Wolf on Wall Street: Thursday, June 23, 2011

Thursday, June 23, 2011

Update on the Miners Trading System

Both systems are long NUGT as of tonight's close. NUGT actually showed substantial underlying improvement today and closed well off the open. I was hoping that the system wasn't going to call for an exit after looking at the NUGT chart.

The current stop-loss (on a closing basis) is at $27.41.

For risk management/position sizing purposes, the statistics show that the worst draw down on a bad trade is about 8% (not the average) so you can roughly use that figure to calculate risk in your position sizing.

SCON TRADE (LONG)

Ths is a C&D trade and speculative, but worth a look

Daily

60 min 3C

15 min 3C.

NUGT Update

NUGT showed substantial improvement today, and f you bought it on the open, you should now be in the green by nearly 2%

3C 5 min leading positive divergence

3C 10 min relative and leading positive divergence

and a relative positive divergence even on the 15 min chart for the day.

That's pretty impressive

This Was NOT Institutonal Accumulation

A huge move in prices intraday, huge volume. The 1 min chart showed a quick positive divergence so I'm sure market makers and specialists got the news a few mins before everyone else and stocked up quickly, but the overall disposition of 3C shows clearly this wasn't accumulation by institutional buyers, they're not chasers, they buy quietly. I'd imagine they'll want to bring prices down a bit to start accumulating, but the Greek news should be supportive overall.

Twas the News-and Where would you expect it from?

From Reuters:

Greece has won the consent of a team of EU-IMF inspectors for its new five-year austerity plan on Thursday after committing to an additional round of tax rises and spending cuts, sources with knowledge of the talks said.

"We have a deal," said one of the sources.

Another source close to the negotiations said that a few remaining technical details would be finalised on Friday.

Finance Minister Evangelos Venizelos announced on Thursday Greece's Socialist government would lower the minimum threshold for income tax to 8,000 euros a year, increase the tax on heating oil and impose a one-off solidarity levy on income of between 1 and 5 percent.

Interesting...

Either someone just set some algos loose or something broke in the news I haven't seen yet, this isn't normal market acton.

Maybe a forced short squeeze?

Gold Update

The same issues mentioned in the last silver post re: Dodd/Frank also apply to gold.

Gold looks similar to silver in its break down today. I usually don't trust the first break of support, but yesterday's false breakout gives it a bit more credibility in my view.

The daily chart/Triangle and the false breakout yesterday, leading to a break of support today

Here's the 15 min 3C chart. Clearly yesterday's move above resistance was a false/failed breakout, as such we typically see fast moves in the opposite direction as we have today. If you trade this short, I'd still be cautious as I don't usually trust the first break, but there could be at least a decent swing move and perhaps even more. 3C is currently in line with price action.

SLV update

I've had a dm view of the bigger price pattern in SLV and the Dodd/Frank bill banning retail traders from trading silver/gold and other assets in OTC markets means they'll be driven to trade in a less leveraged regulated market that is subject to the COMEX margin requirement-not exactly a bullish development for silver. In any case, SLV is breaking the larger pennant today, I don't usually trust the first move on a break of support, but if it's traded with a tight stop, it may be worthwhile on a speculative basis.

Here's yesterday's break of the bearish ascending wedge-target met today and the current move below the daily pennant.

Looking at the pattern on the daily chart, there could be a significant move down. I've covered this pattern numerous times, it's more or less a large bear pennant.

USO Update

USO has made some progress today, you can see yesterday's false breakout I warned about n two posts (at the red square). Right now there's a 5 min leading positive divergence in USO, however, accumulation rarely occurs in to higher prices, so I'd expect a pullback shortly. Overall, it's fairly good progress today.

And on a bizarre note, this was released by ZH. Remember, GS doesn't pay millions of dollars for research to give it away for free.

UNG Natural Gas Follow Up

I've talked recently about UNG, a poorly performing commodity, potentially turning this around.

Take a look at this 60 min chart which sent UNG lower in the last cycle.

The 60 min chart, cycle from accumulation (stage 1) to decline (stage 4)-a complete cycle.

Looking at UNG vs. the 50 day moving average, it's obviously turning and likely forming a base. When large positions are sent to specialists to be filled, there's an average target price, if UNG runs too high, they simply knock it back down and begin accumulating again.

Now take a look at the daily 3C chart.

Rarely do we see a divergence this big on a daily chart. It looks like someone is putting together one big position in Natural gas.

Market Update

Some of the big boys are showing pretty good relative strength

AAPL

INTC

PFE

As for the market, understand that Tuesday we hit resistance at the $129.75 area, that's when I started seeing some negative divergences develop and started talking about the need for the market to pullback, regroup and basically accumulate to make another run at the resistance level. Wednesday we had slightly higher, but marginal gains, 3C continued to fall apart suggesting as I said yesterday, we'll see a pullback which is not a bad thing so long as the underlying 3C action shows some accumulation in to the pullback.

Accumulation has to start somewhere and that is on the 1 min chart. As accumulation grows stronger, it will move to the 5 min, 10 min and 15 min charts. By the time accumulation is obvious on the 15 min chart, we should have enough fuel to launch a new test of resistance.

Here are the current market charts:

DIA 1 min showing some decent 1 min 3C positive and leading positive divergences.

DIA 5 min with both positive relative and leading divergences

The IWM hasn't shown much yet on short timeframes, but the hourly chart is encouraging that it hasn't taken a deeper dive.

QQQ-early morning divergences suggested the Q's would back and fill into the gap. Right now, the 1 min is in a leading positive divergence.

The hourly has also held up well.

SPY 1 min. relative and leading positive divergences.

SPY 15 min chart has held up pretty well thus far.

As for financials, FAS has been lateral in a price range, but 3C is in a leading positive divergence

There are similar signs on the 5 min chart

As well as the 10 min chart.

I suspect averages like the Q's will pullback a bit and hopefully we'll see some stronger divergences on the intraday pullback. Right now the positive divergences are rather slow in building. An event in the SPY like a brief break of the 200 day moving average around $121.20 could trigger a lot of stops and that could allow for a nice pop in accumulation, we'll have to see if something like that happens and watch t closely to make sure there is accumulation on such an event.

Quick Trade In Financials

We'll have to see about the pullback and whether t starts accumulating, but in the short term (intraday), it looks like financials will fill some of the gap and that may be a trade some of you may be interested, perhaps long FAS for an intraday trade?

XLF 1 min positive divergence

FAS (Financial bull 3X) positive divergence

FAZ (Financial bear 3x) negative divergence.

USO Update

Well USO dis what was expected. Right now though it looks as f it'll move in to the gap and fill a bit.

3C was negative, but didn't fully confirm the move down, I'd expect some backing and filling, as morning trade passes, we'll get a better picture of what's coming next, although there are, as I pointed out yesterday, some very bullish looking charts on the long end in USO.

The PMs

GLD and a false breakout of the triangle yesterday

3C did a good job calling the false breakout.

The next major hurdle, should gold stay below the triangle, will be to test support at the trend line around $140.00

SLV was noted the last several days as being in a wedge, which in this case is bearish, yesterday it began its break, today it has fulfilled the wedge's downside target.

The next hurdle on the downside will be a conclusive break of the pennant, which as I have shown before is part of a large bear pennant, similar to a bear flag in theory, but much larger. Here's the pennant and the break would occur below $34.00, this could send silver much lower.

Early Market Update

DIA 1 mn

QQQ 1 min

Both the above chart did not confirm on a 1 min 3C timeframe, suggesting they will most likely back and fill into this morning's gap.

Initial Claims

Missed consensus this morning by 14k at 429k with the previous being revised higher, not a good start for the day.

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.