Here's the market situation as I see it, As you'll see in one of the trade ideas I will talk about in a minute, the market is out to make as many people wrong as it can at any one time, that's because the masses are retail and the few that control the market are institutional. Just like I showed you in Wednesday night of last week's post, the institutional money had a heads up on what Bernanke would say or what the expected him to say and found out he wouldn't. The gap up was immediately sold off by institutional money. The market more or less was lateral and CNBC would have attributed that to traders not wanting to make any moves before Bernanke has his say in the afternoon, but the fact is, institutional money was using that nice lateral trend to exit positions in a big hurry, I'm sure they appreciated the relative lack of volatility-especially downside- in price; it gave them a chance to get out without the market dumping. Before Bernanke ever uttered the words about "Unusual economic uncertainty" CNBC let the slip first, by a couple of minutes, so the leak was out and at 2 pm (1:58 precisely), retail jumped off the cliff and so did prices-Institutional money was hard at work selling while everyone else was just hanging, I'm sure they felt a sense of relief after their own mad dash earlier to unload, that they didn't get caught in that downdraft, at least not as badly as they could have. This is not speculation as far as the money moving out, it was clear on the 3C charts I posted that night and the very next day, Bill Cara who is very well respected in the financial circle, wrote almost the exact same thing I wrote-you can go to Trade-Guild.net and read it for yourself "I'm Not Alone". I don't read Bill's site, or anyone else's really and I doubt he knows of me, but we had the same exact, obscure suspicions. It was uncanny to read his morning brief which was posted the morning after I wrote my piece Wednesday night.
I have also said that I do believe that Institutional Money did pick up some of the sold off shares on the cheap and you may recall, before last week's rally ever began, I gave about 2 days notice that it was coming because I saw the accumulation. I even mentioned I thought it would take them two days or so to unload that position. Tuesday was up big, that was day 1, Wednesday was down on Bernanke's Senate testimony, no help there. Thursday was up, BUT and this is a big BUT, I had complained about the $.06 cents that we needed to see a break above $110. Thursday, intraday there were 5 or 6 attempts to break through $110 SPY-I wrote quite a bit as to why they'd want to break $110 and I wrote a post about a fight on Wall Street between market makers/specialists and some institutions unloading at $110 or creating resistance there-we got as high as $109.94-thus my article about 6 cents.
"But You're Bearish Brandt!?!?!"
Right, long term, for the trend, where the meat is at, I'm bearish. So why would I want to see higher prices above $110? Well just like you'll below when I talk about the double bottom in one of my ideas and the disconnect between theoretical technical analysis and real world, there's another disconnect. I posted here that an up day can be bearish, in fact it can-IF IT IS SETTING UP A BULL TRAP!
Quickly, what is a Bull Trap?
Imagine at the left where it says "Highest Close" that this was the $110 level. $110 is a great, even whole number, stops and limit orders are surely piled up there-it's a market maker's pay day to hit those orders. However for the Bull Trap, they have to make new highs above the former highs-imagine that where it says new highs, Friday was the start of that-as it was above the $110 SPY level. Now this can happen in a day or it can take a few days, but what they do is hit all the orders booked and the new ones and make a lot of money on the spread which is the difference between the bid and the ask or what you get when you sell it vs what you get when you buy it. Furthermore, the bullish people, and most people are innately born "bullish" (people have had bad experiences with markets going down; although I find them easier and quicker to make money in), the bulls want to buy into these new highs, to them it is proof positive that the uptrend is still alive, they want to believe that this market is recovering so they buy. However, the Price /Volume statistics I gave you for Friday showed that while retail drove prices up, professional/institutional traders were backing away from rising prices. What they may have been doing though is selling short to all the retail that was buying long-market makers and specialists are even allowed to go naked short-meaning they don't have to find the shares to borrow, they just sell until their inventory is minus and keep selling. So now everyone on the professional side is happy, the market makers got to make a huge payday when the market broke resistance at $110 and the institutions were happy because they get to unload their accumulated positions from over a week ago, into higher prices and maybe even go short. The retail bulls are (not informed, but) happy nonetheless.
Then an event occurs that breaks the newly formed support at $110-on the chart above that would be at the day labeled "Trap Sprung". Look at the volume rise, again, market makers make another pay day as retail who love whole, even number have piled their stops at $110, at $109.99 they are converted into sell orders. THIS IS WHY I TELL YOU TO NOT PUT STOPS AT OBVIOUS LEVELS AND DON'T PUT THEM IN WITH YOUR BROKER WHERE THE MARKET MAKERS CAN SEE THEM! Keep your orders in your head until it's time to execute if at all possible. Now we have two support levels, one drawn around $12.63 because volume was big there so it seems to have been important and one right below that is not drawn around (on this chart of F) $12. When prices move below that support, all the buyers in , above that support level are now at a loss. the institutions that went short above our $110 level are all at a gain and the retail buyers above $110 are panicking and selling which causes more selling-volume is huge, market makers are happy, institutions are happy and the little guy gets screwed out of their cash again.
So being I'm bearish, yes, I want to see a bull trap so I wasn't to upset about the moves up late last week. So far, indications are for a gap up open. If you look close, the last day of rally was a gap up and a small bodied candle, this is a common reversal pattern so if we gap up and close close to where we opened, it still is not very bullish. Or we could see a day like Wednesday with a gap up and a deep sell off the rest of the day. It's possible that we can even see a new right shoulder above the $113 level -higher then the last shoulder and still be bearish. THAT IS EXACTLY WHAT HAPPENED RIGHT BEFORE THE SELL OFF IN 2008, we saw a new, higher shoulder form starting in March and ending in May and then down she went and it was a HISTORIC sell-off. I remember it vividly, it seemed like the market would never stop going down, but a year of rally has erased that from most people's mind, although if it happens again, as I think it will, they won't forget the second time.
So we will see what happens, nothing in my mind and longer term view has changed, the charts are still bearish, the distribution is worse, and there's a potential trap set.
Now, the reason we keep at least 25% in cash, even in a full on , beautiful trend, is for counter trend moves. I've seen a lot of cheap plays looking pretty good, so this weekend you have a new list with 19 trades there from shorts on huge companies to longs on big and small. Pay attention to the sectors these stocks are in so you don't over-correlate. If I say it's a long or a short and don't give you a limit price, it's because we would generally execute the order right on the open at market price. For limit orders, they can take place intraday. For stops, unless otherwise noted, you should always try to hand in there until minutes before the close. Unless there's a full-blown sell-off against my position, I always try to execute a stop out as close to the close as possible.
So if you want to play some longs, there's quite a few in there, many will be one or two day pops, hopefully double digit and you can take all of your gain or take partial gains and leave some on the table with a close stop. Never let a winning trade turn into a loser.
Here they are and there's more on the spread sheet.
EGT is in the gaming sector and for whatever reason the sector looks like a pretty decent long position. THERE HAVE BEEN SEVERAL STOCKS SIMILAR TO EGT THAT HAVE BROKEN OUT IN THE LAST FEW DAYS ON BIG MOVES. Remember that the overall market exerts the most gravitational pull on your stock, then the sector and the least pull comes from the stock itself. This is why the saying “A Rising Tide Lifts All Boats” exists. Now even in a bear market, there can be bullish sectors within it. So EGT is worth keeping on your buy list, but you want the stock to prove itself to you first since we are in a bear market still, we need confirmation. This is also a very low volume, low priced, and high Beta stock, which means it is exceptionally volatile and very speculative. You don't want to commit a lot of capital to this trade. You also need a wide stop to give it a chance to work.
This 2-day chart of EGT shows the cycle we are in, remember, to know where you are going you have to first know where you are and as demonstrated, we are in an accumulation/basing cylcle right now. This doesn't mean it will be a huge winner , but it is a higher probability and that is all we have to work with is probabilities. You can also see that 4C, on this 2 day chart is showing exceptional accumulation in a huge leading divergence. I notated past divergences so you could see 4C's effectiveness and cause and effect between the divergence and price action.
This 1 day chart shows the triangle pattern which we have discussed recently-Triangle when they are large, tend to function as tops or bottoms, this appears to be a bottom of some significance. Volume has declined throughout the bottom, this is also a sign of accumulation. Institutional money is very quiet about trying to buy in a low range, they don't want to draw attention to the stock until they are ready to break it out. The breakout point is around $.27-$.28. MACD has also gone positive.
Finally I used the trend channel on a 7 day chart because the stock is so volatile. The Trend Channel stop is at $.20-this is way to obvious a level to put a stop at so I'd keep my stop around $.17. I know that makes for a huge amount of relative risk, but you can alos wait for the breakout and then put a stop under $.25 or a bit lower. If there's a big blast up and it makes double digits, you may want to consider taking out your profits and moving the stop up to create a probability in which you will not have a loss on the trade.
STEC looks like it's formed a small base and is trying to move to stage 2 “mark-up”. A breakout above the $16 area should lead to a nice move, although it may very well pullback a bit, probably to the 22 day moving average but not until the breakout.
3C appears to be gearing up for the test of resistance and a possible breakout. The Trend Channel suggests a stop of $13.50 , this will move up every day so if you get involved and don't have my trend channel then email me if you'd like the current stop. A 22 day moving average would work well too or you can just look to cash in on the breakout. There's a lot of possibilities. The current small price pattern is a Bull flag of sorts and the implied target is $20. The longer term trend, if it successfully breaks out implies a target of $22 or so.
IMN looks like a long too, it is also in the same sub-industry as STEC so unless you want to treat both as one trade for risk management so you are not overly-correlated in your positions, you may want to choose one or the other. IMN appears to be in a short cycle coming out of the Stage 1 base and trying to reach Stage 2 “mark-up” where the stock rallies. The volume is not stellar, so I won't make any notes regarding it. I do like the base/price pattern. You can see it's like quick/short double bottom. Here's a good lesson about theoretical technical analysis as you will find in books versus what we really see in the market. In theory, the second bottom at July (the first at June) should have not gone down as low as the first. However as I have been telling people about manipulation in the markets, Wall Street uses your expertise in technical analysis against you. All of the buyers who use TA would have put a stop just below the June lows, the specialist sees the stops, a quick py day by hitting them and can stock up on the cheap. Note the increase in volume as the stops are taken out in July. Right now we have a semi breakout, volume was low on Friday, but it was low market wide as buyers backed off rising prices. A close above $10.35 on good volume would be helpful and raise the probabilities of a move to 12.50. Currently the Trend Channel has a stop at $9.39, but you could also try tight stop around $10.04. $9.46 is also an area that shows support.
If you are uncomfortable with rising prices and feel that they are leading to drawdown on short positions that you do not want to sit through (although proper risk management should not have you in this position) then you can consider a tactic we use which is to sell 25% of the shorts and replace them with an ultra or triple long index like UPRO (3x leveraged on the SPY). If there's another day of bullish activity we sell another percentage-usually less then 25%, and that will get you close to a hedged position where you can sit until you see a reversal you trust, usually you'll be able to add the shorts back in at higher prices and make up money on the way down. That's one way of handling the situation, but I do not ever just close everything and go in the opposite direction because of a few days of bullish activity, usually the market reverses, you have no shorts and get clobbered on the reversal down. It all depends on how you feel about the long term picture, assuming we are talking about long term positions like core shorts.
Playing these long pops also is another way of not giving up a good short position that was assembled at much higher prices and when the market reverses, you didn't lose anything and the long that popped on a 1-2 day trade for double digits, is just extra profit. Everyone here is trading differently-from day traders to swing and trend or investors so if you have questions specific to you and your trading style, please feel free to email me for a second opinion.
Have a great week! And Welcome New Members.
Hey guys and gals, lets start using those comments for trade ideas and such, I get a lot of great emails, you should share those with everyone via the comments.
