Commentary - October 22, 2013
Momentum cycles retreated yesterday and markets stalled. Part of what happens during an intermediate advance is that stocks and indices move too far above their 5 or 10 day moving averages, which triggers automated trading programs (institutional) to either take small profits, or to more often just stop buying.
Institutional trading pauses usually cause markets to move sideways since they control the largest portion of daily volume. It also provides the necessary action to build up some buying pressure that will be required for the next move up.
In the past, we've compared it to things like a battering ram, which must first be pulled back in order to create enough energy to break through the next resistive barrier it will encounter going forward.
Pullbacks on the momentum cycle also become stronger as the intermediate move matures. That means deeper pullbacks begin to occur which take the indices down to their 10 or 14 DMA's. Those typically begin to show up after the first 2-3 weeks following the intermediate bottom.
With a rising long term cycle, and intermediate line that still has lots of room to run (on the Dow), we may not yet be to the point where the short term cycle will move out of the upper reversal zone. But deeper retreats are on the horizon. The 16 day cycle is ready to retreat as is the 8-10 day cycle, so make sure stops have been raised.
As always, we have stops on long position ETF's (DDM, QLD, SSO) layered under their 5 and 10/14 DMA's at this time. For longer term traders (401K's etc.), stops should remain under the deeper 30/50/100 DMA's.