Some Trades

First of all, if it wasn't clear from my post, we are at a hugely transitional moment, I believe that the market has set up a volatility-Bull trap-two separate traps, both take your money just as fast. We had very bullish price action in the Dow, next the S&P, however, if it isn't clear to you yet, then you are probably a new member and it will be soon-there's so much more to price action. I've used the example before of two cars that both can do 200 miles an hour, except when you look under the hood, you find one was built well and will do 200 miles an hour every day, the other was built to do 200 miles an hour, but not built so well and when you hit the 20o mile an hour mark you have something to be fearful of because you know what is under the hood and it's not quality. The same with a price advance, a 2.5% advance in two different markets can mean two very different things. One can mean more to come, the other can mean-CAUTION, you are in a danger zone.

So hopefully the charts I showed you make that clear. I also hope you understand that tops like the one we are in are built for one thing, taking your money by shaking you up and down and never allowing a trend of more then a few weeks to a month. Investors get caught up in the very natural human emotion of hope, but I will tell you after studying every top and bottom of consequence since the early 1900's, both are processes, not events.

That being said, the most important thing you can do is be on top of your risk management game and I have a link on the site all about it and if you have questions, PLEASE email me and lets get them straightened out before you get into trouble. I say this every night-that is how important it is.

As for trades, being we are where we are, I urge patience. I'll list some trades for you, there are plenty more and you should find a service to set alerts so when they are triggered you can get into them. The trades tonight are designed as "show me trades". We want to see them doing what we expect and then we jump in, not all of my trades are like this, but it;s the environment that dictate the kind of trades I look for.

So here they are-see if you can figure out the common denominator.

AIXG short. Most of these will be on 5-day charts, this means that most of them are meant as long term trend trades, but they should be close to breaking in our direction. Here we have a clear top that was violated on heavy volume and a run above resistance which is a short squeeze-or a bearish trap. However, the stick is still sick, it just had the good fortune of being able to run with the market as most stocks do. The volume on the last bar and the candle are ugly. The limit order to go short (these are just my opinions, feel free to choose your own) is below $29.40 the stop is $33.60. While the stops will be wide, that is initial stops to give the trade a chance to work. You must use position sizing and lower the amount of shares you take on in a wide stop, when it breaks in our direction, you can tighten the stop and add shares.

BAC short on a daily chart. The red box is the resistance zone. You can go short below $13.75 as it stands now with a stop at $14,75 or you can wait to see if it enters the resistance zone and pull the trade then.

CHCO short on a 5-day chart. There's a clear top, resistance at the trendline and a bad looking candle setup that indicates a reversal. The short level is below $29.33 with a stop at  $30.57. This trade has a decent risk profile. The rally to resistance was weak.

CYH short on a daily chart. The red trendline is a resistance zone. It acted very bad today in an up market. Short below 30.93/ stop $33.55

Here's a long based on a descending-bullish wedge. Targets for wedges are their base-near $21. Volume is correct for the pattern, it's broken out on good volume. there's a yellow line, it's the 10 day moving average, that's where you want to buy and use a 22 day moving average as an add to. If the trade works out, email me for current stops-the same as any of these.

SUSS long, you want to wait or maybe you don't, but I would, for a breakout above $12.27, the stop is $11.47 As with all of these, take a look at the longer charts and determine" is this stage 1,2,3 or 4?"

TEL short, this is a pullback in a downtrend. The stop is $27.65 and go short under 26.20

VRUS short on a weekly chart. Again a top, a breakdown and rally above support where it is barely hanging on. I'd go short just below $25 with a stop at $28.13. Again, when it works, you can narrow the stop and add shares. First though you need the trade to work before you have huge exposure.

WFMI short on a 5-day chart. I'd go short below $37.25 and stop out at $40.47

XRTX short, this is a very apparent top, and a perfect pullback-this is an ideal short setup if you see it ever again. I'd go short below $12.55 with a stop at $14.55

These will be on the spread sheet, but let me remind you; YOU HAVE ONE ADVANTAGE OVER WALL STREET-YOU DON'T NEED TO BE IN THE MARKET, SO IF YOU DON'T SEE YOUR TRADE OR IT'S NOT TIME FOR YOU, THEN STAY IN CASH-THEY CAN'T DO THAT.

As For the ERJ Trade

Here's the link to the article


I don't know yet which way this is going...

Their revenue dropped 79% VERY BAD

However, they raised guidance-GOOD

They raised it based on a global recovery, so the question is, does the market agree?

As you may know this was an earnings play short from earlier today based on what I saw on the charts as distribution going into earnings.

We'll know tomorrow a.m. and I' quite excited to see what happens.

No big surprises today, but a few events that should have registered as big events.

In a nutshell, two things move the market-supply and demand? Yes However, there are two things behind supply and demand and those two things are Fear and Greed. As I have said, when a chart is read properly, it shows human emotion and that helps us understand what sentiment is in the market. Sentiment could be described as the dominance of wither Fear or Greed. A quick way to gauge sentiment is to use the CBOE indicator the VIX. The VIX is referred to as the “Fear Index” and it tells us whether investors are fearful by registering high numbers (because of recent volatility over the past few years, those numbers are subjective and best looked at in terms of relative extremes) and when investors are fearful we typically see a rally. When there's a rally underway, investors tend to get complacent and then we see low reading in the VIX and when that happens, typically a sell-off is close. It can almost be described as contrarian thought. Here's the VIX

Today the VIX registered extreme complacency with a reading not seen since early May, “22”, a one day drop of 6.38% While the VIX can go lower, in relative terms it seems we are near a reversal to the downside.

There has been a pattern playing out on the up days I've noticed the last week or so. We see an early move up, which I believe is retail traders placing limit orders before heading off to work based on some news event. The market makers/specialist widen the bid ask and run price up without anyone on the institutional side having to commit finds to get the market higher. This is why we see this early in the day, it's why most pro traders rarely trade the open unless they have a specific strategy and it carries on until the orders are triggered and filled. By afternoon we see a trading range develop:

As you can see, “1” is the early morning run up, “2” is the trading range as a lack of buyers in the market keep prices relatively stable within the range and “3” is the afternoon run-up which I believe is created by an minimal investment by institutional money at the right time, in the right stocks. This run up keeps retail traders believing the rally is alive and well, however, there can be no healthy rally without increasing buy side volume and without institutional support.

Why would institutions do this if they are not bullish and buying?

Because like anyone, they want to and are able to sell positions they may have purchased within the last few days, into higher prices. If you are selling, you obviously don't believe the rally has much left in the tank, otherwise you are a buyer. As you can see in the chart above, the blue arrows represent the intraday price trend, the red arrows represent the intraday selling by institutions. Even TSV in the lower window shows the selling and has closed below it's moving average in a negative divergence so it's not just my indicators as you will see.

The next two charts represent what I was concerned with when I wrote last Friday's article about a possible Inverse Bottom Head and Shoulders.

The one thing that is most important in confirming a H&S Bottom is volume-do not underestimate the need for proper volume to confirm real pattern from a false pattern or just random pattern. What is needed is an advance in volume s the right shoulder rallies from it's bottom. Really any rally after the head is formed (to the right), should see a marked increase in volume. Furthermore the breakout above the neckline/resistance level must see a big increase on the breakout. As shown in both charts, volume has decreased, not a marked increase-the breakout was on even less volume today in the DIA and SPY-traders, despite this extraordinary breakout, are backing off from buying. You'd think such a breakout would create a tidal wave in buying?

If You Want To Make Money, You Must See What the Crowd Missed...

What did the crowd miss? Perhaps the falling volume? In an effort to see what the others have missed, I rarely use indicators in the way that the masses use them, for example, here's a MACD Histogram which is half the length of the typical MACD used by countless traders and found in countless books.

This is a momentum indicator, in a healthy trend it makes higher highs with price, in an unhealthy trend it makes lower highs as price makes higher highs. As you can clearly see, the MACD negative divergence, in all cases on this chart has led to a reversal in price. The yellow arrows represent positive MACD readings, the red represent divergence/negative readings and on what should be a “milestone day” with these breakouts, look at MACD, it's not increasing-IT'S DECREASING!!

The Mystery of The IWM and NASDAQ?

The market is rallying, putting in breakout highs, yet the IWM, besides gapping up with the market, which tells us nothing because the market largely moves together, put in a Doji Star which is at best a total loss of any momentum and at worst a reversal candle. The NASDAQ 100 severely underperformed the price pattern of the Dow and S&P as well. Remember, MARKETS LARGELY MOVE TOGETHER!

And For the Killers....

In the chart above, I'm using the influential 1-day chart with 4C on the DIA. There was an overall positive divergence between May and June, marked by the blue arrow. Each of the red arrows show a negative divergence and subsequent price reversal off the highs of the trend. This indicator should be heading toward the sky the last week, but instead... another red arrow with a relative position below that of the June highs-another divergence. This divergence has shown distribution since the July rally started!

The chart above of the SPY 10 minutes, shows 3C in a leading negative divergence! This should be in a leading positive divergence!

FEAR IS STRONGER THEN GREED!

Want proof? Look at the 10 day decline in June-it wiped out 10%, at the same time the July rally-about 20 days-gained the same 10%. So it took half as long to wipe out the same gain we just saw.

Now, there are positive indications in the market still, they are simply overwhelmed by the negatives; here's why. There is no one single economic release that can undo the damage of the GDP report. It would take months of positive releases with almost no negatives to convince smart money that the economy is turning. Right now the fear is stronger then ever that we will enter a double dip recession and it is well founded. Bernanke's senate testimony made this clear. The GDP number came as a shock, if it wasn't a shock, then the Fed would have warned that we would see this slowdown, that it was a natural part of the recovery-they didn't-not to this extent.

The market is all about manipulation and what better way to get money into the market, into a trap then creating this breakout? So, while we can always be wrong, and if we are, then risk management will kick in and do it's job, I seriously doubt that we are wrong. I do not doubt their ability to create a few more days of upside volatility, but over the long haul, I see this market heading to new lows eventually.

Today's Stats:

All 30 Dow components closed up, with P/V relationship nearly even with Close Up Volume up at 17-this is bullish, but when so many close up on such diminished volume, it's a contradiction and commonly (good is bad, bad is good) it can signal an overbought market just as the VIX did.

The NASDAQ 100-59:34 except this time, 59 was close up on diminishing volume. Remember I talked about the IWM and NASDAQ underperforming.

The S&P-500 248:226 with diminishing volume edging out advancing volume.

Despite the internal P/V relationships, every major average closed on lighter volume and all are trading down in after hours.

That's the daily wrap, check back as I scout for trades.....  

Last Update before EOD

Here you can see the negative divergence in the DIA, I use this because it seems like the action is in the quality names as the IWM is severely underperforming and even the Q's have hit resistance. There's a clear uptrend there on the 1 minute chart, clearly the DIA is starting to trade in the lower end of that channel with two negative divergences and a TRIN Index reading of .65 which is quite a bit under the Overbought position around .70-.75-even though it started the day in a near neutral position. These all point to a probable reversal tomorrow and today is almost a template of exactly how the market has been trading on up-days, a big retail push in the a.m., institutional selling throughout an early-to mid afternoon trading range and then a move higher toward the close.

This all wreaks of volatility plays in which Wall Street takes money from people who chase the big move up or down and then it reveres the next day and they get out as the moves are quite volatile. this is top behavior, but in a micro environment. Lets see where it closes and how it acts in the last 10 minutes or so when the professionals will step in to close the market.

****UPDATE In addition, the VIX which trades the opposite direction of the market and calls reversals at extremes is now trading down to 3 month lows.

An Earnings Play

Above you are seeing 2 charts, both 3C 15 minute. The first is the SPY. Remember I said that most stocks will trade in sync with the market to a large degree. The second chart was submitted by a user, this is ERJ and they report earnings after the close today.

Note how much worse the negative divergence in ERJ is then it is in SPY. This leads me to believe that institutional money is moving out of this stock before earnings, which to me implies that ERJ will not react well to earnings, which may make it a decent short, but to get the most bang for your buck you'd need to enter it before the close with a short trade.

PLEASE REMEMBER THAT THIS ENTIRE EARNINGS/3C  THING I'VE BEEN DOING IS EXPERIMENTAL. THIS IS THE FIRST QUARTER I'VE USED IT TO SEE INSTITUTIONAL MONEY BEFORE THE FACT. THAT WOULD MAKE THIS A VERY SPECULATIVE TRDE WITH THE ABILITY TO GAP HIGHER IN THE MORNING SHOULD EARNINGS BE GOOD WITH A GOOD REACTION SO PLEASE KEEP THAT IN MIND WHEN TRYING TO DETERMINE WHETHER YOU'D LIKE TO TRADE IT.

THANK YOU TO THE MEMBER THAT BROUGHT THIS TRADE TO MY ATTENTION.

Update 2

Continued negative divergences in the SPY-all the way up to the 60 minute timeframe. There's little doubt that these higher prices are being used by institutional money to distribute their shares in, perhaps a trade, perhaps going short. There can be no NEW bull market without institutional accumulation.

Update ...

There's a good article I just put up on Trade Guild this a.m., the article came to me from a WOWS subscriber-This is what I mean by everyone getting involved in the comments. There's over 7000 (non-pink sheet/penny ) stocks -tons of ETFs, ETNs and other trading vehicles. I can not see everyone every day, but the more eyes we have out there, the more ideas I can confirm and bring to you for all to benefit.

As for the market this a.m., it's got several negative divergences including a few 5 min 3C divergences. I'm not seeing the scale of divergences that I would like to see to call a reversal, but remember that 3C shit down with institutional activity for a few days last week it has to catch up.

You have to realize, and maybe the article I posted this a.m. will help, that these little bits of good news pale in comparison to the huge blow that the GDP report dealt the recovery. Slowly the government is admitting, it's worse then we thought, it's not getting better, we didn't see this coming and they are trying to break it slowly. These pops from 1 good report are run up by retail traders. The pattern we've seen is retail traders run the market up in the am, pro's trade toward the close, and then the price stays elevated, but in a range and smart money is selling up there.

We'll see what happens today, but longer term, which could mean days , weeks maybe a month, this thing will come crashing down.

Since I started writing, I have 3 3C indicators, all with negative 1-5 min divergences, perhaps we are close to a downside reversal.

ISM Index

The manufacturing index came in at the slowest pace seen this year, but still better then analysts expected which gave the market another shot in the arm. The reading was 55.5, expected reading was 54.1. A reading above 50 indicates manufacturing growth, below 50 shows manufacturing contraction. The question is will they tie this lowest number of the year with the surprisingly low GDP?

I listed a lot of longs last night for a few reasons, one I mentioned that last Friday was the last day of the month which means window dressing where managers sell assets that aren't performing, are many times bought back on the first day of the new trading month. In this manner they have the bad assets off their books for end of month reports.

So a pop up in the morning is not anything unusual on the first day of the month or a quarter.

In the market there's a few intraday divergences to the downside, but more importantly there's no volume follow through on the move so as I explained (last night I believe), the market will take any pop like this and use it to make money off retail traders, but unless the volume picks up, we can pretty safely assume that institutional money is still not impressed and hasn't changed their outlook.