MDM - Model still on sell

Published : November 18 2010 at 18:58 ET

The fail-safe is contextual as I wrote in the report I sent out earlier today. Given market action today, the model will stay on a sell signal for now. At critical junctures, I use confluent market maker levels as one guide, and some key ETFs did not close above confluent resistant levels. That said, we are not far from the model switching to neutral should these levels be broached on strong volume.

Also note, when the model issued a sell signal during the trading day on 11/16, there was no prior standby-sell day. In more normal markets, however, the fail-safe is fairly rudimentary as it kicks in when the NASDAQ Composite moves above the high of the standby-sell day. Had 11/15 been such a day, the NASDAQ Composite would have to trade above 2536 (I add in a one point buffer) in order to switch to neutral under normal circumstances. This also coincides with the former April 2010 high in the NASDAQ Composite of 2535 which could also create resistance against the market moving higher. (For added clarification, when we wroter earlier about 2514 being the level at which the NASDAQ could go neutral in SOME cases, this was written with respect to situations where there was no sell signal standby prior to the actual sell signal, but also advised that fail-safes are contextual.) 

In terms of market commentary, you dont have to look far for rational opinions on the market. But opinions are just opinions and the market often surprises. Thus over time, I have found it best to rely on price/volume action of the major indices and leading stocks. It is also important not to put too much weight on wiggles in the market because wiggles, even sharp ones, are part and parcel of major market action. Yes, the market can pull back sharply, and it can bounce sharply, but price/volume observed on the major indices and leading stocks over a number of days gives a bigger picture.

Here are various sound opinions on current events which carry both bearish and bullish implications, which is why trying to predict the future direction of the market is not a worthwhile exercise. Instead, watch the market day to day. Each day, with new price/volume information, you will be able to adjust your positions and market exposure accordingly. That is the essence of portfolio management and market timing.

GM IPO- A bit of hype gets the market excited.

Ireland/EU- Ireland will most likely take bailout funds. This is of course an ongoing saga in the EU, and other dominoes are likely to fall. These dominoes add impact when in confluence with other negative events such as China. Also, there are signs, although minor, of growing social unrest in the UK and Europe.

QE2- Today's bounce could very well be an opportunity for the big money to continue to move out of the market. But it is also a question of whether the forces of QE2 are powerful enough to overcome the recent negative turn of events.

China- The October 19 rate hike in China was not enough to derail the markets. A second hike would add weight to slowing down China's fast growth. China's stock market has shown distribution and weakness over the past few weeks. That said, China's growth is robust. Remember in the mid-1990s when US growth was fast enough that the fed hiked the discount rate four times from 1994 to early 1995? Yet 1995 was one of the strongest bull markets ever. The same could happen to China after this brief pause.

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