for IWM in the last 30 minutes of trading is simply the true image of modern technology trading, with all HFTs and large players algorithms kicking aligned together. Most certainly 90% of that extremely high end-of-day volume was generated by large players’ automated programs and Tuesday’s VWAP (61.61) area can be expected to be furiously defended from now on. Such massive programmed intraday reversals from oversold levels are seldom for the short-term horizon, but are rather initial longer term strategic positioning by value seekers. But a tactical pullback can be expected today.

According to Bespoke, today’s last hour reversal marks only the tenth time since 1985 that the S&P 500 was down 1% or more at 3PM and finished the day in positive territory. in the prior nine occurrences, the S&P 500 finished the next day down by an average of 1.26% with negative returns eight out of nine times. But over the next week, the S&P 500 rose by an average of 1.13% with positive returns four out of nine times. The new IWM buy signal ST/LT settings have only an expected 3-day gain of 0.45% from the previous day's close, with a win ratio of 61.5%. In my view, this can justify entering unleveraged positions at today’s limit buy price (65.23) but there is no hurry for leveraged positions which can be entered later with better odds for risk-adverse traders.

Taking all this together, we could see large players let a light volume pullback happen first to the Volume-Weighted-Average-Price (VWAP) anchored at their initial positions of yesterday before resuming their heavy-buying programs. Roughly, over time, it would be a 50% retracement from yesterdays last 30 minutes move or near the weekly S1 (62.56). This is also in line with what we can know about the way their algorithms are running and the way a bear trap is manufactured nowadays when false moves often lead to fast and tangible moves in the opposite direction.

A potential logical target for large players is the 50-day moving average (69.96 and declining daily) because the market topped about 50 days ago and the rate of decline of the average can only slow down if prices are stable or rising while old plunging data points are dropped from the moving average. Technicians do know that a flattening moving average has much less resistance than a falling one. However, we currently have massive floor selling pressure just above the 50 dma that looks prone to create a logical programmed consolidation or pullback if and when this rally attempt succeed. The retail crowd will likely jump late on board as always and that will be the perfect setup to feed them while early birds will be able to book profits.

The initial stop on a new long position starts just under yesterday’s lows and the 2 support clusters. It will need to be adjusted 8.03% below your execution entry price if you can enter below the limit price. This wide stop is of course linked to extreme volatility and is another reason why I would be slow on entering leveraged positions.



The GDX robot was stopped out and is waiting in cash today. Please read Pascal’s comments.
Billy