SCTY was first featured here as a "Momentum Stocks" hitch-hiking LONG trade on May 16th, Momentum Stocks. The other stocks featured and the resulting gains since the "Hitch-hiking" long trade of momentum stocks from May 16th include: FB +16%, AMZN +12.6%, PCLN +13.6% and SCTY +41%.
The chart provided for SCTY was the following with the following comments from May 16th (in red).
I'll likely go through my momo watchlist and pull some other names out that may be interesting, however don't forget that these are for short duration, "Hitch-hiking" (meaning to follow the market or draft it) trades."
It turns out SCTY was bouncing from the neckline of what looks like a pretty well formed H&S top, to create the right shoulder; that's why the trade ideas all came with the caveat at the end of the post, "however don't forget that these are for short duration, "Hitch-hiking" (meaning to follow the market or draft it) trades."
Above you can see where the mid-May SCTY price level would be, right near the neckline of a H&S price pattern/top.
I doubt there's any coincidence that the broad we were expecting a break-out/head fake move above the SPX's 3-month range and the $1900 level where range resistance was right at the same time, mid May, in fact the bear flag we suspected would sling shot prices higher was formed May 15-20th which is when and where we are talking about hitchhiking longs as well as the bear flag that started forming was looking as it would be used to create a short squeeze.
This is from May 16th as the bear flag was just forming...
"Most Technical traders won't short a bear flag itself without the confirmation of a break below the flag's support (bottom trendline), however on the break below the flag they will chase price and enter a short position. If the larger head fake move is actually to the upside, catching some shorts in a bear trap and forcing them to cover as price moves back above the flag and forces a small squeeze just adds more upside momentum to the head fake move."
The point being simple, it's not coincidence that the momentum stocks were looking ready for an upside move as the market was setting up a short squeeze move based around the bear flag from the 15-20th of May, which was only about a week after we had said the probabilities of the market turning lower from the 3-month range in the SPX are very low without an upside head fake move first as the range is just too obvious in the most watched ETF in the world.
This move is what set up most of the right shoulders we are seeing now in the averages like the IWM and watchlist stocks including SCTY.
We had another SCTY "Momentum Stocks Update" on May 20th which was the lowest close in SCTY (also very close to its neckline) since then, essentially the best entry you'd get SCTY long, SCTY Update. (Excerpts below in red)...
I haven't forgotten about the momentum stocks watchlist that I talked about on Friday, it just hasn't been a very interesting list since Friday....You may recall that one of the breadth indicators I use from Worden's T2 series, is the Percentage of NYSE stocks trading 2 Standard Deviations Above their 40-day moving average; these tend to be momentum stocks and besides just knowing generally that they have been beaten down lately, we can see it on this indicator as they went from over 40% to 30% to 10% in just a matter of months, in other words they were beaten down pretty badly and this makes sense from an asset manager's allocation p.o.v., they want to get out of the high beta names and in to the blue chip, dividend paying names if they are going to be long.
The last sentence underlined and in bold above is interesting given the same indicator was featured in last night's End of day Wrap, A True Dead Cat Bounce? Except this is post-bounce and it is now showing a different set of indications than mid-May, see charts and excerpts from last night's post below (again last night's post comments are in red).
"Furthermore in looking closely at breadth indicators, I found this which may speak to high beta stocks that the market has been chasing all year and then some."
"Percentage of NYSE Stocks Trading Two-Standard Deviations Above their 200-day Moving Average.
In both cases, this is only the second time since late 1013 to early 2014 that the indicator in green (vs the SPX in red) have failed to make a higher high, in both cases the SPX had its biggest loss of the year, about -6% over 8-days.
Hopefully tomorrow we'll have some more insightful signals. All of the averages ended with 1 and 2 min negative divergences at the end of the day."
The point being, that these breadth indicators above, after the mid-May expected bounce led by none other than momentum stocks, which also tend to be the "Most Shorted" and as you know, a large part of the move from mid-May until now was "Short Squeeze" induced. The failure of these "Momentum/Most Shorted Stocks" to make a higher high with the SPX is likely proof of exactly what was said in mid-May regarding momentum stocks rallying...
"in other words they were beaten down pretty badly and this makes sense from an asset manager's allocation p.o.v., they want to get out of the high beta names and in to the blue chip, dividend paying names if they are going to be long." May 20th SCTY Update...
The point again being large institutional and hedge finds often carry single positions of a billion dollars, for some funds that's considered a "moderate" position size. I have often compared institutional money to a large oil tanker that needs miles to come to a stop whereas we are jet skis, we can get in and out of a trade in a single day and not move the market against our position as long as we are trading something fairly liquid (not penny stocks), it's not the same for institutional money, they need to create demand to unload a billion dollars worth of stock, they need to do it in to both demand and higher prices and in smaller pieces over a longer period. This is the entire concept of a head fake move, to create demand that they can unload in to. Remember, we confirm head fake moves as a real move won't show distribution whereas a head fake move will. The question then is simple, what do you need to do to get retail buying and sell in to strength as we know that has been the trend...
You may be tired of seeing this chart, but it illustrates the point being made...
Institutional money and hedge funds to a lesser degree (orange and blue) are net sellers (which includes short selling as both come across the tape as a sale) while retail (green) have been huge buyers, who do you think is selling to who?
I digress, back to the question, what will cause retail to buy after being eaten alive in a 3% wide 3 month range in the SPX?
A breakout above resistance and the psychological whole number of SPX 1900, both in the exact same place, at the breakout level or top of the 3-month range.
While this is a MACRO example of the head fake concept which essentially states that reversals (in this case to the downside) see a head fake move at least 80% of the time and in every asset and every timeframe so the concept is fractal, which means it works as well on a daily chart like the one above as it does on a 15 min chart. The key is to confirm the head fake move...
Confirmation of a head fake move, a large one. See "Understanding the Head Fake Move" articles on the upper right side of the member's site.
The second point in last night's breadth indicators failing to make higher highs is what we were looking for before the move began as long only funds move from high beta to Defensive, for instance, Utilities which I also showed last night outperforming the market of the 9 S&P sectors.
Back to SCTY (the point however is that SCTY is a proxy for the general market).
From the SCTY update of May 20th... SCTY Update
"Here are the charts and why SCTY is starting to look timely and interesting."
"The recent 3C charts at the bottom of the right shoulder are showing the kind of divergences you'd want to see for such a price pattern, here the 1 min trend is leading positive at a new high as the lower right shoulder is formed, perfect."
" The 3 min chart shows a positive at the lows of the head and an even stornger leading positive at the lows of the right shoulder, just as you'd expect to see."
"The highest probability trade would be to catch SCTY and the overall broad market both in positive divergences and looking ready to make a move, the market will give SCTY something to draft."
The SPY broke out about a week before SCTY.
Now after SCTY's major move, featured this week on Tuesday, June 24th as a Short trade "Set-Up" Trade Idea/Set Up: (Longer Term) SCTY
"SCTY... This is actually, a larger H&S stage 3 top and guess where? Right at the top of a right shoulder, the dominant theme among the watchlist."
" Here's the daily chart with a large H&S top at the top of the right shoulder"
" As for the 15 min chart which went positive to form the right shoulder as price was sitting on the neckline, it is now leading negative and I suspect it will get a lot worse.
Note the head fake move hitting stops before the upside reversal"
As for the 15 min chart getting "worse", here it is a mere 2-days later...
The white trendline is where the 15 min 3C chart was this Tuesday so it has in fact gotten worse, which would suggest there's been more institutional selling in to any price strength available.
and...
The SCTY 5 min chart as of Tuesday vs...
The 5 min chart as of today, it's lower than Tuesday, but more importantly is the move of the last 2 days has seen a steeper leading negative divegrence (red arrow to the far right). The 5 min chart (and shorter timeframes) is typically a good chart for timing of entries.
"The Trend Channel has held the entire right shoulder since 6/10, the trend is broken on a closing basis below $68.70."
And the Trend Channel now...
As I had said, the Trend Channel (one of our proprietary indicators) held the entire move since 6/10 on a closing basis, however it stopped out at the close of 6/24. The Trend Channel will NEVER take you out at the exact top and even after it is broken price can flip flop around in "volatility spasms", but after a decade of using it, I've found once the Trend Channel is broken, you are usually best off exiting the trade as you "may" hit a higher exit by chance, but more often than not, all of the easy gains are far behind and what you are left with is largely lateral volatility. Typically you'll find having exited at the stop out usually gives you the best return as volatility and unpredictability after that often result in gaps down below the initial trend channel exit.
Finally from Tuesday's update at 12:18 p.m.,
"Typically with a Doji/Star as a reversal candle, the confirmation candle of a downside reversal in about 50% of the cases over the next day or two, will gap up and then close down forming a bearish engulfing candle, confirming the downside reversal, that gap up with the 1-5 min charts going negative is an ideal entry and the lowest risk entry for a SCTY short position which I'd view as a longer term trending trade because of the size of the top.
I'll be setting alerts for a move/gap above $71.20 to look at a short in SCTY."
On 6/24 we didn't end the day with a Doji star (yellow arrow) as we had seen around noon time, but the numerous small bodies Stars (in the yellow box) are an indication of a loss of momentum and open SCTY up to a downside move.
The set-up I had envisioned as laid out above from the 6/24 "Trade Set-Up" was a gap up, thus the reason to set alerts above $71.20 on the open (which still haven''t been hit) as most decent bearish reversal confirmation candles start with a gap up and close lower like this bearish engulfing candle I attempted to draw in at the red arrow. The idea is to check the opening 3C charts on such a move, look for signs of distribution and enter there, however on a "bigger picture" basis, this is actually an excellent entry in this area with low risk as a stop can be placed a bit above the recent highs so long as it's not at an obvious place like whole numbers or resistance areas like $72.18.
As for other charts...
We do have a current sell signal on my custom DeMark-inspired Buy/Sell indicator..
The signals here have been pretty accurate.
Other 3C charts...
And the 15 min trend through the H&S top pattern. 3C should make higher highs with price , if you look at where price is at point A and point B, you can see there are no higher highs in to higher prices which would be the head of the H&S pattern and at point C which has higher prices than point A, 3C is significantly lower.
That said, SCTY has been one of the strongest performers, just look at it's performance as a momentum stock pick, 41% vs the next closest, FB at 16% and volume has been rather high on the right shoulder which is not what we normally want to see with a H&S top.
For these reasons, I'm still an advocate of a gap up with confirmed 3C distribution, the set up I drew above with the candlesticks, this gives you a better entry and much lower risk as a stop can be placed right above the gap up if it ends the day as a bearish engulfing confirmation candle.
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