1/24/2014 Updates

A nervous market begets volatility.  Even though the Great Financial Crisis is 5 years behind us, you can tell from a chart of the S&P that with each wave of volatility, traders and investors wonder if this is going to be the ‘big one’.

To demonstrate this, the chart of the S&P Index below shows trading signals generated from an indicator that the majority of traders have on their screens, which is the MACD.  This is a simple measure of expansion and contraction of two moving averages. When the averages expand, the index tends to rise.  When they contract, the index tends to fall.  The standard periods for these two averages is 12 and 26 days respectively.  As you can see from the chart, each time these averages contracted (indicated by a cross over of the MACD lines) the S&P index experienced a drop and/or extreme volatility as stocks sold off and others bought the dip.  This pattern has been prevalent since April of this year, and the most recent crossover of those MACD lines happened last January 9th – indeed, the market behaviour we are seeing this week is in line with this pattern.

The question of the day then is:  will markets recover, or is this the start of a larger correction?   The sentiment we are seeing from some respected market analysts is that the market is due for a correction.  The fundamentals we are seeing such as a change in monetary tone from the Bank of Japan and a global emerging market currency sell-off could indicate that the largest of funds are positioning for a possible correction.

Of course no one knows for absolute certain what the case will be which is why large investors appear to be playing it safe by cashing in some profits now.

If you are already invested in the market, it would be a good idea to also take some profits, but ill-advised to sell everything, and certainly not a good idea to buy new positions in the S&P.

For the Facebook algorithm, we are going to be putting more weight on an intraday algorithm we’ve been running since Jan 7 and has navigated successfully through the volatility.  Should this algorithm go long, and those MACD lines cross once more on the S&P, then this will signal the highest probability for a new up trend.

Simple MACD pattern (click to enlarge)

 

1/23/2014 Updates

9:40 AM:  Negative news came out of China and Japan overnight which Asian markets found distressing.  This puts into question two pillars which have been holding the S&P aloft, and the selling is spilling over to US markets this morning.

Facebook stock is a part of the selling and gapped down to $56.30 on market open.   We now have a divergence in algorithms and so the Stock Predictor is now a hold.

 

1/21/2014 Updates

The chart below shows an ascending triangle pattern we have been tracking on FB since the December 23rd high.  The problem with triangle patterns{.broken_link}, as market technicians will attest to, is that it’s difficult to know they are forming until they are formed.  In this case, it was looking like a double-top pattern up until last week when FB rallied back to the top of the wedge – a pattern which more than a few short sellers likely got fooled into trading and are now covering.

This outlines the problem with chart patterns in general – In our view, these patterns are untradable, and cannot be relied upon within a reasonable degree of certainty.  Chart patterns are ‘rules of thumb’ and do not necessarily apply to all markets and time frames, and certainly don’t necessarily adhere to modern day markets distorted with central bank quantitative easing.  This is where algorithms become very useful in predicting what the next trend will be…

Breakout of consolidation (click image to enlarge)

However, we are not out of the woods yet:   Markets have been jittery all month as the S&P and other indexes are approaching some very key technical resistance areas.  An algorithm we had running on the S&P index has sold out of its long position at the open today. Another algorithm went long the VIX last week.  The USD/JPY currency pair is stalling, and 10 year treasury yields are starting to decline in what is appearing to be a corrective pattern.  This is not a good time, from a risk/reward perspective, to take any new positions in equities.  As we tweeted early this morning, it won’t take much to push this market over a cliff.

1/15/2014 Updates

Yesterday’s recovery in the S&P index after the January 13 sell off was impressive, bouncing off a key moving average and taking back 76.4% of the loss to close at 1835…

S&P 240 min chart – click to enlarge

Facebook followed suit in a similar fashion, and as a result we had our final 2 algorithms go long at $57.60.

The move itself was powerful, decisive, but not a natural move.  It appears that markets are being manipulated upward, which isn’t necessarily a bad thing.  If this is the case, there will be many short sellers feeling much pain in the days to come as the S&P continues to smash through a long time channel top that has formed since 2009.  If/when that happens, shorts will cover and new money will pile into stocks, sending the index to new all time highs.

Also, if this happens, short sellers who have been reading the Facebook chart pattern as a double-top will also be buying furiously, possibly sending Facebook to $60-70.

This may be speculative, however the patterns we are seeing, are very similar to what happened in August this year as Facebook pushed higher after gapping and holding from $38, with our algorithms allowing us to make the correct call to hold on for the ride.

 

1/14/2014 Updates

The Facebook Stock Predictor has generated a Buy signal and is now long from $57.60.   All algorithms are now in alignment, however given the current market volatility this could change.  Further analysis and updates to follow.

1/13/2014 Updates

Our intraday algorithm went short FB at $57.51 this morning after being long overnight.  We have seen steady selling throughout the day various technical indicators are triggering a market-wide sell off, including the S&P index which held it’s own for the first part of the day, but is now following suit.

This may be the correction we have been waiting for to ensure an entry at the best price possible with minimal downside, IF the selling doesn’t turn into a fully developed panic.   For now, the Stock Predictor continues to be a HOLD until all algorithms (longer term + intraday) are in alignment.

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1/9/2014 Updates

Today was a down day for global markets as Mario Draghi said some unflattering things about Europe’s economy.  Normally this wouldn’t be a problem (stocks completely ignored the government shutdown after all), but negative sentiment by the ECB head was the catalyst for downside including the S&P 500 index, which Facebook is now a part of and is emulating the index’s ups and downs.  By late morning, FB was unable to break  through the $59 level, tumbling nearly 2% to close at $57.22.   With such daily volatility, the Stock Predictor will always be a HOLD, however our intraday algorithm, operating profitably since October 31 generated a Sell signal at $58.18 and this algorithm is holding its short overnight.  (If you wish to be included in the intraday list let us know by contacting us or replying to this email – estimated email volume is 3 to 5 per day).   Recent signals from the intraday algorithm are shown in the chart below (green arrows are longs, red arrows shorts, green dashed lines are profitable trades)

(click image to enlarge)

Looking at the larger picture, one of our Daily algorithms (Algorithm ‘X’)  is still indicating a ‘Buy’.  This algorithm was one of our secondary algorithms initiated November and allowed us to call a ‘Hold’ signal at the $54.50 top, just before the November correction down to $43.50.  As you can see, this algorithm is still a ‘Buy’ (from $54.35), however it is apparent from the 10/22 Sell signal to the 12/20 Buy signal that shorting the stock outright would have been a break-even proposition at best, so going Neutral as the Stock Predictor did at that point avoided many a sleepless nights for our followers.

(click image to enlarge)

Which brings us to today’s price action:

There are many mixed signals almost daily since the new year, and tomorrow’s non-farm payroll figures should become a catalyst for whichever direction the markets choose to travel.    World markets have been increasingly correlated since the financial crisis (QE), and like a symphony orchestra, beautiful music can be made when all players are in sync.  Likewise, if a Maestro (market makers) loses control the performance can be sloppy.   It’s during these periods that it is best to wait to the sidelines until all patterns on all time frames are operating in sync.  We still have one Daily algorithm (the original Stock Predictor algorithm operating profitably since May 2013) that is still maintaining a Sell signal.   Until this one is in synchronicity with both the Daily and intraday algorithms, the Stock Predictor is a ‘Hold’.

1/8/2014 Updates

8:35 AM –  Nanex has posted an interesting forensic analysis of Facebook price action at a high frequency trading level http://www.nanex.net/aqck2/4525.html  –  It appears that some one (or some thing) wanted to see Facebook lower on the day.  Nanex describes the action as “Sudden bursts of trades would tear through the order book. In one case, this repeated 4 times in 2 seconds”.   Not only is this manipulative price action, but it happened during morning trading hours when volume is supposed to be the highest and markets not as easily shaken.  Perhaps a Market Maker was trying to protect a hedge, or perhaps a HFT algo was testing the stock’s resilience, but regardless of the reason this is not a characteristic of an orderly market.   Intraday traders should proceed with caution.

2:29 PM – Yesterday’s action brought with it a significant change in weekly (Jan 10) Options open interest, notably at the $58 strike price which is where Facebook is hovering around now. (this information is updated by the exchanges once each night)

The volume on the $58 Jan 10 Calls was almost double the entire open interest currently at that strike level, showing that Call options sellers (i.e. the apparent smart money) are quite confident Facebook will not close above $58 by end of day this Friday.  Call options sellers also stand to lose the most money if FB closes above $56/share as per the table below.

For Put options, open interest is the greatest at $56.50 and $57.00, meaning losses start mounting should Facebook trade below $56.50.   If these statistics are maintained through out the week, watch 56.50 – 57.50 as a potential closing price range toward Friday.

Looking at the larger picture, the Daily FB chart has developed general technical characteristics that suggest further upside from here in the days or weeks to come, however price action is volatile and consistent recent trading patterns have yet to play out, therefore the Stock Predictor is still HOLD.   Also, given that the median sell-side analyst price for the stock is close to $60, the amount and sustainability of any potential upside is uncertain.   Further details and a chart to follow.

Open Interest figures as of Jan 8 2014 (Jan 10 expiration):

**

Call Options:**

Strike    Open Interest

58.00    7841

60.00    6911

57.00    6252

56.00    6169

Put Options:

Strike    Open Interest
56.50    7040

57.00    5776

55.50    5620

55.00    4961

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1/7/2014 Updates – Rally is suspect

11:45 AM – Approximately 30 minutes after yesterday’s 11:45 AM update, our intraday algorithm switched to long.  It happened to be a correct trade, holding overnight last night for a 3.7% gain into today’s rally.   This intraday long signal did not have a material impact to the Stock Predictor HOLD signal as our other long-term FB algorithms are not in alignment.  Regardless of the win however, the current rally is quite suspicious for a number of reasons:

1.  Rally Started After 11 AM EST –  The highest volume is experienced between the hours of 9:30 AM and 11:00 AM EST, when London traders are active.  During these times, price changes are more realistic, as traders from both sides keep any wild price swings in check.  During lunch, or after the 4 PM market close, prices can be prone to manipulation in such a low-volume market.  Before 11:00 AM yesterday, Facebook was trading in a very tight range, and only broke out when London was closed.

2.  Option Open Interest – Yesterday’s observation regarding options open interest remains valid, and indicates a possible $55 closing price by EOD Friday.  An overnight ramp-up would be just the price action that options sellers / delta-hedgers need to sell volatility.

3.  Wild Price Action –  Today’s price action from the open was far from orderly.  The climb from $57.60 to $58.50 was not only quite rapid, but it met with wildly swinging ranges as exhibited in the 1 tick chart below.  In our experience, this type of price action is indicative of larger volume players stepping aside.  According to finviz, The median price of all analyst calls is $59.19 with a range of $54 to $62- if large institutions were to follow this sell-side advice, then they would certainly not be buying at today’s levels, with the downside risk significantly more than a few dollars of upside.   If larger stock holders are leaving smaller investors to trade amongst themselves, then what comes after this could potentially be a stop-hunting excursion by market makers, possibly down to the $55 level that the Open Interest levels indicate.

4.  Facebook Futures aren’t buying it –  The January FB Futures contract did not trade above $57.70 during this morning’s rally.

It is for these reasons that the Stock Predictor is still a HOLD, until all of these factors play out and the market resolves itself.  The intraday algorithm continues to be long, for now, but this could change. It is possible that the stock is basing (trading in a range) in preparation for a strong move through $60/share, but it is not looking like this will happen this week.

If you are a current holder of the stock, and you are in this for the long term, by all means stick with your conviction – the stock is still on a bull run, and any downside could be met with buying. 

For those who would like to be notified of every intraday signal separately, please reply to this wemail and we will add you to a separate intraday signal list.

1/6/2014 Updates

10:31 AM  – This morning the intraday algorithm which correctly called the most recent slide in Facebook stock went long at the open at $54.37.  We still have one longer-term algorithm which is not in alignment, and so the Stock Predictor is still a HOLD at this point.

Looking at the open interest of weekly Call and Put options expiring Jan 10,  sellers on both sides have been lining up heavily along the the $55 strike price, which is a strong indicator that FB may trade at or close to $55 this week, leaving the majority of those contracts expiring worthless.

As a result, it is looking like it is looking like the stock will not trend this week, but this could change.   We will let you know immediately should the intraday algorithm or the market changes tack.

11:44 AM – The intraday algorithm just went short at $55.39 – this also happens to be a 61.8% fib retracement from the Dec 30 swing low.  Day traders may wish to book profit here.  Stock Predictor is still a HOLD.

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1/2/2014 Updates

11:09 AM:  This is a low-volume shortened trading week, as well as an options expiration week ending Friday.  As a result, delta-hedging market makers are in control.   To determine a possible price range for Facebook this week, we turn to the open interest in FB Puts and Calls expiring tomorrow:

The following strike prices have the most open interest for a January 3 expiry:

FB Call Options**

** Strike        Open Interest
$56.00        9350

$55.00        9225

$58.00        7298

$57.00        6642

FB Put Options

Strike        Open Interest
$54.00        5889

$55.00        5223

$52.50        4565

$57.00        4273

Options sellers will lose the most money this week if Facebook trades above $55/share, or below $54/share, thus it is quite likely that the stock will close at some point between these points by end of day Friday.

Monday is a new day with full volume expected and the next options expiration being January 10th.  So far it appears that FB could trade closer to the $56 range, but we will continue to monitor and look to the open interest accumulation and our algorithms for direction.

For more information about delta hedging, this document from the ASX provides a good summary.  The document refers to warrants, but the strategy also applies to North American style options:

http://www.asx.com.au/documents/products/market_making.pdf

12/30 Updates

9:46 AM – HOLD – the intraday algorithm that shorted Facebook at the $57 level from last Friday is still short, and a second intraday algorithm just went short from $53.85.   The selling is possibly related to a TWTR sell-off, as well as the start of a US Dollar correction apparently under way.  The Stock Predictor is still a HOLD (no position) until both the intraday and daily (long term algorithms are in alignment.

12/27 Updates

HOLD signal on Facebook – An intraday algorithm that has been correct since mid October has generated a Sell signal at the open – given the negative sentiment in TWTR and other social media stocks, as well as correlated currency pairs, the Stock Predictor is now a HOLD.    Will look to re-enter when the intraday algorithm switches to long.

2:00 PM

The chart below demonstrates the entries and exits of one of the intraday algorithms, based on a 10 minute chart using custom bars.  Green up arrows are Longs, red down arrows are shorts.  Green dashed lines represent profitable trades.   This algorithm alone has returned 25% since Nov. 1st.   Long or short signals are followed based on the historical profitability of trades.  Since Up to and including November 30th, Long trades have showed the greatest profitability, however since December 1st this shifted to short trades which had better returns.

December 1st is also proving to be a reversal point for many stocks in the universe of  700 stocks that we scan.  If this is proving to be a corrective top of a very long and extended bull run, then the volatility we have been seeing across the board would be consistent with this thesis, as bulls and bears typically do the most battle at market tops.  We continue to monitor the situation…

One of 2 intraday algorithms running on FB (click to enlarge)


12/23 Updates

All algorithms are now long Facebook with an average price of $57.17/share.    While it is always better to wait for a pull-back to enter a new trade, the current move has the makings of a constructive bubble.. that is, FB could potentially have a vertical move from here as a perfect storm of new investors jumping in and shorts covering could make pull-backs limited.

While the Stock Predictor is now long, the current price action does not fit within our own quantitative risk parameters for investing.  It is for this reason that a stop loss of 2% will be added to the trade to protect against any sudden negative market sentiment, adjusted daily based on each day’s opening price.

 

12/19 Updates

This morning Facebook announced that an additional 70 million shares of the company will be sold.  The stock is down as much as 5% in pre- market selling on the news, after a  5 day ramp-up following the S&P announcement.   Many investors bought the stock in the belief that they could front-run (purchase shares before) index funds.  With this announcement, Facebook has ensured that there will be enough supply of shares in the market.  As a result, disappointed investors are unloading their shares as the easy money appears to be not as easy anymore.

A share offering is probably one of the last things a company would want to do to raise cash for operations, with the reason why demonstrated in the share price this morning.  Nonetheless, this can be categorized under point #3 of our Dec. 12 update:

3.  For those funds which are obligated to buy FB as part of an indexing mandate, they may not necessarily purchase the stock in the open market… As such, trying to front-run these funds in the open market could be a high risk losing proposition.

Where the stock goes from here is speculative at best.  We choose to wait on the sidelines as per the current algorithmic Hold signal, and see how the daytime markets digest and react to the news.

 

12/12 Updates

2:31 PM

For the Intraday traders:  Both our intraday algorithms have now gone long FB for an average price of $51.30.     Best of luck to those who decide to play this potential up move.

10:29 AM

Yesterday the Facebook algorithm generated a clear Sell signal on FB during the regular trading day.  After hours it was announced that FB would be added to the S&P 500 and 100 index.

This would normally be bullish for a stock, however there are a number of factors which could work against Facebook in this regard:

1.  The S&P is currently coming off all time highs set earlier this month.  If the S&P were to break down, so could Facebook.

2.  Large fund managers could ‘Sell the news’, using this pop to lock in gains made since the bottom set on 11/26.

3.  For those funds which are obligated to buy FB as part of an indexing mandate, they may not necessarily purchase the stock in the open market.  Facebook does not pay a dividend, and so there could be alternatives to owning the stock outright such as ‘leasing’ shares or owning options (depending on the fund mandate).   As such, trying to front-run these funds in the open market could be a high risk losing proposition.

4.  Market Makers who use delta hedging strategies may become a go-to supplier for any funds who are required to add FB to their holdings as a result of the new listing.  Should these Market Makers’ inventory of FB shares be depleted they would need to adjust their hedges over time, which may or may not have a positive or negative impact on the stock.   How the stock price reacts to such market-moving currents will require another few trading days.

The algorithm maintained its short position this morning, but one of the intraday patterns generated a Buy signal at 10:15AM with a $50.80 entry price.  As a result, the Stock Predictor is now at a HOLD with the long-term pattern showing down and an intraday pattern of Buy.

We have noticed statistical patterns morphing across all indexes since the start of the month, and it is possible that FB could trade sideways to the end of the year.

For now, only time will tell how the market absorbs the new information.  In the mean time we continue to run algorithmic scans and will let you of any further developments.

 

 

12/11 Update

Facebook has made a strong move to a key Fibonacci retracement level of $50.50, which is 61.8% from the 11/26 low.  Statistically speaking, if a move fails at the 61.8% level, it is a strong signal for a reversal downward, so a battle will be most assuredly waged at this price level.

Aggressive intraday traders have been playing 61.8% retracement moves since the Oct 18 high, however the 61.8 has failed twice before, so perhaps this third time will be a charm and FB will break through – if this happens there will likely be a pull back down to the $49 or even the $48 level.

For now, the Stock Predictor is on the sidelines until FB can prove itself worthy of moving past this key statistical indicator which in turn would break from the historical profitable algorithmic trading patterns that have been evident since the IPO.

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12/10 Update

Early morning trading action confirms our read from yesterday – FB definitely looks to be going higher from here.  It could hit a wall close to $49.50 and base from there, but both our intraday algorithms (10 minute bar time frame) are still long.

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12/9 Update

9:38 AM

The Facebook Stock Predictor generated a HOLD signal on FB and has exited the short position from 48.06 with an exit price of 48.36. The overall daily trend is still down, so the algorithm could re-enter the short closer to $49 which is significant resistance, or if it breaks through that level it could switch to long.  We will wait and see.

A possible scenario is that Facebook is basing (trading sideways) in preparation for a move upward – large hedge funds have had plenty of opportunities to short the stock in the past week but the price has not had any significant moves down.

We are optimizing our algorithms on the stock to confirm that the historical patterns we are observing are still in play, and will let the list know immediately of any changes.

Fundamentally speaking, the hot money seems to be moving into LNKD after reports of a possible move into China.  FB has been blocked in China and will continue to be blocked under the current regime. LNKD on the other hand has content friendly to Chinese business, so we wouldn’t be surprised to eventually see investors selling FB and buying LNKD to be poised for that growth on that point.

For the time being, the market is undecided on direction of FB at this point, and as a result there appears to be no intermediate trend.

3:01PM

2 of our intraday algorithms went long FB near $48.60 –  this is likely signalling  an up move in the near term, however the longer-term algorithms are still bearish.   Aggressive intraday traders who are bullish may wish to play this move.

For the Stock Predictor, it will remain as a ‘Hold’ (neutral) until all algorithms are in agreement.

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12/6 Update

Greetings – The Facebook Stock Predictor went short just now with an entry price of $48.06.  The Daily time frame algorithm has always been bearish, however the two shorter-term algorithms have both switched from Long to Short.

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12/4 Update

The Facebook Stock Predictor generated a new HOLD signal at the open today, exiting the current short position at $46.57, which is $0.07 cents just above the entry price.

The algorithm is now FLAT with no long or short positions.

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12/2 Update

Greetings – the Facebook Stock Predictor algorithm has generated a new SELL signal at $46.50 (previously was a HOLD at $47)

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11/29 Update

The Facebook Stock Predictor algorithm has exited its short position and is now flat.  The intraday algorithm we spoke of earlier went long, but the daily algorithm is still short from $49.37.  Shorts may wish to book profit, and longs may wish to stick to the sidelines until the up-trend is confirmed.

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11/27 Update

We now have 3 different algorithms running on the stock at different time frames (Daily and 10 minute), and all of them are currently in agreement that further declines are possible.

The shorter time frame algorithm has been running since October 20 and has been very correct to date.  Should any of these three algorithms be in disagreement we will broadcast a ‘Hold’ signal to the list to let any short sellers on this list know when to take profit and maximize gains.   A Hold signal will indicate a neutral (no) position on the stock.

11/19 Updates

9:46AM :  After breaking down from the $49 handle Facebook experienced a precipitous drop to settle near $46.. a decline of $3.00, or  6%, or $1.8 Billion of Mark Zuckerberg’s net worth.  If you are a short seller, we hope you were able to capitalize on this move.  If not, we hope the current Sell signal prevented you from buying.   If you are still on the side lines this is a good place to be as the proprietary indicator shows a high probability of further declines from here.  The selling we saw showed that investors wanted out at any price, and this is not a good sign.  The stock will not go to zero, but perhaps this is a well needed correction before FB is able to rise to the levels that so many sell-side analysts expect.

 

11-18 Updates

9:56AM: A reminder that the Stock Predictor is still showing a Sell signal.  FB was up in pre-market but has traded down since market open.  The $49.59 stop loss appears unlikely to be hit.   Retail e-commerce sales are due out at 10am EST which could jolt FB as well as YHOO GOOG TWTR and others.   Will notify immediately of any change in signal.

 

11-15 Updates

The Stock Predictor signal is still ‘SELL’ but we never encourage shorting as this is statistically the most inefficient way to profit from trading.  The sell signal was generated at $49.37 and the stock is trading in a range around this price.

This morning (11/15) we saw a 3:1 sell to buy ratio (above/below bid/ask) since market open, and the stock is struggling to stay above the 20day EMA, which coincidentally is also a level containing a confluence of other significant technical levels.

We remain watchful of the algorithm and will notify you of any changes immediately.

Update: 12:17PM:

FB is trading right on the edge of a key channel which, if broken, could make shorts capitulate and new longs enter trades.  We do not believe this will happen, especially today, a Friday with low volume.

The 13F institutional holdings reporting deadline was yesterday and we saw Morgan Stanley and Goldman Sachs sell off blocks of their Facebook shares (GS about 1.8 million shares, MS about 45k).  This is significant in our view as MS and GS were part of the initial underwriting syndicate.  Typically syndicate members exit near rally tops to maximize gains and to not negatively affect the stock price.   Other funds might be picking up where they left off however – if this is the case then it would explain the volatility we the stock is currently experiencing.

Nonetheless, it is always prudent to adjust risk management levels along the way.  If you are short the stock, we recommend a stop loss 1 tick above yesterday’s high at $49.59.

For the Stock Predictor, if this price is reached, the algorithm will exit its long and maintain a HOLD (neutral) position until the next signal is generated.  The proprietary indicators have not turned over yet, so if a new signal is generated it will likely not be until next week.