Trades For Feb. 16

These are the most current trades

Okay, I'm in the middle of running scans and keep coming up with the same cast of characters. There are a few interesting developments I'll go over in the next post and you'll have your ideas for tomorrow and this week. Below I took this from one of the classes I teach, it's a bit advanced for the typical person who is only vaguely familiar with T.A. but those of you who read charts and can spot confirmation and divergences both negative and positive, should appreciate this post. I had to paste PDF pages so that's why it's a bit messy. You can use whatever your fvorite indicator is, I used my 3C (usually yellow) because it simply is easy to use in spotting divergences-that's all-plus I think it's awesome!

The point is, I used this method to nail an entry on GS down to the day and minute more or less with a lot of confirmation. So check it out, if you have questions, let me know Brandt@Trade-Guild.net

More coming tonight.

Aligning Time Frames

Once you have established the direction of your trades, have identified the main driver of any one position-the market's trend, then you probably want to look for the ideal time to enter. While this can be done with daily charts, depending on your style, time and resources, it can be further narrowed down. For example, “I know the stock I want to short, I know the market is in a bounce which is good because it gives me better positioning with less risk, but how do I determine when to initiate my short?”

Aligning Timeframes

There are entire books on this subject so I can not cover it extensively in our class, but the premise is, the daily chart is favorable for your short, you want the hourly and maybe all the way to the 1-minute chat to be favorable as well. How you determine favorability will be up to you. Here's an example of How I use my 3C Custom indicator to “Align Timeframes”

In this daily chart of GS I can see clearly that my indicator is registering a negative divergence around August, but this only tells me there is “Distribution”-it does not tell me when they will have depleted their inventory through distribution and when prices will sink. I have also established a trendline for the top and as it develops I can see it is a H&S top. I would like to be short the stock once price breaks the neckline and then a rally back near the neckline for my entry.

The next daily chart of GS  (previous) shows the break of the neckline and the subsequent rally to resistance, this is an ideal place for me to short, having a confirmed top and a rally which presents low risk, but how do I know which day is the best day to enter, “when will this bounce be over and price will start to move down?” Point “A” (2/3/2010)  looks ideal on the chart-it's a reversal signal and at resistance.

The next chart (above) is still GS, but a 30-min chart focused on 2/3/10 and as you can see price tests resistance (the red trendline) you can see at point “A” another negative divergence indicating a lot of sellers stepped in at that level. This helps me align my timeframes and gives me a higher probability of having reached an excellent entry point.

The final chart of GS (previous) shows my indicator focussed on 2/3/10-each bar represents 5 minute5! You can further see here that the ideal time to short GS was on 2/3/10 at approximately 3 p.m. when I saw another negative divergence in my 3C indicator at point “A”. I have now aligned my daily, 30-minute and even 5-minute charts all to give me the best possible known entry (known because anything after 2/3/10 we have the benefit of already knowing what happened in looking back.)

Further confirmation shows the QQQQ's daily chart at point “A” (2/3/10) at resistance.

An hourly chart of the QQQQ (previous) representing the market, shows another negative divergence at 2/3/10 point “A”

Finally a 1-minute chart of the QQQQ shows negative divergences at 3 p.m. and a worse one at the retest of the 3 p.m. highs near 3:45 p.m. Now I've not only received multiple timeframe confirmations on GS, but the broader market as well-I found an excellent entry point by aligning and confirming.

Summary

As you know, Technical Analysis is about putting the probabilities on your side. I Found a very reliable Head and Shoulders pattern in GS-a financial company. I know financials did not perform well toward the end of the rally for several months. I say daily distribution using my indicator showing negative divergences. Not knowing how long the stock would be under distribution before a move lower, I waited for confirmation in the break of the neckline of the Head and Shoulders top and then waited for a high probability low risk rally to resistance. I used an hourly chart of my indicator to verify there was true selling at the resistance point and further narrowed it down to almost exactly 3 p.m. on February 3rd, 2010. To add even more confirmation, I used the exact same process using the QQQQ as a proxy for the overall market as the market's moves have more gravitational pull on your individual stock then anything else. I saw all the same negative divergences at nearly the exact same time. So I had many probabilities in my favor:

1) A weak industry group

2) A Stock in a highly reliable top formation that confirmed the formation

3) I saw Distribution further confirming the top

4) I waited for a low risk/high probability entry

5) I confirmed distribution at resistance on the day I wanted to short GS in multiple timeframes

6) I further confirmed all the same as above in the QQQQ-or more or less, I saw the market was showing a strong likelihood of a downside reversal.

All in all, you couldn't ask for a better entry!