Friday, June 4, 2010
Update
The move in the market and especially the QQQQ (look for a bounce soon intraday), has changed the outlook on everything. In 3 hours the charts have taken a dramatic turn for the worse.
Click on the chart to expand the view
Featured Trade: UNG Natural Gas
One of the nice features of TeleChart is the ability to send yourself an email when an event occurs, such as a breakout above a certain level. Unfortunately, I didn't do that. David from Trading to Win picked this one out a few months ago and asked me to look at the 3C chart. I concluded that it looked bullish, but it would be a bit before it was ready-at that point I should have put in an alert or threw it on a watchlist.
Lucky for us, UNG didn't get away, it just got started. Here are the charts:
Without even looking at 3C I could tell something bullish was happening even though prices continued to sink. What was it? Those two red trendlines form a "Descending Wedge" which despite consecutively lower prices into the formation, it's actually a bullish chart pattern.
One of my finer moments (calls) was the end of the uptrend in oil. We had 5+ years of appreciating prices, lets call it five years, that gives us 260 weeks, I had nailed that one within a week and even greater pride and joy was the same week Cramer was all over his audience to buy oil! What gave me that insight? The exact opposite of what we see here, an Ascending Wedge (bearish) confirmed by 3C.
Ascending Wedge in oil. Some of the ways to confirm include declining volume, divergent MACD and the actual pattern being drawn objectively. I also use 3C as it is a topping pattern I expect to see distribution.
Back to UNG:
Here we see declining volume right to the Apex, MACD isn't too insightful until late April. Also note the Head and Shoulders or inverse H&S bottom-very nice base. This stock broke out today on great volume.
Typically these patterns retrace their base, which means there's at least a 40% gain in the trend, it could be significantly more.
Here's a great crossover system that will dramatically reduce your whip-saws and false signals. The yellow line is a 10 day moving average. The blue line is a 22-day moving average. In the middle window in yellow is a custom indicator (if you have TeleChart I can give you the code). This custom indicator has a moving average of 22 bars (in Blue). Lastly I have Wilder's RSI, period 30 (note it's double the length of the typical RSI setting). MACD is there purely out of ease of use, it does not figure into the system at all.
OK, that seems like a lot, but it's very simple. When in doubt, keep it automated and as simple as possible. There were 5 rallies and any one could have potentially been the breakout, however this indicator only gave one buy signal and that was today. All that needs to happen is the yellow lines (m/a and custom indicator) need to cross above their moving averages in blue. The last requisite is that RSI needs to be above the middle line or "50". During all of those crossovers in the bottom formation, only the real breakout was signaled.
How to play this... Typically after a strong day on INCREASED VOLUME on the breakout, we'll see a second day or two called follow through. If you like the trade, make sure you correctly asses and manage your risk and go ahead and buy some at market right off the open. If there's strong momentum this won't come back for a pullback anytime soon so you want to get your foot in the door. On average, the first pullback of a new uptrend will pullback to the 10-day price moving average, usually intraday so if you can't watch it every moment, each day estimate the level of the 10-day m/a and put in a limit order for the other half of the position. This could be at higher prices, it's a sacrifice you make for confirmation that the trade is moving in your direction. Typically the next pullback will occur at the 22 day moving average. You can use the cross-downs as a signal (2 out of 3 is a sell signal) or a break of the 22 day moving average on the close (ideally on volume).
Out target is the base of the formation around $11, it's nearly a 40% gain. It may go significantly further then that. You can also use my Trend Channel as an effective stop if you have TeleChart, if not click on the TeleChart link at the top of the site and check it out.
Note the dashed red line, that is a VWAP or Volume Weighted Moving Average and Wall Street uses it to gauge the effectiveness of the market maker/specialist that filled the order to accumulate. If the average price filled at, is above the WVAP, that market maker won't be seeing anymore business from the institution. If they filled below the VWAP, then they did a good job (depending on the extent). So you can roughly figure out what Wall Street's average price is and you'll want a stop below that. I use my Trend Channel which accounts for volatility and the current stop would be $7.10 and the VWAP is at $7.20. If you want to trade tight, then a stop (on a closing basis ) of $7.77 would be decent. Personally with all the volatility, I'd go with $7.10.
This is a fantastic setup and you should study it, the descending wedge, the inverse H&S bottom/accumulation in stage 1, a breakout moving into stage 2 mark-up. It's really a beautiful chart and not an easy one to manipulate for too long.
UNG is your Featured Trade. As always, RISK MANAGEMENT FIRST (see last night's post about it if you are new to the site). As always, any questions you can email me.
As for the rest of the market, make sure you understand and are aware of the post below, those are all fairly non-correlated ETFs that we are using as the basis of our short position (we are buying them long).
The Markets
Tuesday was an impressive down day that carried expected negative breadth readings. Wednesday was nearly the mirror opposite in all ways except the negative breadth reading remained (look at the last few posts on Trade-Guild). Today was a virtual wash, with another day of negative breadth readings. Today only 4 stocks on the Dow 30 closed bullishly (not to say that only 4 stocks closed up, but did it on rising volume as well).
By contrast, the much better acting NASDAQ 100 had 43, which is not surprising as it is only the NASDAQ 100 and Composite that actually managed to break out of the lateral movement-the DOW and S&P flirted several times, but buyers backed off at resistance.
3C (orange) detects accumulation and distribution through divergences, both negative and positive. I've added a blue arrow where there was a small positive divergence, the white box following is the reversal that 3C picked up on. The red arrows mark relative negative divergences and the white box shows the reversal. The largest red arrow that stretches from the morning highs until the end of day represents the SPY attempting once again to break through resistance, but this time we see major distribution considering the chart's timeframe of a minute. This is a key development. As I said last night at Trade Guild,
"As far as 3C goes, I don't have any consistency among the 3 versions or the averages I track . The only thing I see is some positive looking longer term action which could be just late to turn as those charts take a while or it could be warning of a right shoulder in a Head and Shoulders pattern that could develop from here. Other than that, I do not see organized accumulation or distribution, so right now there's no edge there."
Today was a strong development for the bears.
This is 3c v.III (blue) on a 10-min chart. The first red arrow on top shows a relative negative divergence and most probably the reason the retest of the highs failed so badly. The second lower arrow shows a LEADING NEGATIVE DIVERGENCE between the morning and the close, this is a significant development.
3C V.I shows several negative divergences to the left that led to lower prices. There were nearly an equal number of positive divergences that led to price appreciation. The bad news for the bulls here is 3C's leading negative divergence into today's close. The 10 min chart is fairly significant as it borders between market maker activity and institutional actions.
Finally the index that has shown the most recent strength, the NASDAQ 100 / QQQQ.
You can see, just like all the other averages, we are seeing a negative divergence brewing at the end of the day as the Q's make higher prices. I think we may be close to a reversal here. If the S&P and Dow can't break out soon, then I believe it will drag the NASDAQ down. It seems Wall Street may be preparing for that possibility.
So it seems we are moving into an area of distribution. There a a lot of leading divergences, which suggests to me that we will see downside. I think we will see early morning downside, although it would be typical of Wall Street to launch an expedition on the S&P and DOW above the consolidation zone, (a false breakout) and then we'd see downside from there. I have no strong evidence of this, I just have seen Wall Street's new normal and volatility. It would be a perfect situation for all of them, from market makers to institutions.
For the new comers, the list of core ETF's we are using to rough out a position was posted earlier today. The basic plan (unless we see a right shoulder and a head and shoulders top develop instead of the Broadening top that I favor) is to be about 50% in these stocks at this point. For those of you who are new, it would be fairly ideal time to start those positions. You must absolutely use risk management, the 2% rule, proper position sizing and non-correlated equities.
We'll hold about 25% of the portfolio in Cash which can be used to take advantage of swings, opportunities and to hedge if need be. The final 25% of the portfolio (on the short side-and these are rough numbers, you must do what works for you) will be added when we have confirmation of our current bearish analysis and that will come with a breakdown below $104.35 on the SPY, at which point you should see volume increase dramatically.
*For a detailed view of my analysis, check the recent two videos I posted here and on Trade-Guild.net
Remember, I posted a lot of shorts (real shorts, not long inverse ETFs) and real shorts have the ability to allow you to use your profits before you close out the trade, unlike long positions, including the long Bear/2-3x leveraged ETFs. The ETFs have broad exposure, especially the core we have chosen. They also are not news specific like a stock. I'd suggest blending a mix of the two, with a few select longs like tonight's UNG.
Most of all, be patient, understand there's a lot of volatility in this market, 1) because it's the new Wall Street dynamic and 2) because of this being a top formation-volatility is inherent in a top. And before you enter any trade, make sure you understand the comprehensive risk management plan we use, last night's post covered some of it and there's more available at Trade Guild under "Resources and Concepts" on the left side.
As always, email me with any questions.
Areas of interest-Bearish
- the Q's breaking below $46.25
-The SPY's inability to close above $110.80
-SPY moves above $110.80 and falls back down on increased volume
-The Dow's inability to close above $10264.20
-or an intraday move above that level and a move below it gain on increasing volume
-the Composite falling below $2281.07
-XLF breaking above $15.02 on the close
-The dollar index breaking out-around $87.50
Areas of Bullish interest
-The SPY breaking above $110.80 on the close, especially on rising volume
-The Dow closing above $10264.20, especially on heavy volume
-The Q's making a new closing high on increased volume and a wide candle body
-Q's filling $47.74
-The composite making a new closing high on volume.
Strong closes with dominant P/V relationships of Close Up/ Volume Up
Lucky for us, UNG didn't get away, it just got started. Here are the charts:
One of my finer moments (calls) was the end of the uptrend in oil. We had 5+ years of appreciating prices, lets call it five years, that gives us 260 weeks, I had nailed that one within a week and even greater pride and joy was the same week Cramer was all over his audience to buy oil! What gave me that insight? The exact opposite of what we see here, an Ascending Wedge (bearish) confirmed by 3C.
Back to UNG:
Typically these patterns retrace their base, which means there's at least a 40% gain in the trend, it could be significantly more.
Here's a great crossover system that will dramatically reduce your whip-saws and false signals. The yellow line is a 10 day moving average. The blue line is a 22-day moving average. In the middle window in yellow is a custom indicator (if you have TeleChart I can give you the code). This custom indicator has a moving average of 22 bars (in Blue). Lastly I have Wilder's RSI, period 30 (note it's double the length of the typical RSI setting). MACD is there purely out of ease of use, it does not figure into the system at all.
OK, that seems like a lot, but it's very simple. When in doubt, keep it automated and as simple as possible. There were 5 rallies and any one could have potentially been the breakout, however this indicator only gave one buy signal and that was today. All that needs to happen is the yellow lines (m/a and custom indicator) need to cross above their moving averages in blue. The last requisite is that RSI needs to be above the middle line or "50". During all of those crossovers in the bottom formation, only the real breakout was signaled.
How to play this... Typically after a strong day on INCREASED VOLUME on the breakout, we'll see a second day or two called follow through. If you like the trade, make sure you correctly asses and manage your risk and go ahead and buy some at market right off the open. If there's strong momentum this won't come back for a pullback anytime soon so you want to get your foot in the door. On average, the first pullback of a new uptrend will pullback to the 10-day price moving average, usually intraday so if you can't watch it every moment, each day estimate the level of the 10-day m/a and put in a limit order for the other half of the position. This could be at higher prices, it's a sacrifice you make for confirmation that the trade is moving in your direction. Typically the next pullback will occur at the 22 day moving average. You can use the cross-downs as a signal (2 out of 3 is a sell signal) or a break of the 22 day moving average on the close (ideally on volume).
Out target is the base of the formation around $11, it's nearly a 40% gain. It may go significantly further then that. You can also use my Trend Channel as an effective stop if you have TeleChart, if not click on the TeleChart link at the top of the site and check it out.
Note the dashed red line, that is a VWAP or Volume Weighted Moving Average and Wall Street uses it to gauge the effectiveness of the market maker/specialist that filled the order to accumulate. If the average price filled at, is above the WVAP, that market maker won't be seeing anymore business from the institution. If they filled below the VWAP, then they did a good job (depending on the extent). So you can roughly figure out what Wall Street's average price is and you'll want a stop below that. I use my Trend Channel which accounts for volatility and the current stop would be $7.10 and the VWAP is at $7.20. If you want to trade tight, then a stop (on a closing basis ) of $7.77 would be decent. Personally with all the volatility, I'd go with $7.10.
This is a fantastic setup and you should study it, the descending wedge, the inverse H&S bottom/accumulation in stage 1, a breakout moving into stage 2 mark-up. It's really a beautiful chart and not an easy one to manipulate for too long.
UNG is your Featured Trade. As always, RISK MANAGEMENT FIRST (see last night's post about it if you are new to the site). As always, any questions you can email me.
As for the rest of the market, make sure you understand and are aware of the post below, those are all fairly non-correlated ETFs that we are using as the basis of our short position (we are buying them long).
The Markets
Tuesday was an impressive down day that carried expected negative breadth readings. Wednesday was nearly the mirror opposite in all ways except the negative breadth reading remained (look at the last few posts on Trade-Guild). Today was a virtual wash, with another day of negative breadth readings. Today only 4 stocks on the Dow 30 closed bullishly (not to say that only 4 stocks closed up, but did it on rising volume as well).
By contrast, the much better acting NASDAQ 100 had 43, which is not surprising as it is only the NASDAQ 100 and Composite that actually managed to break out of the lateral movement-the DOW and S&P flirted several times, but buyers backed off at resistance.
3C (orange) detects accumulation and distribution through divergences, both negative and positive. I've added a blue arrow where there was a small positive divergence, the white box following is the reversal that 3C picked up on. The red arrows mark relative negative divergences and the white box shows the reversal. The largest red arrow that stretches from the morning highs until the end of day represents the SPY attempting once again to break through resistance, but this time we see major distribution considering the chart's timeframe of a minute. This is a key development. As I said last night at Trade Guild,
"As far as 3C goes, I don't have any consistency among the 3 versions or the averages I track . The only thing I see is some positive looking longer term action which could be just late to turn as those charts take a while or it could be warning of a right shoulder in a Head and Shoulders pattern that could develop from here. Other than that, I do not see organized accumulation or distribution, so right now there's no edge there."
Today was a strong development for the bears.
This is 3c v.III (blue) on a 10-min chart. The first red arrow on top shows a relative negative divergence and most probably the reason the retest of the highs failed so badly. The second lower arrow shows a LEADING NEGATIVE DIVERGENCE between the morning and the close, this is a significant development.
You can see, just like all the other averages, we are seeing a negative divergence brewing at the end of the day as the Q's make higher prices. I think we may be close to a reversal here. If the S&P and Dow can't break out soon, then I believe it will drag the NASDAQ down. It seems Wall Street may be preparing for that possibility.
So it seems we are moving into an area of distribution. There a a lot of leading divergences, which suggests to me that we will see downside. I think we will see early morning downside, although it would be typical of Wall Street to launch an expedition on the S&P and DOW above the consolidation zone, (a false breakout) and then we'd see downside from there. I have no strong evidence of this, I just have seen Wall Street's new normal and volatility. It would be a perfect situation for all of them, from market makers to institutions.
For the new comers, the list of core ETF's we are using to rough out a position was posted earlier today. The basic plan (unless we see a right shoulder and a head and shoulders top develop instead of the Broadening top that I favor) is to be about 50% in these stocks at this point. For those of you who are new, it would be fairly ideal time to start those positions. You must absolutely use risk management, the 2% rule, proper position sizing and non-correlated equities.
We'll hold about 25% of the portfolio in Cash which can be used to take advantage of swings, opportunities and to hedge if need be. The final 25% of the portfolio (on the short side-and these are rough numbers, you must do what works for you) will be added when we have confirmation of our current bearish analysis and that will come with a breakdown below $104.35 on the SPY, at which point you should see volume increase dramatically.
*For a detailed view of my analysis, check the recent two videos I posted here and on Trade-Guild.net
Remember, I posted a lot of shorts (real shorts, not long inverse ETFs) and real shorts have the ability to allow you to use your profits before you close out the trade, unlike long positions, including the long Bear/2-3x leveraged ETFs. The ETFs have broad exposure, especially the core we have chosen. They also are not news specific like a stock. I'd suggest blending a mix of the two, with a few select longs like tonight's UNG.
Most of all, be patient, understand there's a lot of volatility in this market, 1) because it's the new Wall Street dynamic and 2) because of this being a top formation-volatility is inherent in a top. And before you enter any trade, make sure you understand the comprehensive risk management plan we use, last night's post covered some of it and there's more available at Trade Guild under "Resources and Concepts" on the left side.
As always, email me with any questions.
Areas of interest-Bearish
- the Q's breaking below $46.25
-The SPY's inability to close above $110.80
-SPY moves above $110.80 and falls back down on increased volume
-The Dow's inability to close above $10264.20
-or an intraday move above that level and a move below it gain on increasing volume
-the Composite falling below $2281.07
-XLF breaking above $15.02 on the close
-The dollar index breaking out-around $87.50
Areas of Bullish interest
-The SPY breaking above $110.80 on the close, especially on rising volume
-The Dow closing above $10264.20, especially on heavy volume
-The Q's making a new closing high on increased volume and a wide candle body
-Q's filling $47.74
-The composite making a new closing high on volume.
Strong closes with dominant P/V relationships of Close Up/ Volume Up
