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Two weeks ago, on September 6 and 7, our mid-term system was extremely close to a bottom. In fact, if any of our indicators were just slightly different we would have triggered a buy signal. This signal would have ended the current sell with about a break-even gain. Last Thursday, on September 14, our system triggered another signal of sell. This suggests that we did have a bottom strong enough on September 6 to ignite a new uptrend, but historically speaking, the market was not quite oversold enough to trigger a bottom, according to our mid-term system.
This does tell us that predicting mid-term buy and sell signals is much more complicated than just looking at how strong a price decline or increase has happened since the last buy or sell signal. Meaning, that triggering a buy signal on the 6th or 7th would have been correct, even though we would have only broken-even. Our system was designed by looking at breadth, sentiment, volume, and price action. Historically, we would not have been correct to trigger a buy signal on that day (according to our work), but we are writing this to explain that we do not aim to hit a certain percentage gain on each buy and sell signal, but try to predict the future of the markets using statistics that are based on the common characteristics of tops and bottoms. Even though we would have been correct in triggering a buy on the 6th, we do not alter our system based on results. To do so would open up more buy signals on minor declines and therefore cause larger losses and smaller gains to our portfolios in the long run. We have used Texas hold'em for an analogy before and we will use this poker game for an analogy tonight. Folding a seven and a deuce before the flop is clearly the right play, and a professional poker player would never be upset when the flops comes 2, 2, 7. To do so would be to change his system of playing based on results, not on theory and strong statistics. Based on results we should have triggered a buy two weeks ago, but to alter our system to allow for weaker buy signals would be devastating in the long run.
The first chart below shows both SMH (the lower part) and SMH divided by DIA. You can notice that even though SMH has broken above its August high, our indicator (SMH:DIA) has not. This tells us that SMH is beginning to underperform in its relationship to DIA and it is quite possible that the ETF has topped at the 35.10 level, its current resistance.
The next chart is of QQQQ. You can see how the ETF has broken above our 40 resistance and is sitting right below our 40.60 resistance area. It is not necessary for QQQQ to hit the 40.60 resistance before retreating. In fact, a move to 40.60 would most likely push QQQQ to the next highest resistance level. The market has decided that the 40.40 resistance area was strong enough to push the ETF lower, and it is quite possible that the downtrend started at the open on Friday.
The final chart shows IWM. IWM has also hit strong resistance at 73. We believe that the downtrend for IWM started last Friday as well.
As our system triggered another sell signal after the close last Thursday, we strongly encourage our subscribers to add to their short positions at this time. Resistance is currently strong in QQQQ, SMH, and IWM and it is quite possible that the top is already in.
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