From a multi-pivots perspective, IWM is still stalling under its strongest resistance cluster YTD. YR1 (85.68) was first unsuccessfully tested on 04/06/11 and led to a rejection toward the 50-day moving average. The second test was successful for the last three days of April before reversing nastily on May 2, from QR1 (86.66) and failing to find support at YR1.
This week’s activity is setting up a severe potential bull trap pattern, as Tuesday’s bounce was stopped once again at the confluence of SR1 (85.46) and YR1 (85.68). Another test of the 50-day moving average (82.93) is most likely next week. Due to the previous pattern with rising volatility and the proximity of the summer season when large players avoid deploying new long term strategies, a failure to hold the 50 dma next week could quickly lead to a sharp selloff. The probability of such a scenario is higher than the previous 50dma test that occurred with a neutral 20 DMF mode. The 20 DMF actually turned into a short mode on May 5 while testing the 50 dma and remained short until now. The failing bounce to SR1 (85.46) and Friday’s run toward the 50 dma on a very negative 20 DMF of -150% increases the selloff probabilities. Also IWM’s relative strength (lower pane on the chart) started to rise while approaching the 50 dma on May 4, while it is now starting to fall.
All these developments are among the main reasons for the IWM robot to hold its short position with rapidly rising 3-day short edges. The next logical area of potential support and strong bounce is QPP (81.80) since QR1 (86.66) is now the reference resistance level for the year. The highly rotational nature of the current correction will probably avoid a longer term (10-day) short edge and I expect that a buy signal might come around QPP from a very oversold 20 DMF level.
So far this year, the robot has been excellent for switching from trend-following to mean-reversion strategies and let’s simply follow its next signals once they come around.
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