Transitioning - October 25, 2011

[Billy]

Forum Clusters 111025.xlsx

The easy conquest of Monday’s strong first resistance cluster - including the yearly and quarterly pivots - is an extremely rare event and must be respected. It happened on rising volume with a strengthening 20 DMF and explosive relative strength. So, we know that large players are behind the move and most probably for the middle or long term horizon. Under such circumstances, the most overbought indicators are simply confirming a transition from mean-reversion behavior to long term trend following.

Several leading component stocks of IWM were the targets of mergers and acquisitions, so it may have distorted the real strength of the ETF. But the fact that so many large companies are rushing to take over small companies on the same day, with the same timing, indicates that small caps are offering attractive value and that bidders are afraid to miss the opportunity of bargain prices. At least, we know that this is not short-squeezing, but the truest of all accumulations.

A pullback is coming for sure, but it could happen after more momentum through the weak first resistance cluster. The optimal reward-risk multi-pivot sell or short entry (76.43) is now above weekly S3 (75.90), while the optimal buy entry (73.37) is just around yesterday’s close. These are just indicative guidelines for your discretionary trading because the IWM robot settings are still neutral.

In case of a pullback starting today, as I wrote yesterday, the yearly pivot (71.84) and quarterly pivot (71.25) area should hold as major support just above last week’s range and breakout borders.



While the robot doesn’t advise any new position, the GDX money flow remains on a sell signal and the ETF is still confronted with floor cluster resistances totaling twice as much the pressure (26 +6 =32) than the support clusters (13+3=16). The robot’s short position is now mid-way between the entry price (53.01) and the stop (59.38). Only a breakout above the 200-day moving average (57.98) would confirm a risk of hitting the stop soon.
Billy