After a deep pullback in the market last week, the market is gapping up 3% on the S&P 500 futures as of this pre-market writing on news that European officials are making progress in dealing with the euro-zone debt crisis. Where have we heard that one before? Nevertheless, they expect to reach agreement by Tuesday of this week.
As we have written, the gap up/gap down nature of the current environment greatly increases the risk of the model being on either a buy or a sell signal. Current volatility levels have increased the fail-safe to beyond 2% in last week's market action, especially after the sudden gap down which occurred on Monday November 21, after the market had been trading in a choppy trendless manner in the weeks prior, and thus was another reason for the model to stay safely in cash during last week's trade.
That said, the model will switch to either a buy or a sell signal if it sees a low risk entry point such as a dead cat bounce into resistance (sell signal) or constructive pullbacks in leading names to logical support areas (buy signal) where the fail-safe on the NASDAQ Composite is less than 2% away.
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