Markets keep attempting to rally but, not surprisingly, stall and fall below their short term moving averages.

Theses failed rallies are part of the lower range trading expectation that is developing in a similar fashion to what happened after markets dropped in July 2011. Subsequently the broad market, such as the S&P 500 index, moved into a consolidation period that followed over the next month. Then a retest of market lows happened in October, and from there, markets were finally ready to run.

We may very well be in a condition similar to that period this year and the chops are highly likely to continue near term. Markets are likely to remain as such while short term cycles create oscillations within that lower range. This works for day traders and scalpers trying to make a living but not us looking for momentum trades in our Index Trader systems.

Our longer term Trader systems for some of our Canadian ETFs will remain in cash until this consolidation period can begin to break upward. Our short term trades are likely to remain as momentum positions trying to get a couple of percent given the opportunity and good probability.

The shorting effort remains very dangerous since the market overall is still bullish biased long term. However, short sellers aren’t fully out of the market yet. They are still holding positions that have not been fully covered with the hopes for a retest of lows where they can cover at better lower prices.

Remember that volatility is very high and again looks much like the period we had in 2011 where it remained high for a month following the hard drop during the month of August, and created volatile chop through September. We will need to see volatility slope downward in order to negate that happening this time around as well. Remember that failed rallies lead to sudden short selling reversals. When the intermediate advance stalls early on, that’s when they try to pile back in.

The likelihood of trades in the Portfolio Sector System is low at this juncture due to very low institutional volumes into equity sectors of U.S markets. The Bond Sector Portfolio may go long sooner than later. As you know the portfolio systems strictly volume based which is all about the massive volumes of large institutions, not very transparent to retail investors. Presently the top sector favorite for these big players is? CASH!

As for Canadian Index Trader, the long term ETFs such as XLB, XFN and CDZ are all in cash. These cash positions so far has avoided large drawdowns from their peaks a few months ago: 8% for XLB.TO (long bond index), 10% for XFN (Financial index-mostly large banks) and, 13% for CDZ.TO (Dividend Index).

Conclusion: As we said earlier, we are likely facing a period similar to 2011 where the market strongly chopped and consolidation went on for a while before markets were finally ready to run. Be patient and we should have a momentum trade coming up for TLT (long term US treasuries) quite soon once the win probability is high. If that does not happen then a SPY long trade should happen.