Friday, September 24, 2010

The C's

I had to throw this together in a hurry as I have an appointment with the Genius Bar as AAPL. I don't usually have time during the trading day to do this. Here are the SPY, DIA and QQQQ.

You don't have to follow all the arrows, just understand the concept of a negative divergence=distribution which can be selling or short selling. The idea is the 3C indicator is lower at it's high then it was at a lower point in time. If there was confirmation of a healthy trend, 3C would move in almost lockstep with price and make higher highs.

The idea of a divergence (negative) is smart money picks up or has a position they want to sell, or they want to go short into.  Like you or anyone else with common sense, you want to either sell or go short into the highest prices possible. For you and I that's pretty simple, for smart money there's another factor. the size of their positions are not 100-1000 shares like most of us, they are hundreds of thousands to millions of shares. Just like economics 101, the rules of supply and demand apply. If they flood the market too quickly with their supply to sell or try to accumulate a short position (still= selling) too quickly, then they throw off the supply/demand balance and send prices lower, exactly what they do not want. So smart money must feed out their shares incrementally in smaller packages, this type of selling is very difficult to detect, 3C does a great job at sniffing it out. So a smaller position takes less time, therefore the divergence will be shorter before the reversal-market volume and retail buyers willingness to absorb supply also factor in. So low volume or uninspired buyers can cause distribution of a position or accumulation of a short to take a longer time.

This is where 3C is of no use, in determining their position size and plans for their short size, although I have a few ideas I'm working on to give a better feel for how much they have accumulated. The market maker also plays into this and can front run institutional money as they are filling the orders for the smarties. This can also be a factor as Market makers or Specialists trade their own accounts in addition to making a market. It's said that up to 30% of a stock's volume per day can be the market maker simply trading their own account. They are known for taking the opposite side and basically betting against the customers who have tasked them with executing their orders-Wall Street is dirty, there's not a lot of loyalty.

So in nutshell that is the idea. While it is not perfect, it does tell you something very important-they are selling. Without 3C you'd simply see an uptrend and most probably assume they are buying and would most likely fall victim to being the last person standing when the music stops.

Last night I ran the simplest of tests using 3C with a random basket of stocks and we saw what would be a return that most managers would die for. So obviously it works and my years of experience with it show that it works well. Like I often tell you, the reasons are unknown. We find out later. At the moment is is occurring , the logic seems counter intuitive. I have reasoned against the 3C charts many times and missed great trades, so now I trust them until shown otherwise. the reasons will probably come out later and the reasons aren't that important unless your primary concern is outsmarting the market. Which opens the door to leave you with this market motto, "Do you want to be right, or make money?"

I'll be working more on trading systems, if anyone has specific requests, specific groups or trading styles they'd like to see covered, let me know. I figure I'll have a tending system, a swing system for times like this, a short term system and an investors long term system for those not interested in watching the market every day.























20 comments:

meeeee said...

BRANDT. Look at he amount of (BUY) VOLUME for RUSSELL 2000 (IWM) in the last 15 MINUTES on 9/24/10.

JC said...

Brandt, can you explain the relevance of these divergences. I am not experienced enough to look at these and see what you see. I see them ticking up towards the end of the day. Does that indicate a pop at the open of Monday? Or are these all solid negative and the big boys probably added a lot more short shares today to keep the market from going up even more. Today was difficult for all of us, hoping it is just a bump down our path and not that we took a wrong turn all of sudden because someone changed their mind.

JC said...

Anybody see this out before the close:

http://online.wsj.com/article/SB10001424052748703499604575512254063682236.html?mod=googlenews_wsj

Brandt said...

The Russell looks to be playing catch up as it has been lagging a bit, I think that's why there was so much action there today, but the last 15 minutes the Russ 2k was actually down slightly, when volume is that big and there's no appreciable corresponding price move up, it's typically churning which is bearish, it's a way to spot distribution using volume analysis. On my 1 min chart, the biggest bars were all red 3:49, 3:50 and 3:59 and they were nearly twice the size of the green bars in between.

Brandt said...

3C doesn't move in a straight line, the longer ones ticking up are not important. At each bar it measures the money-in the stock versus "X" bars ago so say right now it's showing less then 30 bars ago, it goes down, but the next tick forward the amount compared to the next 20 bars back was different, it will tick up. Really it's not of any consequence, just the way the indicator is constructed and changing flows of money as thy never stay constant. The important thing to look for is a divergence. meaning price makes a new high between two relative points, 3C is lower between the two same relative points, money has exited, but not measuring market money flow or retail, it's specifically looking for the sizes institutional money sells in. A big retail investor could probably effect a short time frame, but when you see so many in so many timeframes and different averages, then you have a good idea of the trend, which is bearish.

Part of the indicator I can't explain at all as it is based on Don Worden's proprietary work, he's been creating indicators for Wall street since the 1960's to measure accumulation/distribution. I just found a way to make a good indicator work better.

Mr Pink said...

Brandt,

Taking the following chart that you posted above and based on your experience with 3C have you ever seen such a wide discrepancy between the market price and where 3C 'points' too?

3C DIA 1 hour chart.

http://2.bp.blogspot.com/_gGhyx-JKKA8/TJ0JOT__YRI/AAAAAAAAGh0/3fL86J8DUGw/s1600/dia+60.png

The market price is at 108.57 and 3C is 'pointing' roughly at 100.92. On the DOW that is 800 points difference! Have you seen this kind of 'spread' before, is it unsual? And if you have seen it before how did it play out? Did the market price actually come down to the 3C level and if so how fast and how long did it take?

Brandt said...

Yes, I've seen it many times. It just depends on how long it takes to distribute, consider volume, how aggressive traders are, etc. I can probably find some other examples in the recent past to show you.

Mr Pink said...

Brandt,

Yes, i think i need to see a previous examples of a similar situation (preferably on the DIA also), so i can see how the current situation will play out. Thanks.

Brandt said...

Here's a quick example-I scrolled through about 10 charts so I didn't look hard..

http://www.flickr.com/photos/54219262@N05/5021619040/

The distribution was over a month, the accumulation was about 3 weeks.

Brandt said...

Intraday data can only go back so far-you'll see the chart I sent you stops at the left side. So to find a Dow divergence, I'd have to use daily, it would be a big top and last a lot longer. That's as far back as I can go on 60 minute so I don't have choice pick, but here's the last one on the Dow a little over a month

http://www.flickr.com/photos/54219262@N05/5021632822/

Brandt said...

The fact the current one is leading-pointing down rather then relative-like the two examples, only shows how much worse the distribution is this time.

Mr Pink said...

Brandt,

OK, thanks for the charts.

Do you think the DOW, SPY, etc can possibly go much higher. Is it probable in your experience? We've had over a 900 point 'bounce' on the DOW (from the lows of around 9950 to where we are now 10850). We are talking about a 10% move in a month there on fresh air really (no significant news that should increase the value of the DOW by 10% in such a short space of time).

It seems like we are an extreme now to me.

Also, what do you think the bailout of the credit unions news will do to the markets (you'd think they announced it after market close because they wanted to bury it because it's bad news?)

//finance.yahoo.com/news/Govt-seizes-3-failing-apf-2215921552.html?x=0

Brandt said...

The market can do anything, it's hard to say, but considering the extent of the divergences, the consistency, I'd say we probably had the actual break 3 days ago. Today looks to be an anomaly. I gave up a long time ago on speculating what this and that meant because they were generally wrong. the information we have, smart money had a long time ago, so they are working on information that we won't hear for weeks. Trying to make sense of it is comforting, but ultimately futile. Whatever effect the of the credit unions, it's already factored in.

As I told you all about, I showed my students the housing accumulation for a year and a half several years before the hosing boom. Before that housing was not something that gained much, they had inside info or incredible analysis that told them to buy housing stocks that were depressed and no one had any interest in. They made billions on that. However, back then, speculating why they'd be accumulating housing stocks, you would never have imagined the housing boom, not while everyone was still talking "dot.com"

You understand what I'm trying to say? They are far, far ahead Just of us. So back then if you saw the accumulation in housing, you just went with it, didn't try to understand it because you couldn't, but in the end you would have made a bundle. It's blind trust. However, I remind you that a week before the market rallied, I pointed out there was buying by them. Who would have thought, everyone was bearish, the August decline seemed like it was going to break the H&S top. You had to have faith in 3C to buy, but if you did and held long enough, you were rewarded. I have years of experience with this indicator so I don't argue with it. However, as I state since the very first time I have contact with new subscribers, risk management is key. Setting stops wide enough, not taking on too many shares that you can't sit this out, etc. Risk management is what it's all about and giving yourself enough room to let this play out.

Mr Pink said...

Brandt,

Yes, i think for 3C to be effective things need to happen as 'predicted' in a reasonable enough timespan.

I do hope your call is correct and this is the top as i feel we are at an extreme and this has gone on long enough for the powers that be to fulfil their agenda, i don't see why they need to play anymore games while at these extremes.

You say risk management, like setting stops wide enough, well i think being short on a the market with a 10% move stop (in your mind only of course) is more than reasonable, and we have had a near 10% rally in a month (which is extreme for the indices by any measure). After all if 10% isn't a wide enough stop, then where do you stop? 15%, 20%, 25%. It just getting silly, so that's why i think things that 3C calls need to happen in a reasonable amount of time.

Ultimately, we are placing our faith in 3C (which is scary to a degree). So, for newcomers, we are placing a large amount of trust in you that 3C's calls (especially major ones like the current one) are always correct. You have even stated that you can't remember a time where 3C has been wrong.

Here's hoping the start of the big decline commences next week. I need to start seeing confirmation of 3C's big downward move call for confidence.

BTW, The 'big player' in the market you advise in the market who said if things went higher he/she would have to start covering their shorts... how are they holding up if you don't mind me enquiring?

Brandt said...

We looked at closing a 1/3 today and decided not too because of the market action around the breakout level-the big volume declines after the breakout. Our strategy is quite long term though. We're talking about some shorter term stuff now.

Put it this way, we haven't seen the move that will make the big $$$, that's under $104, but or every time he called panicked and wanted to sell, I showed him the charts and without fail, every time we got the reversal we were looking for. Had he covered each of those times his account would be cut in half.

You have to do what you are comfortable with though. 3C is an enormous insight into the market, but you have to understand how it works, it's limitations. Sometimes we have 5% rallies that reverse on a divergence, we've had a few 10% rallies, there's a limit to what it can do. So you have to make it a part of your analysis. No two traders are alike and I can give the same trade to two different people, one will make money, one will lose money-it's individualism.

And right now we are at an unprecedented amount of for lack of a better word, manipulation, from every corner, Fed, government, treasury, foreign central banks, etc. All of these things taken together cause incredible volatility and make it very difficult for smooth signals and trades. So this is probably the 2nd hardest if not the first hardest environment I've traded in 12 years.

As for risk management, like I say a lot-you may want to get a small portion of a position started at 5%, because there may be a reversal there, you may add a little more at 10%, but ultimately the bulk of the position should be added when you have real price confirmation of a reversal.

Quality Stocks said...

Mr. Pink...You should prob trade half the position that you have on right now. The market is in a dangerous position and will fail at some point well below these levels. An extended market can become more extended but like a rubber band it tends to snap back hard. I am 100% with Brandt that in the end 3C will prove correct. To try to pick the day is impossible or we would all be rich. That is what the makes the market the market.

Mr Pink said...

Brandt, Quality Stocks,

Well, basically i've been long (as a hedge) on the markets since the 'bounce', so i've made money in that sense. However, like you i believe, i'm net short overall. So, even though i've made money on the short term long market trades i've been doing, overall the higher and higher the market goes my overall net short position gets squeezed and squeezed.

I obviously have the funds if the market goes higher still, but i don't like chucking good money after bad (and after all, this is all being done on the faith that 3C is right, which my confidence is shaken in at present).

So, i want to know i'm doing the right thing by staying short even as the market marches daily.

Brandt, you say:

"but ultimately the bulk of the position should be added when you have real price confirmation of a reversal."

- Can you please IN BOLD LETTERS state when we have definite confirmation of the reversal, so i can let these short term long positions go and therefore have my shorts take full effect! Do you think this has already happened as you have said you thought the market 'broke' 3 days ago!?

Unknown said...

Brandt, I have a few questions:

1) do you see a bear flag forming on a monthly chart, and if so what do you think its effects might be? Do you think that long period like that could also be used for a fake up move and a reversal following it?

2) do you ever run 3c on a longer term charts such as monthly? Are they of any use in those time frames?

3) does the length of 3c always consider 30 bars? If so, why? And if you use other bar span on other time frames how do you determine it?

Thank you!

Brandt said...

Mr. Pink, yes I think yesterday was a game. There was nothing to push the market up that high, therefore a game/shakeout.

Brandt said...

Mislav, I do see the bear flag formation, it is not a bear flag though, a bear flag is a consolidation pattern, found on a daily chart and the qualification requires a preceding down trend as it is a continuation pattern. The more important pattern is the large head and shoulders top on the daily chart. It makes sense in its size/position and stage (almost all equities go through a 4 stage cycle-a top is the 3rd stage, decline is the 4th).

I do run 3C in other then daily formats, each one has a particular timeframe on each stock that works best due to the type of equity. Those timeframes though generally are too long, you miss important details, some of which you need to confirm you are using the proper version.


I use 4 versions, all consider different bar length-up to 100 bars and as low as 10. Last night, I wrote about 20 different versions in all kinds of timeframes, they all confirmed what the four I use know show, so no matter what look back period I use, they all were saying distribution on this rally and for the top in general. It boosted my confidence.