Some of my readers will recognize my previous work from the Reversion to the Unified Mean (RUM) Wave blog. I wrote it in relative anonymity for a couple years. That work can now be found here.
Pull back Monday?
We have seen a MONSTER rally that has eaten my short position for lunch. But, as a rule, I don't react to big moves on the day they happen. The combination of a good "agreement" from Europe, the end of the quarter, and the end of the week were all positive influences on this market. Yesterday I thought the technicals were already too high to sustain the rally.. I was wrong. Here's the breakdown of today's numbers. The score that jumps off the screen is the RumWave score in red. The 4 hr and Daily are high, but not unsustainable.
The slow stochastic on the 4 hr chart (top) shows that the market has room to continue higher, but it would be reasonable to expect a slight pull back based on the red line being so high. On the Daily chart (bottom) we see the first large candlestick higher. We also see a bullish crossing point on the slow stochastic. Both of those tell me there might be more room to run up.
All of these factors lead me to this conclusion: it is reasonable to expect a pullback Monday, perhaps as large as half the gain today (around 130ish points). At that point I will consider closing my short position. The reason is that this same scenario played out at the end of 2011 when the Euro crisis was temporarily resolved. The RumWave triggered a sell signal, had a sharp decline, then grinded higher for months. I'm not saying that will happen, just that it is a possibility. In that particular scenario, the best decision was to buy into the market, even though the RumWave was already pretty high.