Lowering Expectations

Let's make a brief market analysis. The Nasdaq Composite still looks pretty good, but there are several indictions that a deeper correction is right behind the corner. Distribution days are showing op on daily charts of all indexes. We already have a failed breakout which is a sign of selling into strength. Cyclically speaking stock market's short term cycle is 16 days old and should deep down into low in 2 to 5 days. I expect this low will be quite deep and the next short term cycle will not make a new high, but instead complete a bit shorter intermediate term cycle, before rallying into new highs again.


One very important suggestion comes from small caps. I follow SML index, which tracks 600 small caps. These have clear laggards in last two weeks. While Nasdaq broke to new highs, SML was being caught in a correction already. And when dynamic small caps are left behind, this is usually a very bad sign for general market also. Both my indicators, the stochastics and MFI also suggest a deeper correction is coming in small caps, which are my primary trading vehicle. Not mentioning a plethora of failed breakouts I've seen lately all across the board.


Stock traders should now lower their expectations a little bit. Personally, I'll take the following steps that should keep me out of trouble:

• Trade only the best of the best patterns.
• Keeping tighter stops on open positions.
• Taking less risk on initial positions.
• Selling half at 50% of my usual profit target.
• Trailing the rest of position with a tight stop.
  
• Not holding more than 50% of any position overnight to avoid being hurt by big gaps down in market.

In general I plan to mostly just day trade until conditions improve, taking 7-10% profits when I have them.

Gold is acting exactly as expected after an intermediate term low has been left behind. Yesterday's decisive move out of 33 days long cycle was followed by today's follow through, which of course is a sign of strength. Now, what do I expect of gold in the next couple of weeks? First it will have to face resistance at 175 on GLD. I fully expect it will get broken and then the next resistance is all time highs at 185 on GLD. I don't care whether if it gets broken on the first try or not as I will look to sell my stake around 180. When GLD reaches 180 and possibly 185 the usual 25-week cycle will already be very extended and any tag of new highs will probably be met by a bunch of sellers. For now I'm just holding my positions in DGP and GDX and will look to sell sometimes in the second 8-day cycle if everything goes as planned.