Transition From Decline to Accumulation - June 18, 2012

[Billy]

I have updated all the IWM correlation score components and after a long research this weekend, I decided to keep only the two strongest correlated scores to create a temporary composite IWM correlation score. I need more digging and verifications before adding the other correlations with confidence, but it is likely to come progressively over time for some of them.

The strongest predictive correlated score is the one with IBD Accumulation/Distribution % scores. The correlation factor with IWM is 46% which is exceptionally high, because very few indicators do correlate by more than 20%. I like the fact that it involves institutional price/volume relationships for +/-5000 stocks encompassing all the “liquid” small cap stocks universe.

As you can see below, the score jumped strongly above the 20 dma last Friday.



The second best predictive correlation score with a correlation factor of 36% comes from the Alphascanner’s daily stages structure. This one has not yet crossed above its 20 dma, but is now one millihair away. A sideways price action would be enough to trigger a long signal as can be seen in the zoom chart.





As can be seen in the chart below covering the percent of stocks in each stage over the last 20 days, the current market structure undoubtedly points to a steadily rotation from decline stages into accumulation stages. From the IBD ratings, we know it is happening with a long term bullish institutional price/volume bias. During such transitions, it is typical to see much choppy price action like we saw last week, but choppiness will gradually abate if the structure evolves toward the mark-up stages. It is certainly too early for chasing price, but pullbacks should provide improving reward-risk long setups, especially with an intermediate term horizon.



The composite IWM correlation score, weighted by the respective correlation factors has also crossed above the 20 dma last Friday. It suggests that it is time to cover shorts and to start looking for long setups on pullbacks.



It is interesting that the bullish technical signs are piling up right on schedule with the Presidential Election cycle. This is the calendar period for FOMC to state their next monetary policy and for President Obama to start giving gifts like some tax-cuts to the People.

The POMO agenda has been designed to make sure that liquidity will be abundant from Tuesday till Friday. And next week will be the start of windows-dressing for the quarter and semester with managers eager to secure their performance bonuses.



There are no new advised positions today from both the IWM and GDX robots. IWM is getting close to be stopped out once again from its short position, while GDX hasn’t moved much since the last short entry.

IWM looks secure above its uptrend line coinciding with its 200 dma (75.91) and Weekly pivot (76.62) for the next 3 days. The next resistance cluster includes the 50 dma (78.22), but is about half the strength of the support cluster.



GDX is right at the apex of a bearish pennant triangle and keeps acting choppily. It is more neutral than IWM, but massive support clusters still put the breaks on any potential sharp decline.
Billy