Wolf on Wall Street: Monday, December 27, 2010

Monday, December 27, 2010

Nightly Wrap

Today's big news, today's only news was the Dallas Fed's Texas Manufacturing Index which came in quite below expectations of 17 at 12.8. The worst part was what was in the report, higher materials and labor cost with slower order demand. That was it for today. I suspect the gap we saw down was very similar to the overnight action on Monday in Europe where we saw flash crashes, today's drop in the NASDAQ this morning wasn't quite a flash crash, bu an over .80% drop in 15 minutes or so, came darn close. As I warned last night, the low volume this week will create volatility. I also warned early this morning not to overreact to flash crashes as they typically will recoup part or all of the drop. Computers are basically doing all the trading and in order for them to generate returns on the spread and volume rebates, they need to create volume, taking out the stops in the NASDAQ 100 this morning did exactly that, but as we saw through the rest of the day, the NASDAQ recouped a lot of its losses to end the day down .02%-a far cry from -.80%. The major averages today averaged a decline of -.04% another nothing day. Interestingly, the dominant price volume relationship was close up/volume down followed, not surprisingly by close down volume down. The second relationship tells us nothing, the first is the most BEARISH, yes bearish of the 4 possible combinations. It shows a reluctance of traders to chase prices higher. I'm not sure we can take a signal from it though as the averages were mixed. The Dow today was the weakest link, partly because there were 18 losers and partly because bellwethers like MCD were taken down and in MCD's case, in a very bad technical fashion.

As you can see by the daily 3C chart, MCD went into distribution as it formed a top. There was a false breakout and just look at the 3C reading on the false breakout (inside the red box)-horrible distribution. A false breakout usually leads to a quick move down, in this case it broke support, then retested it as resistance and failed. 3C is now in a negative leading divergence on MCD, the worst kind.

WMT's chart is also getting ugly, we talked about retailers weakness recently as well as grocers. KO is another chart that's starting to get ugly in the DOW as well as T which is forming a triple top-I doubt it breaks out.

DIS has a similar chart and negative divergence.

Financials held up the S&P today as AIG received $4.3 billion in credit lines. As I stated earlier today, I doubt that BAC breaks resistance at $13.40, guess what the high of the day was? $13.40 and closed at $13.27

Tomorrow is relatively light in the economic news, we have the Case Shiller Home Price Index, the Richmond Fed Survey and US Consumer Confidence. SRS could be a trade in the spotlight tomorrow.

Keep an eye on the KIRK trade highlighted today. The parabolic move up was met with negative 3C divergences. When KIRK breaks below the $13.90 support area, it's probable to see the bell-shaped return to the mean, translation, a parabolic move down.

JSDA did pretty well for us today, I was hoping for a stronger close, but +12% for a day isn't bad and may produce the follow through buying we saw in XOMA's 215% run last week.

I have preferred lately to feature the trades on the site with charts so you understand them better, but since we are seeing the cats and dogs take off and it won't last long, I've listed them on the trade list under the November/December trades. The ones that don't have stops do not because the stop will depend on the breakout. What you need to do is put these trades into an alert system so if they hit the limit order, you know and you can get in quickly. As for stops, the trades that do not include them will have to have the stops determined on the breakout, just email me.

All in all, the market is still showing significant distribution and the action the last several weeks has shown very little commitment on the part of the bulls-after all, it's been 3 trading weeks since we've seen even a 1% gain which isn't that impressive to start with.

As for longer term trades (the trades listed tonight are short term and SPECULATIVE), we'll see how the market develops.

Right now the Asian markets are trading modestly lower, it seems they are finally reacting to the Chinese rate hike over the holiday. The Dollar is trading lower, that's what seemed to spur the afternoon recovery, still the correlation isn't quite right between the dollar and the markets-low volume and HFT's being the majority of the trading can certainly be the reason.

I don't expect we'll see any real great trending opportunities until we get into the new year so set those alerts on the cats and dogs trades listed last night and tonight. 5 of 6 listed last night closed green today.

Negative Divergences

We now have negative divergences in the DIA, QQQQ and SPY as well as XLF (driving the S&P) and SMH (driving the NASDAQ).

What this means is that the gaps that have been filled or nearly filled in the Dow-30 (MCD is weighing heavy on the Dow) are seeing profit taking into the filling of the gap. This may be because the Chinese rate hike came as a surprise and left the locals with inventory at higher levels that they need to dispose of.

JSDA Moving in the Right Direction

JSDA has been featured several times. It falls in the "Cats and Dogs" area and as other C&D trades have shown recently, JSDA is taking off on a strong breakout. Today's gain is already 18% on heavy volume.

a nearly 20% 1 day gain is certainly a gift. Now it's trade management time. It's still looking good, t could be another XOMA. I prefer to phase out of these trades a little at a time and take profits, but allow room for further gains. If you are holding JSDA feel free to email me for updates.

As for last night's ideas, 5 of 6 are already in the green.

Remember the Warning About Flash Crashes.

The S&P and Q's are moving to fill the gap, the Dow is still a bit lagging. 3C is in confirmation on the 1 min charts right now, but still lagging or negatively divergent on every other timeframe. The only thing I see that is pushing the averages up is the fall in the dollar which started at the exact same time as the move in the averages.

JSDA Update

JSDA is another of the cats and dogs trades that have been featured recently, note the market is not doing well, but the cats and dogs are outperforming, this is a warning that the broader market is nearing a top in my experience or has reached a top.

Here's an update on JSDA.

This is a typical cats and dogs setup, a base with accumulation on the daily chart. The base has perfect volume as does the breakout attempt.

Here's the 1 min 3C showing the build up of short term accumulation right before the move up.

And the daily accumulation in 3C

A breakout out of the triangle is likely to produce follow through buying.

Bellwether Breaking Down-MCD

Dow Bellwether, MCD is breaking down badly.

The daily 3C chart above shows confirmation of the uptrend at the green arrow, then a negative divergence at the red arrow and especially at the false breakout. Right now 3C is in a leading negative divergence.

In the red square you can see the false breakout, in yellow the break of support and a test that failed.

This is a major component of the Dow and doesn't bode well for the market.

UPDATE

DIA

QQQQ

SPY

XLF

It looks like financials-XLF are seeing some selling, that should hurt the S&P (SPY) a bit. All the averages have seen a bit of distribution in this lateral consolidation. I'd say we'll see some downward pressure soon.

KIRK-POSSIBLE FALSE BREAKOUT

KIRK Daily testing resistance

KIRK 15 min with a parabolic move up, plus resistance. A failure below either trendline, especially the lower may offer a good position to go short as these parabolic moves, especially when they fail at resistance, tend to turn around pretty quickly. The Stop for me, would be at the December highs on a closing basis so the R:R isn't too bad either.

BAC Update

Financials have done well thus far this morning, that's why the S&P didn't drop like the NASDAQ. I talked about BAC Thursday last week.

1 min 3C chart

5 min 3C chart

15 min 3C chart

The 1 min chart shows a small bounce developing late Thursday, it's a bounce off support, but resistance s nearby and 3C hasn't confirmed the bounce. Watch for resistance near the $13.40 area, it may be a place to start phasing into a short position on BAC if you like the trade.

Watch Last Night's Ideas

The Cats and Dogs, a majority are at a gain already.

Keep an eye on CRIS as it's doing better then the broader market.

LOCM is already up 4.7% this morning, and up 4% if you were to buy on the open.

MNI is also up 2.3% and looking better then the broader market.

OPXT is up 1.16% if bought on the open

NASDAQ slight positive 1 min divergence

We have a 1 min positive divergence, it looks like the NAZ is going to try to recoup at least some of the early losses, or perhaps just bounce. We'll see how it develops.

THE NASDAQ LOOSES .80% IN THE FIRST 15 MINUTES OF TRADE

PRETTY CLOSE TO A FLASH CRASH. Remember, it's been 3 trading weeks since we've seen a 1% or greater move in the NASDAQ in either direction. This morning over .80 loss (were it to be considered on a closing basis) would be the biggest move we've seen in 3 trading weeks. Pretty much qualifies as a crash, nearly a flash crash. Be Careful today. Don't forget to look at the charts of the market posted last week, they weren't looking good.

Early Update

From Wolf on Wall Street's "The Week Ahead" last night,

"We are already seeing some pressure on commodities including oil. It will be difficult to judge the effects of the hike as this week should remain a very light volume market, which can also lead to a very volatile market."

We already saw flash crashes in europe and the open here in the US has been pretty brutal the first few minutes.

Remember, I do not believe we are in a technically sound, bullish environment, more like a very sick one. With the low volume it'll be easy for the HFT and other blackbox firms to throw the market around. In a flash crash, judging by history, the last thing you want to do is panic as they are usually taking out stops and the crash will generally recover part or most of the crash, after that I may consider taking action as they can be warnings of worse to come. THIS IS EXACTLY WHY I NEVER PLACE STOP ON THE BOOKS, BUT KEEP THEM MENTAL IN MY HEAD UNTIL EXECUTION.

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.