Wolf on Wall Street: Friday, September 17, 2010

Friday, September 17, 2010

Lots of Work This weekend

You know I'm a work-a-holic-see the time/date stamps of some of my posts, it's because I love the markets and it's what I owe you, my subscribers that have placed your trust in my analysis.

So there will be probably several posts this weekend. I'm working on weighted averages so we can see what stocks are being used to pump the market.

I'm also putting considerable effort into back testing trading systems related to volatility in the markets and related to move in treasuries and the dollar. Any good results will be posted for all of us to learn and profit from. So keep an eye on your email this weekend.

Otherwise, enjoy your weekend.

Welcome new members! Please review the links at the top right side of the site pertaining to entry systems and our risk management plan. It is essential to be on top of good risk management. Any questions you may have, please feel free to email me anytime.

Comments

There's a lot of insight and quick communication using the comments link, I may add a chat section, but for now, check out the comments

Lesson 2-Market Market/ Specialist Corruption

Here's why T.A, is increasingly useless and likely to cost you money on every pattern you react to

For semi-real time commentary on this particular pattern click HERE for the comments regarding it

The Great Manipulator

I've heard AAPL accounts for 18-19% of the weight on the NASDAQ 100, NASDAQ wants $10,000 for that information, but from what I know of their proprietary formula, I still weighted all the components and published the results last night. AAPL is at least 14% making it the perfect stock to use to manipulate the market higher. So I looked at the chart, less the market maker noise, and 3C 5 min just showed a drastic change in character for AAPL-perhaps the manipulation of prices higher id nearing an end.

The SPY in green/ AAPL in red, look at the price correlation between the two.

AAPL 3c 5 min version 1-the first significant divergence in AAPL

3C version 2-5 minutes, confirmation and a negative leading divergence. The market makers can still bully it around intraday, but the investment made in AAPL to manipulate the averages higher (1 stock rather then 100 is not a big investment) seems to be closing out.

Another Head Fake

There's a triangle on the SPY chart from 11 a.m. to present, it just broke to the downside as conventional TA would suggest, we know what happens though so be on the look out for an upside head fake.

Close

A daily close around this level or below should be the start of a move down. The further into the gap the better and the higher the volume the better, we want to see panic selling.

Click on the chart if you can't see the red trendline.

3C update

The 1 min isn't worth posting, besides a minor divergence at 12:30, it's been tracking price all day. The 5 min though does have a little more insight.

This indicates a leading downside divergence. The longer timeframes are negative as well in different degrees.

3C Hourly

This is one of the broadest measures of institutional activity in the SPY

Here's where the 3C hourly stated out with the hour from yesterday to 9:45 this am.

Here's where it stands now, note the scale has not been changed

Not only is there a negative divergence at the top of the SPY's range, but the leading divergence is worse in a matter of a few hours. This hourly timeframe does not move easily or arbitrarily.

Analysis

Yesterday's closing price rally seems to have been due to a series of “market on close” orders pushing the market up.

As I showed you last night, despite the advance, we had more declining stocks then advancing.

Also yesterday the American Association of Individual Investors released a number of 51% bullish investors, an unusually high number and one in which I think we more or less expected to be toward the final stages of the advance from September. In the market good is bad, bad is good, this seemingly good report for bulls is no different then the high % of shorts in the market late August that set up the institutionally initiated bounce-imbalances are always taken advantage of.

Copper is leading the market, copper has long been associated with increased economic activity, but is it real or a speculative bubble.

These two charts would probably be of little comfort to market bulls.

You can see cause and effect of multiple negative divergences at the red arrows, currently we are facing a serious one in FCX

The hourly chart tracking accumulation for a leg higher at the white arrow and currently apparent distribution of that accumulated stock into higher prices, being where 3C stands on the daily, this is not good for copper, thus the bullish relationship it's price advance has implied.

NEXT SUPORT

$113.35
$112 area-

If price makes it down here, volume will be exceptionally important, especially at the $112 support area.

SPY FLAG 2-Lesson Complete

As I said in my last post, 75% of these patterns will have their stops run. I'm being conservative in saying 75%, if I were to say what I really think, it would probably be closer to 95% and still the retail traders DO NOT LEARN. You want to know why? Because they figure if it's in a book, it's got to be the truth and they never stop to think and look for themselves. In this changing market only those who dare to think outside the box will survive.

Above, a few points, the bear flag broke out to the upside, volume will confirm that for you., then it continued down as expected, again volume will confirm that for you. To be sure you drew the trendlines, correctly, watch volume at break out points and at the arrow there was a brief retest of resistance confirming the trendline's proper placement.

Bear Flag-game time?

I hope you can see this a/\.m.'s bearflag. As traditional T.A. takes it, a decline of the magnitude we saw this am, needs to correct, thus the flag, the flag pole is the decline (it looks like an upside down flag-pole and flag). This is conventional T.A.'s century long understanding of the pattern, so most bulls are not happy to see it, we know that the failure rate for technical patterns, at least temporarily is probably higher then 75%, so a false breakout to the upside to run stops is highly likely. If we don't see that, it would be a very bearish development as Wall Street will have shifted their tactics to confirm bull's fears. However, I wouldn't read too much into a false b/o as it's really a market maker thing to make extra money.

It's too early to use short 3C with that straight fall down and now a consolidation, it needs to compare relative points so far back and with a straight decline down, it's hard to do that.

The SPY

As noted last night, the triangle in the SPY with the start of a breakout drew in pretty heavy volume on the SPY in afterhours last night, really there seems to be no catalyst for the move down, this mornings report just basically took the fear of deflation off the table, it wasn't high enough to cause inflation concerns, so it certainly wasn't behind this move, so I leave the reasoning up to you.

The white arrow is our new resistance area. You can see the volume pickup as the bullish triangle is broken-again something we see multiple times a day, conventional technical analysis fail the user.

Rise In the Dollar?

5 min 3C

15 min 3C

60 min 30C

We've been seeing daily 1-5 min accumulation in the dollar, now we have some substantially longer timeframes that are in leading upside divergences.

A strengthening dollar will likely halt anymore BOJ interventions for the time, this should have a negative impact on Gold, oil and the market as well as other commodities. I've seen this as a pullback in the dollar with an uptrend to resume, who long this time? I don't know if it's as long as the December 2009 rally but there should be a month or two of higher prices ahed I would think.

3C Quick Start

Many of the charts you see here at WOWS are my proprietary indicator 3C which reveals underlying institutional money movements and often contradicts price. To understand the annotations made on charts, you must first understand that 3C has no numerical value, it is a pure divergence indicator. Positive divergences represent accumulation by smart money, negative divergences represent distribution by smart money and when 3C trades with price, that is trend confirmation.

The chart annotation system is simple; white arrows represent relative positive divergences, red arrows represent relative negative divergences and green arrows represent trend confirmation. When 3C is in a white or red box, that represents a leading positive or negative divergence, leading divergences are the most powerful.

We analyse 3C in multiple timeframes, the longer the timeframe the stronger the accumulation. 1-2 min timeframes represent intraday moves, a 5 min timeframe can represent a day or two and 15 min timeframes average trends of a swing trade nature. 30 and 60 min charts can move the market for a month or more and daily charts can be over a year.

You'll get use to seeing the charts and understanding how the multiple timeframe analysis works and works well.

Welcome to Wolf on Wall Street.

The trades featured here are meant to maximize returns with the least risk and highest probabilities. Unless otherwise mentioned, all trades are meant to be executed at market. I prefer long-term trending trades which perform well in rising markets, but really stand out in declining markets. However, we get occasional one day gifts 30,40,60% 1-day gains. I'd urge you to consider taking some or all off the table in such cases, the markets don't give gifts like that often or for very long. Most of the returns that make the system outperform so well come in short-entry trades. If you are opposed to short trades, this is not the system for you, unless you are ok with buying an inverse ETF. If you would like more information about the truth about shorting stocks, just email me.

Risk management. I recommend a specific and consistent risk management approach to all positions. In most cases we try for 2% risk money (2% of portfolio) unless such a position size exceeds 15-20% of overall portfolio in actual position size. Each trader is different and each has a different allowance of open trades. I like to keep the overall money in the trade around 10-15% of portfolio per position in case of gaps against you. Stops are generally executed at the end of day and I personally never place a stop order, all my stops are mental; remember, the middle man gets to see everyone's cards. When you are not in tune with the market or opportunities just aren't that spectacular, I take my risk per position down to 1% or even half a percent of portfolio value.

Each trader is different and must determine their own level of comfort with risk. I do have a channel stop which I provide to TeleChart/StockFinder users for automated stops, I appreciate you using my links to sign up if you do. The Trend Channel catches trends and works well as it automatically adjusts for each stock's volatility. Arbitrary exits based on nervousness about the markets WILL decrease the portfolio performance dramatically. This system will not ever get you in at market bottoms or tops. The recent 1 year performance against the Russell 2k buy and hold had the system beating it by 3:1. Ultimately it is up to you as to how you proceed, but I'm always available to help you determine what might work best for you.

I do use other scans and systems when market conditions warrant their use and may change strategy with market conditions.

The MOST IMPORTANT tool you have to bring you long term success is RISK MANAGEMENT. There are plenty of articles linked at Trade-Guild.net on Risk Management. We can be wrong 75% of the time and still outperform the market with solid, consistent risk management.

Position Sizing

The position sizes noted in the positions @ 2% risk of portfolio are based on a $20,000 portfolio-adjust as needed. Due to tight stops, there is the possibility, even probability that one position could take up the entire portfolio. You need to decide how many positions you want to trade and reduce the position size according to that. For instance, if you want to trade 5 positions in a $20,000 portfolio, no one position should be valued at more than $4,000-not risk money or 2% rule, but share price entry x shares.