Shorting IWM, Buying More GDX - January 11, 2012

[Billy]

With a 20 DMF still on a neutral (cash) signal, but back above the zero line which could trigger a short signal soon, the IWM robot finds an edge for shorting from a limit price of 76.89 with an initial stop at 78.87.

Most of the edge is born out of the strong ST (3-day) settings with a much weaker edge from the LT (10-day) settings. So this setup looks rather good for a quick counter-trend pullback trade, but it is likely that most of the potential gain will be made within the next 3 days.

Several observations: I would play it lightly (unleveraged). The entry price would almost coincide with the October 27 highs (76.97) and weekly R2 (77.18) which together make a nice resistance confluence prone to profit-taking. But that could simply lead to a quick retest of the 200-day moving average (76.04) and the current strong first support cluster. The two floor resistance clusters have now a combined strength of only 10 vs. 37 for the two floor support clusters. In a news-neutral environment, the trend has a good probability of continuing upward.
There is also a dominant put open interest at a strike of 79 which could become an easy target for pinning on next week’s opex, just above our stop of 78.87!



The GDX position is evolving nicely and the trailing stop can be raised once again to 50.55.
This is really a worst-case trailing risk since 95% of exits with the new improved GDX robot are triggered by Money Flow switches. The RT MF is now 3.5 days away from a sell signal but another countdown might begin soon for selling into strength. This could materialize in the vicinity of dual yearly and semester pivots (55.88) or even higher on the first retests of the 50-day (56.60) and 200-day (57.86) moving averages.

There is still an edge for adding a new secondary long position on an undercut of yesterday’s low at a limit price of 54.38.
Billy