HUI Fails to Confirm the Upside Reversal Day of Last Week By Trader Dan
* Monday, May 14, 2012
Today's selling downdraft in the broader US equity markets, when combined with more of the risk off trades, derailed the tentative Upside Reversal Day posted last week in the HUI. You might recall that I mentioned it might be prudent to get some additional upside price action before becoming too convinced that we had a sure bottom in the mining sector shares.
The reason for this is that far too many of both these upside reversal patterns and downside reversal patterns are being generated by the nature of computer algorithmic trading. In times past we would see these patterns form ONLY AFTER A PROLONGED UPTREND OR DOWNTREND when prices had reached extreme levels of valuation.
Commercial traders, whose business deals with the actual physical commodity and who understand "VALUE" better than most traders, would be moving in to cover existing shorts in large size/instituting fresh longs or liquidating long positions/instituting fresh shorts in large size when they spotted these extreme valuation levels. Their buying or selling would be of such magnitude that the market would then reverse course.
Today's BRAINLESS HEDGE FUNDS have no such understanding of VALUE nor do they even make any attempts to discover what value might be. How can they when you have a collection of mindless machines doing the thinking for this lazy group of traders? To decipher value one must have a thorough FUNDAMENTAL KNOWLEDGE of the market that they trade. Such knowledge takes many years to formulate particularly during which the traders gets to witness firsthand changes in supply/demand structures affecting the market(s) that they choose to trade.
What we get nowadays a result of these runamok algorithms, is every single machine on the planet buying or selling merely because the last trade price happened to either go up or down. There is no understanding of WHY there is buying or selling. All anyone knows is that a "bunch of other machines" are buying or selling so just go with them.
The result is what we saw last week in the HUI. Apparently there was enough profit taking in the ratio spread trade that it forced the shares higher. Once a technical level was taken out on the upside, additional algorithm trading then took over to take the HUI through the previous day's high closing a chart gap on the Daily in the process.
However, and this is the key - there was little to no SERIOUS Followthrough buying that occurred to thereby validate the signal. The result was that the buying present last week evaporated in the face of fresh selling.
The close today was not at all constructive with the index not only taking out the previous LOW of that reversal day but also CLOSING below that level. This gives the bears fresh fodder at this point so we will now have to wait to see subsequent price action to get a hint or sign that a serious bottom is at hand. If the market can quickly reverse to the upside and take out today's high, we might have had another one of these all-too-frequent head fakes.
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