MDM - Model switches to sell signal standby after the January 28, 2011 close

Published : January 30 2011 at 19:31 ET

The model is switching to a sell signal standby. The action of leading stocks and the general market averages has deteriorated to the point of tilting the neutral signal to a standby sell. Should the NASDAQ Composite break below its close by hitting 2685, a full sell signal would be triggered. Odds are good this will happen since the NASDAQ Composite closed at 2686.89 on Friday and the futures are down sharply on Sunday afternoon as this alert goes out.

This market environment has been one of the most unusual in history given the sustained central bank intervention by way of quantitative easing (QE1 then QE2). While this has enabled markets to continue to drift higher into the end of 2010 on low holiday volume, there has never been a sustained strong rally without a valid follow through day (FTD). Since the market bottomed from a short-term pullback in November by turning back to the upside on December 1, 2010, we have not had an FTD, and so this has placed the rally in suspicion. Nevertheless, it has been playable on a stock-by-stock basis, which is where our other services come into play regardless of the current Market Direction Model's signal

Please do not jump ahead of the model. Over the long run, we have not seen a marked advantage to shorting an index on a sell signal standby. We find it is generally best to wait for the full sell signal. Of course, in this case, the full sell signal is a heartbeat away.

Keep in mind that this is not a normal market environment as the Fed's Quantitative Easing (QE2) fights any downtrend, and the old saying, "never fight the Fed" may continue to ring true, so even if a sell signal ise issued, there is no guarantee that a sustained downtrend will take hold, hence upside stops should be adhered to. On the other hand, should a sell signal be issued, we have no idea how serious the decline will be, so it is best to follow the signal in order to be in position to profit from a sustained downtrend. In the meantime we will continue to alert members to long or short-sale ideas we feel offer reasonable profit potential on a stock-by-stock basis in our other services.

If you wish to invest in inverse ETFs for the purpose of hedging any long stock positions or for the purpose of engaging in tactical trades to capitalize on momentary market weakness, here are some inverse ETF suggestions:

Note, if your intention was to buy the 1-times ETF but that ETF is unavailable, buy half the position of  2-times ETF, or one-third the position of a 3-times ETF.


EUM - inverse emerging markets (emerging markets have been acting weaker than US markets)

EPI- inverse India - market has been acting weak


EEV -inverse emerging markets (emerging markets have been acting weaker than US markets)

BZQ - inverse Brazil - market has been acting weak

SSG - inverse semiconductor (volatile so proceed with caution)

FXP - inverse China - market has been acting weak

INDZ - inverse India - market has been acting weak


SQQQ - Among 3x ETFs, this provides the best risk/reward when used with TQQQ on buy signals

SOXS - inverse semiconductor (volatile so proceed with caution)

EDZ - inverse emerging markets (emerging markets have been acting weaker than US markets)

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