Friday, January 29, 2021, Island Equity System’s founder and chief technical strategist sent the following memo to his members. This message is being shared because of the important teaching points raised concerning WHEN TO EXIT THE MARKET. The unedited transcript is below.

My apologies for the lack of information surrounding our abrupt exit from the market yesterday. Time was not on our side and I wanted everyone to be able to get out before the close.

For those who wanted to know, here’s more information on the reasoning behind my decision / recommendation:

  1. On Wednesday the Nasdaq bounced back from a low of approx. 13,200. Initially Friday it again bounced off 13,200 but after a brief rally it dropped and crashed through the 13,200 support. At this point I was very concerned. It subsequently couldn’t rally above 13,200 and ended the day near 13,000. So, the Coles Notes version – the 13,200 floor support for the index became the new ceiling. Never good!
  2. I watch the Nasdaq closer than other indexes because so many of our stocks trade there. But in times of trouble all indexes matter. If the market goes into correction being on Nasdaq won’t save you. All stocks will sink like stones. While the Nasdaq remains high and dry, safely above its 50 day moving average (50MA), the S&P500 wasn’t doing as well. On Friday the S&P500 crashed through its 50MA for the first time since the correction in early November. It would end the day there.
  3. Likewise, the Dow and its 50MA suffered the same fate as the S&P500.
  4.  Our distribution day count on the Nasdaq remains incredibly low at 1. Just to remind you, this means roughly that the index has suffered but 1 day of serious institutional selling in the last 25. This is a very low, a very good number. But as I said earlier, that won’t save the index or the market from a major correction, which will hit all indexes the same. Over on the S&P500 the distribution count is up to 5 days. At 5 days we are on alert, at 6 days we have a hand on the trigger and at 7 days we exit the market.
  5. Further bad news on Friday – Nasdaq -3.5%; S&P500 -3.3%; Dow -3.3%. These are very big drops. Each exchange suffered a major distribution day.
  6. The icing on the cake – because of all of the above, the markets got reclassified to UPTREND UNDER PRESSURE, one step away from the “In Correction” tag.  The Uptrend Under Pressure classification places more stingent rules on re-entry so we won’t be re-entering the market on Monday.

I hope all of this made sense to you. If it didn’t please let me know and I’ll be happy to explain further. I hope this long winded explanation wasn’t too much information but I felt it was a major teaching point.

As you know its not often that I PREDICT future market movements. I prefer to react correctly to market movements instead. In this case I’ve made an exception. I believe we could see a major decline on Monday. We will now all watch with interest.

We’ve had a spectacular run in January as our model portfolio is up 13.08% for the month alone. Its time to play a little defense and protect our gains.

As always, please contact me if you have any questions or comments.

D.A. Campbell

Island Equity Systems designs and markets equity trading systems for the personal investor

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