Understanding 3C Part 2

As promised, I'm going to keep adding to this library on 3C until it is a useful guide. You should know that this is a very hard indicator to master for a few reasons. It took me about 3 years to get the basis of what I had on my hands, it is no where near as simple as most indicators that give signals at certain levels or crossovers.

One of the most challenging difficulties in understanding 3C is understanding that it is showing you the underlying action of smart money, which often contradicts price and contradicts most of what we have been taught about the market. There are thousands of technical analysis books basically regurgitating the same thing with a new spin, but the market cannot be summed up in a book and those who truly understood it would never tell you. Why do you think it's so hard to find a book written by a Goldman Sachs trader or someone who is really in the know?

So for a few years I thought 3 was good at the daily timeframes, but was missing on the intraday, it wasn't, it was a contradiction between the reality of the market and my understanding of how the market works. I had to unlearn everything  thought I knew about market function and let experience show me.

The second difficulty in understanding 3C is understanding that each timeframe represents something different, and depending where you are in a cycle, the behavior of 3C will be different.

For example, when someone asks what the market trend is, what is the proper answer to that question? This is akin to a trick question because the market can have many trends in effect all at the same time, it depends on the timeframe you are looking at and the amount of history.

Lets answer the question, "What is the market trend?"

 On a monthly chart, the trend is UP

 Even on a weekly chart the trend is UP

 On a daily chart, the trend went from a top to a downtrend.

 On an hourly chart, the trend is UP

 On a 30 min chart, the trend could be up or down, depending on how much history we looked at, here the trend is down with lower highs and lower lows.

The 5 min chart shows the trend as up.

So just as the market can have multiple trends all at the same time, 3C can pick up multiple trends at the same time, that is because while Wall Street may be in a current cycle uptrend over the last week, their purpose of doing so is to get rid of more shares or to go short, so the positive divergence we see that started this uptrend, may not be the only trend 3C is showing, it could be showing Wall Street's larger motive of getting short as well. Each timeframe tells us something different.

The charts I usually deal with, multi-day, daily, hourly, 30 min., 15 min, 10 min, 5 min, 2 min, 1 min and sometimes tick by tick.

The multi day trend shows the broadest picture of the market and while our monthly chart above showed an uptrend, 3C would contradict that be showing the very negative underlying character. The daily chart can also show primary trend's underlying action. The hourly chart (don't be fooled by it's seemingly short timeframe) can show us underlying action that can influence a month long move or more. The 30 min chart is similar. It also depends on how long the divergence took to form; the longer the divergence, the longer the resulting trend that results from it generally speaking. The 15 minute chart is a good timeframe for market swings or a week to several weeks. The 10 min chart can reflect a trend of about a week. The 5 min chart reflects trends of a few days and the 1 min chart usually calls intraday moves up and down.

However, remember, I also said the function of each timeframe depends on where we are within a trend. Starting from a brand new trend, lets assume the market will soon transition from a downtrend to a new up trend. The first chart that will show a positive divergence will be the 1 min chart. When this happens, the 1 min chart may be useless in calling intraday moves as it keeps moving up in what I call a "Running Divergence". If the accumulation is strong enough, then the 5 min chart will start to show positive divergences. If accumulation continues, the 10 min chart will turn positive, at this point the 1 min chart may go back to calling intraday trends up and down as it has passe along the accumulation to longer and more important timeframestimeframes, 5, 10 and 15 minute.

Market Cycle Stage 4 "Decline"

Wall Street lets no move go to waste and the end of their successful uptrend is not the end of the game, with no more institutional support for the market, it will drop. At some point distribution is over, but the negative divergence will continue as they continue to sell, but now they are selling short. Again, one of our best timing indicators id the head fake that adds extra energy to the next trend, this time down, so they'll typically run some sort of bull trap. Another good timing signal if you are paying close attention will be multiple timeframes all showing the same signal.

One last area to over before  wrap this chapter up, types of divergences.

There are two types of divergences, relative divergences and leading divergences. Leading divergences are the strongest type of divergence. I'll show you some examples.

 Above is a 30 min chart of the SPY. This is a relative divergence, we are comparing 2 relative points, point A and point B. Note that price is higher at point B (you can see by the red trendline.), but even if it were the exact same level, 3C s lower at point B then point A, this is a negative relative divergence.

 This is back in July of 2011 at the market top. The white arrow is accumulation and a relative divergence. The red arrow marks a relative divergence, but what is more important is what is in the red box, this is a negative leading divergence. Note how it is going in the complete opposite direction of price and it is making lows that when compared to 3C at similar levels in the past, price was much lower. The next chart will show you what happened after this 15 minute negative leading divergence (leading because it is leading price).

The late July/early August decline. The red box is the area we looked at in the chart above where 3C was leading negative. This shows an enormous amount of distribution which at this point, was most likely institutional short selling.

That's t for today, I will continue these posts and link them for you to go over. Email me with any questions.

RIMM UPDATE

Yesterday RIMM was under consideration as an earnings play trade, a lot of people are trading RIMM so I decided to just update RIMM. I do have a mid size position in RIMM that I think I will hold, but I would not generally place RIMM out for all members as an earnings trade because of one chart today. So the bottom line, those of you thinking about it, here are the charts.

 RIMM 1 min shows improvement

 5 min shows improvement

 10 min remains in line

 The 15 min chart was very positive, today it is just in line-this is what I don't like.

The 30 min chart looks positive.

I am thinking that with the market being ready to reverse, if RIMM reacts well, it may be short lived.

Trade Idea DGP (long)

GLD has been showing improvement and a few things are standing out. Again this is probably a bit early so I am easing in to these positions a little at a time as I suspect the base could be larger then it is now.

 GLD 5 min has improved significantly today

 So has the 15 min chart, which is more important.

 DGP 10 min is coming along moving toward a leading positive divergence.

 And DGP 15 min is already there.

 The head fake we see so often before a reversal, appears to have happened today, taking out support.

Here's the intraday view.

So I like DGP as a way to play gold long. I'm still leaving room to add on any weakness.

Trade Idea SCO (Long)

SCO is an Ultrashort on Crude. It is probably a bit early to be buying, but I don't mind getting my toes wet and picking up a little in this area, I can always add to the position.

 SCO 5 min accumulation. There's a chance that the base grows in which case you can probably pick up some shares a bit cheaper, but like I said, I'm just getting my toes wet, not putting on a huge position, although I am leaving room in my risk management to add to the position.

 The 10 min chart looks good, in a positive leading divergence and note the flat trading range.

The 15 min chart probably has even more room to improve, but as it stands, it to has entered a positive leading divergence.

USO/Energy Update

USO and Energy are correlated, but Energy is a much broader Industry group with services and other non-crude components, so they trade a little bit differently.

USO

 USO 1 min showing today's action from the negative divergence on the open sending it lower, to a positive divergence recently. This is short term, intraday action.

 USO 5 min chart shows the last cycle down, accumulation for this cycle up and a pretty strong negative divergence in place now.

 USO 10 min is also in a leading negative position.

 Here are two cycles, note the 15 min chart is much more negative on this cycle top.
The way USO looks now, it may be one of my first short positions I enter. The Euro/$USD is what the trade is all about at this point.

EUR/USD

 In red, this is the  resistance zone I expected to fail last week. Since the Euro has moved higher, pushing the dollar lower and allowing a positive environment for equities. When this reverses, so should USO and the broad market.

Here's a 1 min hart of the same FX pair, right now there is a consolidation, when this breaks, I'll be looking to short USO/Crude as a higher dollar will bring oil prices down being they are traded in dollars across the world.

XLE-Energy 

 This is the broad Energy Industry Group, the 1 min chart hasn't been very strong today.

 There's a relative negative divergence on the 5 min chart as well.

 This shows the last cycle's top, the accumulation for the move up in white and current negative divergences.

This 15 min hart shows a broader history going back to August with accumulation in white and distribution n red. One notable feature of XLE, when it falls, it gaps down most of the time.While I feel USO is a stronger short, I also want to have exposure to Energy on the short side for that initial gap down that is likely to occur.

Market Update...

 DIA 1 min shows this morning's negative opening, accumulation sending the market higher and confirmation of that trend thus far.

 The 5 min chart shows our original accumulation on 9/12 and now we are seeing pretty good distribution of the Wall Street accumulated position from 9/12

 The 10 min hart shows the last cycle down and currently this cycle has more distribution, making me think they have already started to sell short and this will be a bigger plunge then what we have seen the last month or so.

 Some previous cycles on the 15 min DIA chart and the current 15 min negative divergence. I think we are in a zone where you can start moving your portfolio towards flat/cash.

 QQQ 1 min has fallen out with the price trend and is leading negative.

 The last cycle top, accumulation on 9/12 and what looks to be in line trade.

 However the 10 min chart is also leading negative.

 The 15 min chart looks really bad, especially compared to the last move down on 9/8

 SPY shows this mornings action on the 1 min chat, which is basically in line, but there is a relative negative divergence vs 3 p.m. yesterday.

 The 5 min chart showing the last cycle top, accumulation for this leg up and is in line.

 Accumulation on 9/12 on the 10 min chart and in line trade.

The 15 min chart is just starting to fall out.

I'm going to start cleaning up my portfolio and moving to cash, I'll probably leave S&P longs in place for a bit longer as well as financials, but Dow and NASDAQ (tech, small caps and large caps) I will probably start moving out of on this strength.

Silver/SLV Update

It's been awhile since we have seen decent signals in SLV, I don't know if it has been fear of margin hikes, problems concerning the physical holdings of the ETFs or what, but we are starting to see some signals come through now.

 SLV 1 min positive divergence. Note the tell-tale flat trading range we often see accumulation at.

  SLV 5 min positive divergence

And a slight SLV 10 min positive divergence

The 15 min hart is in line. The 5 and 10 min charts will have to show more underlying 3C strength before the 15 min hart moves in to positive territory.

I'll keep an eye on this, we may have our first silver trade in awhile.

Taking 25% off the table in financials, will leave 25%

This effectively leaves my entire portfolio positions at 25% of what they were, I intend to most likely close out the rest today, but I'm so far in to a profit at this point, the trade is guaranteed a winner.

GLD Update

As you know, there has been some break in the GLD/Market correlation, but largely it is working more then it is not. So a drop in the market as we are expecting for the next leg, would likely send GLD higher as a flight to safety trade. So far GLD is showing some encouraging sings. I plan on closing my Gold Shorts.

 GLD 2 min accumulation

 GLD 5 min accumulation

 GLD 15 min accumulation

 Some 30 min history and some current accumulation.

The 60 min chart is still in line with prices and takes some time to move as well as a lot of accumulation.

Again the question is, "How big is this next leg going to be?" Remember, they accumulate into weakness and flat or range bound markets. I'm not sure I would start adding gold longs here quite yet, unless you can do it in pieces and allow room to accumulate more on weakness.