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MLR - PMP 10/8/13

Major averages finished lower on lower volume. The budget stalemate adds considerable headline risk in the short term. Volatility levels have been jumping. Despite the elevated levels of the CBOE VIX indicator, the equity markets have been taking it in stride with the "risk-on" small-cap Russell 2000 Index just 1.8% off its high, the S&P 500 off 3%, and the NASDAQ Composite off 1.2%. Nevertheless, based on the increased volatility, the Market Direction Model has moved to a neutral/cash signal as a prolonged budget stalemate that spills into a debt-ceiling stalemate could easily send the markets lower.

A good lesson in handling trades that reverse came in the form of Netease.com (NTES) which has had a number of pocket pivots contained within a reasonably tight, constructive, price/volume structure over the last several days. Monday, it had another pocket pivot then turned lower on a big outside reversal day. Volume was heavy even though there was no news on the stock. Should a trade reverse, it is always paramount to know one's exit point whenever one puts on a trade.

NTES has gotten support at its 50-day moving average. Some may wish to keep looser stops on a small core position and instead wait for a violation of its 50-day, knowing that NTES has violated its 50-day twice in recent months then turned back around to hit new highs both times. Such stocks as we have said before contain added risk as they tend to trade in a sloppier manner. Thus, an alternatively tighter selling strategy could have been to sell part or all when NTES undercut the low at 70.5 of its sideways price structure, thus one would have sold intraday when NTES undercut 70.5.

LinkedIn (LNKD) closed just below its 50-day moving average yesterday. A move below the 137.10 intra-day low of yesterday's price range would constitute a 50-day moving average violation for the stock, something not seen in LNKD since early May of this year.

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