A Lesson in What Smart Money Can Do

YOU MUST READ AND LOOK AT THE CHARTS AND THEIR ANNOTATIONS AT TRADE GUILD TONIGHT, HERE'S THE POST


http://www.trade-guild.net/2010/05/today-smart-money-took-drastic-action.html


Something rather amazing happened today and if you look at the charts and understand divergence analysis or my 3C indicator, you will see with your own eyes that smart money has been pulling this market down the last few days, even though it originally appeared that they had the intent of a bump up in price along the order that we anticipated.

SOMETHING CHANGED and probably over the weekend. Smart money pushed the market lower and between 11:30 and 2:30 today-which includes a significant portion of the lows, they accumulated en massse . I do not think I have ever seen such an impressive shift in the longer 3C charts (15-60 minutes) so quickly and so obviously, it was very distinct and confirmed on all 3 major averages and all 3 independently written 3C indicators. You will be surprised to see that the accumulation occurred during light volume, except for a spike or two, but that is exactly why accumulation is so difficult to see, they don't show their hand and say "We Are Buying!" as that would drive up price, instead accumulation almost always happens on low volatility and low volume as we saw during the period we are interested in.

This chart is just for you, I did not post it at Trade Guild, but you can see at the lows of the day, 3C 1-min went into a huge upside divergence-positive accumulation-Amazing

You can see where price was heading lower before 12 pm today and 3C (blue) was already in motion higher and peaked with a leading divergence around 12:30. As prices climbed, their accumulation activity waned. They were in for the cheap shares, which may indicate that the move, while possibly fast to the upside (so you may want to get long exposure soon) may not carry further then our targets around $116.00 (SPY)

So what does this mean? It means that as of now, it seems that either they were covering a lot of shorts and or buying. Of course the two actions are one in the same, either way the intention would be to be ready for a move higher. This move could be as short lived and reverse as quickly as it did today in two hours, or we could see the pendulum swing hard in the other direction.

This is a trick time, in technical analysis all we can see is what they are doing, we don't know why and won't until it doesn't matter anymore so there's no point in trying to reason the actions taken this week and especially today. I was shocked to see what I saw as I went from chart to chart and confirmed with all 3 versions of 3C.

So there are many possibilities, I tend to be skeptical and a bit paranoid which is good for a trader so I'm concerned that they will make an effort to move this market below the two closest support levels at $109.41 and $105 on the SPY (add a zero to see the levels for the S&P-500).

So we have the trades that are most useful right now-those would be the longs, ultra and 3x leveraged long ETFs I've listed the past few days. Those are the trading vehicles I'd use for the time being. The question is when to buy. A break below either support level would be a gift and you'd be a buyer as soon as prices rose back above those levels. Or they could have all the inventory they need now and take prices up now with an obvious Doji reversal signal it is what most traders are expecting anyway, which helps them mark-up prices.

You'll have to choose your plan. You could, if you haven't already, accumulate portions of your intended position so if there is a break below support you don't have huge exposure and you have dry powder to load up the truck. You could wait for a pullback or for a move up or you could sit this one out. I have a feeling you'll need to be nimble toward the top of the move.

In any case, choose your stops before you enter the trade, do not make them so tight that you are easily stopped out and make sure that you position size accordingly so that you don't risk more then 1-3% on any single trade or for more conservative traders, on the portfolio.

The bottom line is at some point, probably very soon (day/days) we will see a move up unless something drastic happens to shift sentiment again, which I can't see at this point with the level of planned accumulation.

As usual, if you have questions, please feel free to email me.

Battle Plan

Everyone needs a plan, here's a few ideas, but first read the analysis at Trade-Guild.net tonight.

If we see a breakout above $112.80/$113 on the SPY, then the longs I gave you the last two days are quite workable. There is a high chance of a false breakout below $112/$111.75. If that were to happen and then we see a move back above those levels, especially on volume, we have another workable long setup. You can sit in cash right now too, but we do have a strong 10 minute divergence, but it may be destroyed as the 1 and 5 minute divergences from yesterday were, remember I said this market is susceptible to news and news is what caused the breakdown today, however it seems that there are institutions with positions at higher levels and I'd think they'll want to see the market move up to unload them. 10 minute divergences are also stronger then 1-5 minute divergences and the 10 minute positive divergences have been strong today.

If we get a break of the hammer at $111.75 (SPY), you'll want to look at the shorts I listed in May-there are two lists, both to the right of this post and I'll add more once we see what is what-you are not going to miss the train with all the downside we have below.

The triangle that formed at the end of the day will be an upside breakout at $112.80-that is worth adding to longs or establishing partial positions which you add to as the market moves higher, but I never expected more then a few days of upside so these longs are quick trades. No matter what you do, you must follow the risk management rules. There's no excuse (other then a bad gap ) to lose more then 2% of your portfolio on any bad trade. If you are losing more then that, you need to email me and we need to work out a risk management plan.

Ultimately, most of you should be holding core short positions, remember the longs were just for a bounce trade. So in any case, you should be somewhat hedged. If the longs work out , you'll make money and set up great shorts, if they don't you'll be hedged, you'll close them and the shorts will be profitable. Just review all the trade options I laid out and be ready to execute them on a break either way. I can see adding to shorts below $111.50 on the SPY.

Bottom line, with the information we have right now, I still expect upside, intraday there's a lot of false moves so follow your risk management plan, but don't jump out of positions that have no reason to be out of if they haven't hit your stop levels (don't react to emotions). In other words a downside breakout of support is a high probability and a move up after that is also a high probability, you don't want to sell at the low unless your risk management plan dictates that in the position sizing you choose.

To me a gap down means nothing, just as the gap up today meant nothing except (as I pointed out in my posts) it was an opportunity to sell some longs at a profit. The market will do everything to fool you and scare you out of trades, don't fall for it. Volume is always a good indication of how real the move is. I'll try to update in the morning on TG and again in the afternoon. Whatever happens, think risk management and remember, the longs are tactical, the shorts are strategic as I believe ultimately this market is going much lower.

Finally, CASH IS A POSITION, if you are not feeling good about these longs and want to wait for the shorts to hit, then be in some cash.

Email me with any specific questions or and especially if your risk management plan is costing you more then 1-2% of your portfolio on any failed trades. Be sure to look for my updates on TG, and check WOWS too if something serious breaks I'll be updating here.