Monday, March 5, 2012

WMT Trade Idea Follow Up

WMT was a trade idea (short) from last Friday, it is doing what I hoped it would do and even if you are not interested in the trade, there's some things to be learned that can be applied elsewhere.

Obviously WMT has a low Beta of .45, meaning if the S&P moves 1%, WMT is expected to move .45% over a 5 year average. For this reason, I prefer an options trade to get extra leverage on WMT, but remember the key word is "trade" not a hold until expiration.

Here's the link to Friday's idea

And here's what I said that is key to the trade...

"WMT broke clean from a solid uptrend on heavy volume and has since formed a bear flag. The obvious trade is a cross down below the bear flag, however as we have seen over and over, obvious patterns like this often get shaken out on a head fake move first. Be on the look out for a move above the top trendline of the flag, it may be a high probability/ low risk entry. Otherwise you can wait for a cross below the bear flag. A head fake move could all happen in one day so I would set some alerts fro a cross above and another alert for a cross below. If you don't have an alert system that is real time, email me."

 Here's the bear flag which created a break away gap, this gap is VERY bearish and I seriously doubt it gets filled. Today WMT is doing exactly what I said on Friday which is the exact opposite of what Technical Analysis books will teach you. Shorts already would have piled into WMT on the bear flag expecting a break down, this is such an obvious pattern and such a classic, the fact it is being shaken our now is no surprise at all. It is still bearish and this works to our advantage, but first they are going to knock the short out and take their positions.

 The 30 min chart shows the distribution and break down of WMT, it is ugly and in trouble. The Green box shows WMT is just in line, it is not seeing bullish accumulation on a 30 min chart.


 The 5 min chart showed some accumulation (this would be much smaller then on a 30 min chart, it started the bear flag bounce, but we are already seeing smart money sell in to the breakout as shorts cover (this could also be short selling).


 As usual, the shorter charts show more detail, the 2 min is showing a lot of distribution on the breakout move so as retail shorts cover on what they believe is a blown bar flag (TA even teaches them to go long on a failed patter), smart money is taking the other side of the trade and using the retail covering (buying) to sell short in to.

 Look how bad the 1 min chart is, it's moving in the opposite direction so you know this is a head fake breakout from the bear flag.

We can either watch 3C on any further price gains and look for a spot to enter above the bear flag, or you can wait for a break back below the bear flag's resistance upper trendline or even below the lower flag support trendline. In this situation, if your account permits it, I would prefer a phased in entry, maybe 25% to 1/3r above the bear flag upon seeing a likely market reversal, maybe another 25% below the upper flag trend line and the remaining 50% or remaining 1.3 on the break below the lower trendline. We want to add as the trade works in our favor.

This is exactly what I was hoping to see, this gives us an excellent, high probability trade with lower risk and the head fake will likely add fuel to the downside move.

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