Wolf on Wall Street: Thursday, September 30, 2010

Thursday, September 30, 2010

TRADES

Tonight I'm featuring MSPD, I've liked this short trade for a long time, but it threw a lot of people for a loop.

Above, MSPD was progressing well into a nice Head and Shoulders Top, it even broke down in early August sucking shorts into the trade. Then it fooled everyone by forming a bear flag which is a bearish continuation pattern, meaning it is expected to consolidate upwards and then breakdown hard again. Because the bear flag continued up through the neckline resistance that had been broken earlier in August, many shorts would have stayed in the trade, even though that resistance point should have not been crossed, but the bear flag kept them in the trade.

A closer look at the bear flag. Typically most consolidation patterns (this one is bearish) have 5 points of contact before they break in the anticipated direction. Each of the blue arrows represents a point of contact within the flag. The Blue box is the area in which the flag was expected to break down. This trade was heavily manipulated and it followed the market up and broke out to the upside, burning many shorts (white box). This gave market makers and smart money excellent positioning on an otherwise nearly flawless H&S top. As the flag progressed, weakness could be seen as the breakout turned out to be a false upside breakout and price shortly re-entered the bear flag. The 3 days up after that (small bodied candles) was very reminiscent of a bearish candlestick pattern called a "Falling 3 Methods". The breakdown below the bear flag on heavy volume is the confirmation of the false breakout and manipulated pattern. It now looks like a decent short set-up.

Above is a 15-min 3C chart inside the bear flag showing the false breakout in the white box. Note the negative divergence in 3C confirming there was short selling into the false breakout, not buying. The pink arrow now shows a leading negative divergence which is very bearish.

First we look at the stops. The red horizontal line would be my first choice. According to our risk management though, you'd have to take on fewer shares as the risk is greater. The second choice would be the white line. This is not a bad alternative either, just with the volatility in the markets I'd hate to lose a good trade due to volatility.

The entry could be at Market price at Market open. You could also wait for a new intraday lo below today's low to enter on a limit trade but do not place a limit trade with your broker, only place the trade when you are ready to execute. You don't want to show the market maker your hand. Or you could enter part of the position, maybe half at market or limit and add either on any bounce or on a breakdown through the neckline as that is your ultimate confirmation. You have less risk, but less profit as well.

Any way you look at it, this trade now looks ready for a big slide down. I thought it would be an excellent example of how the market works and how emotions -FEAR and HOPE work in this trade. Hope kept shorts in the bull flag even as it broke through the neckline resistance. Fear of the large breakout kept people from getting excellent positioning as price showed it to be a false breakout. For Longs Hope was brought into play on the breakout of the bear flag, Hope also probably kept many longs in the trade as it re-entered the bear flag, thinking this was a simple pullback. The volume today shows capitulation by longs.

NEW TRADES WILL BE UP MOMENTARILY

Some of these trades are ready to go, some require some patience. I highly suggest you put in alerts via whatever system you use. TeleChart tabbed at the top of the site has an excellent alert system, for price, news and more.

Ugly Close

As I pointed out earlier, the market saviors such as AAPL are going through a change of character as are the markets. Today we saw 3 key reversal days in the major 3 averages and on some of the biggest volume of the entire rally. Today was definitively bearish.

The DIA daily

The SPY Daily

The QQQQ Daily

Here's the AAPL 3C 15 minute chart, you can clearly see the change of character.

3C was making higher highs and higher lows with price in confirmation of the trend until 9/23, since then it has had a rapid shift in it's position of confirmation to the most powerful leading negative divergence on an important timeframe. Remember, AAPL acted as the Patron Saint of the market for quite some time. 9/23 corresponds to the first dip down we had on a 3C confirmation day in which all of the timeframes lined up negatively, this is usually the reversal point and rather rare to see.

Again, I can not stress enough how $115 on the SPY was in easy reach and today's economic data was not so horrible, the market could not or did not want to hold it. This is very strange in itself as this makes nearly a dozen times that $115 was in reach and the market failed, usually on increasing downside volume.

Whatever it is we are seeing, it now seems to be lining up with our expectations. The volume in the market today, considering past days, was quite impressive and makes you wonder, "where did it come from?" My guess is this was an attention getter.

You never know what lurks behind a move, but for what is obvious and what is seen, it looks like we are seeing the start of a reversal.

Market is churning

Churning is what we see near a top. It had a great opportunity today to hold onto $115 (SPY) and gave it up.

As you can see, today we have thus far a bearish engulfing candle on high volume. The gain in the last 14 days is pathetic. This is really not looking like a rally continuation, but rather a top.

Semis look to be breaking down

Again, the DIA LEADS

With a negative divergence....

Interestingly, the Q's lead the upside moves and the DIA leads the downside moves.

SPY and DIA

Seem to be trading together. While the Q's remain in a positive leading divergence, the current stance on both the SPY and DIA is still in negative territory and ripe for a negative divergence.

Q's

It's strange that banking seems to be leading the charge today, yet the Q's are leading the averages. The Q's failed to confirm the negative divergence and are now in a positive leading divergence.

You Heard It Here For Years

Here means here and at Trade-Guild. I've noted and shown charts several times that seemed to indicate smart money knew what the Fed was up to before the Fed released policy statements. Even Bernanke's congressional testimony was a day in which we caught smart money slipping out the back door before words to the effect of "uncertain economic outlook" slipped out of Bernake's lips.

Now we have THIS (click the link)

This partly explains why smart money's actions seems so at odds with the current sentiment and market conditions.

SPY !-min Confirming

The 3C 1min on the SPY is now confirming a soon to come reversal, the Q's are still not quite there.

MSPD Back on Track?

I've liked this trade for quite a while, we had several false breakouts, the bear flag downside continuation pattern and the break of the neckline in the H&S top, both seem to be resolving to the downside and I still love this trade, I never lost hope in it as a short.

Daily showing the H&S top, the bear flag and the break back into the bearflag. A move below the neckline will be strong confirmation.

The 15 min 3C chart

The negative divergence at the breakout is why I felt this was a false breakout.

DIA Telling Us Something?

The DIA is the first to put in a solid 1 min negative divergence. We'll see if the others follow and if this holds, but it looks pretty solid right now.

Changes of Character.

I switched to Chrome Browser and pics seem to be uploading. Here's AAPL and GLD

GLD

12 pm

is where the positive divergence completed, the price action since then has been based on that divergence. Right now it's in line with price, which is to be expected until the next divergence develops, it is not stronger then an average 1-min divergence at this point so it should be a leg or two and hopefully we'll see the negative form up. The fat $115 was given up so easily is strange.

Afternoon Update

It's looking more like a positive 1 min divergence, so we should see a move up, I'm not sure how significant with the 5 and 10 as negative as they are.

GLD

So far today GLD is taking a licking. It did something very commonly sen at the end of an uptrend and broke out for a day or so above the top of a fairly even channel. Then it plunged back into the ascending channel. It's now approaching the channel bottom around $126.50, the place I said several days ago I'd consider getting my toes wet in a short position if that is fulfilled on the close.

I'm still having trouble uploading the pictures except through 3rd parties and by the time I get those up, the data has changed, it takes long enough the easy way. I'll keep trying though and if anything really important comes up, I'll use a 3rd party like Flickr or Screencast. Any other ideas are appreciated. If you are on twitter and following me I can upload them to www.Chart.ly

The SPY/Market is still pretty much in gear to the downside except the one minute chart is not as enthusiastic about going down as fast as price, this may be the start of a 1 min positive divergence. The 5 and 10 are very enthusiastic.

Charts.

For now this is how I'll have to upload them.

spy 1

spy 5

spy 10

AM UPDATE

Sorry for the late update, I lost all my realtime feeds. I looked at 3C 1, 5, and 10 minute, they all look pretty negative. I'll try to get some charts up, I'm having trouble with that as well.

So far the price action down is inline with 3C.

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.