Wednesday, February 23, 2011

IWM MACD Sell Signal

We have the second negative divergence MACD sell signal in the IWM in the last 5 weeks.  The first one, which was a hook sell, is technically still in force as the MACD did not climb above its previous high.  However, with the second sell signal coming after the IWM made a fairly significant new rally high, we should expect that the downside potential will be somewhat muted with weak support at the January low and strong support at the April and November 2010 highs.  Notice how the rising 200dema will likely meet or surpass those levels by the time the IWM reaches them which will provide an additional level of support.

It seems the game plan would be to enter short on any weak retracement of this week's decline with the view of exiting at support.  If, and it's a big if, we see 5 waves down to that support, we could begin to look at intermediate opportunities on a subsequent rally into the April/May time frame.  Otherwise, this correction is setting up new long opportunities.

After hours Biogen is up $3+.  Today VRTX gained 15% gapping past my Stop Limit entry point of 40.25.  I will look to enter on a pullback.  BP has set up a very nice cup and handle.  See my post from 2/8/11 on oil, which shows upside targets. Cash oil today closed at $100 and is well on its way to the next objective around $107.  I am long the OIL.  RBCN is set up for a double bottom breakout with a handle.  CME has barely been affected by the selloff.  The break below the longterm trendline in precious metals stocks (GDX) appears to have been a bear trap.  There are a few stocks in that sector that have setup - IAG, GG, AUY are a few.  WFR has built a very long base that has potential to double.

My conclusion is that the 2010 flash crash coupled with the extended rally has given a large number of laggards time to catch up and set up as a rotation out of recent high flyers is underway.  The current correction could last well into March, but should provide excellent long opportunities for the next rally.  Only if we were to see failure below the April 2010 highs might we conclude otherwise at this point.

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