Friday, July 11, 2014

Yesterday's swoon finished with a weak short squeeze that never quite brought shares back to unchanged. Bulls will likely be on the defensive Friday as a result, but don't count them out yet, since all they need do to generate a more powerful squeeze next week is to hold the broad averages buoyant for a couple of days. Bears are so used to getting wrung out that they can always be counted on to trip over themselves to buy the dips. Who needs a Plunge Protection Team with so many nervous shorts still in the game?

The narrow failure of yesterday's shakedown to achieve a 1943.50 downside target was mildly bullish, but we'll wait to see whether sellers follow-through Thursday night/Friday morning before we draw any conclusions about the underlying strength or weakness of this vehicle.  Night owls can try bottom-fishing at the 1953.50 midpoint pivot, stop 1952.75, in any case, but if it's decisively breached, that would be indicating more weakness to at least 1943.00 over the very near-term. That Hidden Pivot can be bottom-fished as well, provided the pattern that created it remains intact.

Don't let the sleazy head-fake that occurred on yesterday's opening bar spook you, since the stock had already managed to take out a key price peak before DaBoyz pulled the plug.  As a practical matter, long positions held since mid-June, when I identified a 47.38 target with GDXJ trading near 38.68, should have been exited on a stop-loss at 46.20 on the selloff. That would have simply been managing the risk of the trade using the 1-to-3 risk:reward ratio that I always advise. Since the stock topped at 46.50, about 90 cents shy of the target, we should have been willing to risk a move of no more than 30 cents against us at that point to capture the remaining (and implied) 90 cents of the rally to the target. I call this a 'dynamic' trailing stop because it is adjusted by shrinking the stop-loss as the underlying stock closes on the target. Because the rally leg was bullishly impulsive, having exceeded an important high at 46.00 made in mid-March, we should expect GDXJ to achieve a new recovery high of at least 49.61 after this correction has ended.  The correction looks like it has further to go, however, since a minor Hidden Pivot support at 43.64 was exceeded by eight cents at yesterday's low.  Meanwhile, the 41.02 midpoint pivot of the large pattern shown is a logical place to do some bottom-fishing for the anticipated ride to 49.61, although we should be prepared for a bullish reversal from somewhere above it. Please note that it would take an uncorrected thrust exceeding the 2013 peak at 54.56 to decisively break the back of the bear market begun in 2010 from $179. _______ UPDATE (July 15, 4:53 p.m. EDT): The correction has been nasty and now looks like it will come