BIDU- Example of Trading with the probabilities, timing and 3C signals

I think we've had enough trades that had no common technical indicators supporting them, did not have price supporting them and in FB's case, were at the time some of the most hated stocks in the market, yet we were able to find something that the crowd missed to make huge percentage gains, often in a short period of time.

I don't know who said it, but it's a common trading maxim, "You have to see what the crowd missed to make money in the market". Another one of my favorites is from Jesse Livermore, considered by many to be the world's greatest stock trader and without a doubt, ground-breaking in his day for his use of technical analysis via tape reading. In essence Jesse said, it wasn't his being right about the market that made him money, a lot of people were right and lost money, it was his ability to sit that made him money. More or less Jesse is talking about not only having good analysis, but having the courage of your conviction to stick with it. As a society we want instant gratification, we rarely have the patience to see a good trade through because we think in terms of hours and days instead of weeks and months or even years; we expect the market to make a huge move in days, but look at a price chart, you'll see that most of the time, the market doesn't do anything.

This trend in the SPY only saw 19 days of  59 that added to the move up, some days only added a fraction (+0.10%). On average, for the days that moved, that's less than 1% a day for those 19 days, so as you can see, an edge and timing a well as patience are key.

Basically any analysis that is based on price and/or volume can be considered technical, while analysis based on value vs price, company dynamics, etc can be considered fundamental analysis.

In my opinion fundamental analysis is fundamentally flawed as you will never have the best, most timely information and you are not likely to be superior in your understanding of how these influence price compared to the multi-billions of dollars spent by institutional money world-wide, but more than anything it comes back to the reliability and timeliness of the data. Can you find something the crowd and Wall Street missed that gives you a significant edge?

Technical Analysis is not my favorite either, at least not the conventional type as it is so outdated, so predictable that Wall Street actually uses it to trade against technical traders. However if you understand (by way of observation) how these pieces work together and you think for yourself, you can beat the crowd, you can even beat Wall Street as you do have some advantages they don't. I have found that patience is a key attribute for successful trading, we all want to see something happen, we sometimes want to make something happen, but being patient and only trading when you perceive the probabilities to be highly in your favor will give you good positioning, it may not be the very best, but often way better than what anyone else is getting and often even better than Wall Street's average price.

One of my favorite stocks this year we have traded very successfully has been BIDU because there are different types of trading strategies and long/short trades, I'll use BIDU as an example of what has REALLY worked.

If you put yourself in the moment of each one of these trades, if you look at how many days are involved, how you would feel emotionally, what the edge and set up were, if you really put yourself in the moment I promise you will gain a new understanding of the market and what is realistic, what is not. I caution you though, when you look at say a daily chart and see 3 weeks of price going no where, it looks like a VERY small, insignificant period on the chart, but if you are in the moment emotionally when looking at a historical chart and think about each one of those long days , your perspective will be very different and that is were you will find the true usefulness of this post and how to best put the odds in your favor and capture large gains. Putting yourself in the moment of a historical chart is the most beneficial thing you can do, it's also the hardest thing to do and almost impossible to teach as I spent nearly 4 years trying to get students to historical charts emotionally, not with indicators and moving averages.

Here's a weekly chart of BIDU...

 When price moves up in a healthy rally, volume should move up as well, it may not look like much, but from 2005-2007, that small move in BIDU with advancing volume gained 700% (green). Going in to the 2007-2008 top BIDU fell, the capitulation moment at 2009 was a nearly 50% drop, on the chart it looks like a small pullback, but imagine a 50% move (yellow). Large triangles are often tops or bottoms, depending on the preceding trend, here in BIDU we saw it as a top and looked for opportunities to short BIDU, the red vertical arrow is about where we went short with the core short at approx. $150, giving the core short that is still open over a 20% gain even with the recent counter trend rally up.

Chasing stocks in this market doesn't work, it kills. Stalking stocks and entering shorts in to price strength and longs in to price weakness works, it lowers risk and gives you a better entry. How can we stalk a position?

We have tools that no one else has, we can see things no one else can see, therefore we can plan ahead and wait for the trade to come to us, if it doesn't there's another bus just around the corner. Knowing BIDU had a large triangle, it was more likely to be a real price pattern and not a manipulated one, we just needed confirmation. Although we worked in many timeframes, this is just 1.

 There were two triangles, a large top and one following that, we went short at the red arrow after having built a position in this area. While that looks like a small period of time, that was 19 days, almost 4 trading weeks, but the signals were strong, we didn't abandon the trade, we built it. As Jesse Livermore says, it wasn't being right, it was being patient.

Keep in mind, this was a breakout move from a large triangle, most traders were going long BIDU on the breakout, but that is exactly what Wall Street needed to sell in to strength and demand.

 The daily chart of BIDU shows 2009 accumulation after a -50% capitulation move, that would not be an easy area to buy, but 3C clearly shows it was the right area to buy, just as it showed the triangle top was in to massive distribution, the probabilities were to the short side as we built long term core short positions, but we didn't need to wait a year.

 The yellow area is the smaller triangle after the large top triangle, the 4 hour chart clearly shows distribution in to the breakout move, while other traders only had price and standard indicators to follow, we saw what was under the surface in BIDU. If you have been watching market behavior then you know 80+% of all reversals start with a head fake move like this move in BIDU to multi-month new highs, emotionally that is not an easy area to short, but 3C was with us, market behavior was with us, broad market analysis was with us.

Going in to the July lows we had a positive divergence, this also wasn't an easy area to buy at new multi-month lows, but it was the right area for the same reasons as the short trade before it. Now we have a negative divergence on the counter trend rally from the July lows, we already made over 100% in 4 days with puts on this trade.

 Here we see a daily chart, where we first shorted BIDU and continue to hold. At the July bottom we had a bearish chart pattern suggesting lower lows, this was a head fake move that 3C confirmed and many of us bought BIDU for a long, counter trend rally trade around the yellow box. The orange arrow is the exact day we bought puts in BIDU on a breakout above resistance, we made over 100% in 4 days and closed the trade because we suspected a bounce in which we can short in to strength, we were right to close the trade when we did, we opened and closed the trade on the exact right day in both cases.

 This 30 min 3C chart shows the bearish price pattern area in yellow, it even broke down on a head fake move and 3C showed a positive divergence at that point, this would not be an easy area to buy psychologically, but it was the best area to buy. After that 3C confirmed the upturned, also confirming our suspicions this was more than a bounce, it was a counter trend rally, then distribution started. We now knew the next trade was near, we just had to be patient and wait for it; it was worth it with a 100+% 4 day return.

 Here's a closer look at the area distribution of the large institutional position had started, but a head fake breakout is always a good timing indication, I personally bought puts on the day of the breakout for a great price. 3C makes deeper lows in to that breakout, it's obvious buyer's demand is being used by smart money to sell/short in to. The hourly chart right now is leading negative, this tells us the probabilities are to trade BIDU short, but we need a timing signal to enter the trade, that's what I'm waiting for with BIDU now while I maintain the core short position which I also added to on this price strength.

 Here again is the bearish price pattern at the July low to the left and the break below it, BIDU lost 15% is 4 days, the puts made much more, some members made 250%. The support area at the gap was one indication that the short term trade was over, 3C was another, the rejection of lower prices on Thursday was another. To illustrate the difference between Fear and Greed, the two emotions that move the market, it took 18 days for BIDU to move up, BIDU erased those exact gains in 4 days, fear is stronger than greed, however, the head fake move also plays a large part in kick-starting a reversal, the bulls trapped at a loss sell and price falls faster.

 The short term 3 minute chart gave us warning BIDU was about to turn, part of the trade was closed Wednesday for 102% gain, the other half was closed the next day for nearly the same gain.

This chart is still telling us the probabilities are high that BIDU bounces, this is what we want, we just have to be patient and wait for the bounce so we can start a new position short position. If BIDU moves lower from here the core short will benefit and we will have missed the short term trade, but we did the right thing in waiting for the trade to come to us. I'm sure many others are short BIDU right now because they waited for price to move down, they will likely be stopped out on a bounce higher, WE DON'T CHASE TRADES, WE LET THEM COME TO US.

 This is a 30 min chart of the BIDU head fake lows, confirmation and the downside reversal in to a breakout above resistance. Again, put yourself in the moment, it is not easy to short a breakout, but we have information others do not, we understand market behavior in ways others are trapped by.

 Looking at more time fames, the hourly chart clearly tells us which way the probabilities are, patience.

 The 2 min chart shows BIDU is likely to make some higher prices, we want to see that and this chart go negative as those higher prices are made, maybe even some sort of head fake move.

 The 3 min chart is more important than the 2 min, it is not as strong, but still suggests higher prices. The fact this chart is not as strong also tells us something about the character of the bounce, it should be a bounce, not a strong new counter trend rally.

 At 5 minutes, BIDU barely shows any strength, confirming what I just said about the 3 min chart and the strength of the move up.

We have had 4 major trades in BIDU, all profitable, but each with their own character and challenges, each required doing something that is emotionally hard to do and that is to ignore price and short breakouts and buy new lows.

If you can look at each of the trades and put yourself in the moment of buying a new breakdown low or a new breakout high, put yourself in the moment of sitting in a short for several weeks and even adding to it while price was flat, hopefully you'll gain new insights in to how the market works or how deceptive price can be, you'll also learn that 1 day is a VERY short period of time, although when we experience that day it seems to be very long and important. You'll also see that most days the market does very little, it's only a few key days in which the biggest gains are made. 

Each of you trades a little different, each of you are unique, take these examples and see how you can apply them to your trading, risk management and understanding of the market.

AAPL Under the Surface

This is pretty extraordinary, I know we have some lift in AAPL today, we have a flat range, but this is more the stuff I'd expect on a move above the intraday triangle, it makes me wonder if there will be one, there should be one as far as market behavior goes and I probably won't add the second half of Friday's put unless we get that move, otherwise I'll likely just leave what's already there in place. The idea is if I'm going to add more, I want a reason for doing it, I want better positioning, less risk, etc. I may change my mind and I'd of course let you know if the probabilities are so crazy here that they make up for those concessions and they are already close. This becomes more of a personal decision, what is worth what to you, what risk tolerances you have, what your portfolio looks like, where you have enough or too much coverage and where you are thin. I have good coverage in AAPL so my bar is higher to add more.

Price is a component and a very important one, but the market is no longer about discounting value, it's about perceptions and as Cramer said (and this is where Cramer really has some value as he was speaking off the cuff, unscripted and honestly which is why the video is so hard to find now), "Never do anything that is remotely close to the truth", he added that what they do with price is there to create a "New Fiction". I have been saying, "Price is misleading" for many years based on my experience, but Cramer really confirmed this from an operational standpoint.

As for what is going on with AAPL today-forget price, everyone is aware of that and it becomes the most useless piece of information at this point, it looks like the very things I described last week, broad de-leveraging, selling of assets to reduce long exposure, raising cash at the best levels to meet redemptions that will come in when price levels are significantly worse. Remember, only 11% of hedge funds are even equaling the SPX or beating it, that's a massive wave of redemptions and AAPL is the top holding.

 The 1 min chart has been negative all day, never confirmed, but is also pretty stationary so the ideas we talked about earlier today are still very much viable.

As we move to longer timeframes, the amount of institutional activity is represented by those longer timeframes. If the 1 min chart made a huge move down, but the 15 min chart was stationary, that would tell me there's likely some set up going on in AAPL, but the real institutional selling hadn't begun. A 15 min chart that really moves is telling me that institutional activity is heavy.

 The 2 min chart is hitting new lows, it's still relatively short, but it shows what is going on just beyond the shortest timefame and it's not good, this alone doesn't give us high probabilities, but lets keep looking.

 3 min chart nose-diving and making new leading negative lows today alone, this is making a stronger case.

 5 min chart, notice where exactly the 5 min chart changes character dramatically, right at the century mark of $600, a psychological level.

 The 15 min chart leading to a new low today alone.

 30 min chart with a lot of movement for 1 day, again the change in character in 3C i at another psychological level of $650, this is hard-wired human psychology, go to any store and see if the price tag has ".00" after the dollar amount or ".99", retail  sellers understood this a long time ago.

Even a 60 min chart hitting a new 1 day low?

Massive action right below the calm surface of AAPL.

FB Update

Still long FB and fine with it.

Ever since an initial quick long trade in FB that I warned would likely be short lived at the start of August, BECAUSE I thought FB was most likely going to create a base, we've been watching FB for signs that it is doing that. This short term 1 min chart shows us a positive divergence (accumulation) in to a pullback move.

 As does this chart with a leading positive and getting stronger recently instead of at lower prices, which would hint to me FB is closer to a breakout move up.

If you recall, at the time back in June, FB had one of the strongest 60 min positive/leading positive divergences that we could find anywhere, it led to a fantastic long trade (calls), now that same divergence to the left doesn't even look that impressive when compared to now, which shows a large 60 min positive divergence with price at lower levels and 3C at much higher levels. When we entered that early August long, I warned it would likely be short lived, there wasn't a base large enough to support much of a move, that has changed significantly a this base rivals the first time we went long in June.

Some Leading Indicators...

 As shown earlier, there's no risk appetite in commodities right now, USO/Oil bouncing to the gap may slightly change the complexion, but not much.

 Commodities as a risk asset are not at all thinking like the SPX as a risk asset, not that the SPX is up much.

 Yields continue to diverge negatively.

 And today... Equities almost always are pulled toward yields when they diverge.

 And the $AUD as a carry trade currency is an excellent leading indicator among the currencies and I think bolsters the argument I have made (mostly referencing AAPL) about hedge funds de-leveraging, de-risking or just plain old selling.

A closer look at Yields today, a month ago these were in lock step with the SPX.

As for more confirmation and timing of the move I suggested...

Treasuries as the flight to safety trade... 3 charts tell the story and I couldn't make this up, I'm just following the clues.

 As you know from Friday, the Wed/Thurs positive divergence already started falling apart by Friday, it had went negative on the 1, 2, 3, and even some 5 min timeframes which is where the positive divergence ran to, the 5 min chart, so once that 5 min is negative, we almost certainly have the next leg down, we've been heading that way, but remember VWAP and AAPL, 1 last move which would allow the 5 min to go negative across the board.

The 1 min TLT chart is negative, it moves opposite the market, so a pullback here would be in line with the move up in the market.

 However just as the market's longer term charts are very negative, TLT's 2 min chart is hugely positive, in yellow you can see the gap that would likely be filled. However a 2 min chart is hardly convincing, it just shows you how close we are.

a leading positive (new high) 30 and 60 min chart in TLT both suggest the flight to safety trade is complete, just waiting for the price trigger.

How about volatility, it also trades opposite the market so the market going down produces higher volatility.

 Again the 2 min trend is extremely positive, this isn't convincing about how strong the trend is or the accumulation, just how close.

For the strength of the accumulation, this 30 min chart leading positive to a new high (like TLT) with the market having many averages leading to new lows, is convincing.

Again, in my view, if I were a longer term trader who didn't have time to watch the market all day, I'd be fine shorting most anything out there that is a risk asset and just look at it in a month, for those looking to time trades for options, etc. this appears to be your chance, you should have price strength (better entry and less risk) and you have the underlying signals all lined up (high probability trades).

Market Update

Now is the time for me and all of us to really pay attention, that move we were looking for in AAPL's Bollinger bands is here, with a near perfect move in ES to VWAP exactly, this is kind of a fork in the road for the market, it needs to decide, I think I know which way it goes short term, "Pop" (up), but it's also where we want to watch VERY carefully what happens as that move starts, unless as I said before in the USO post, something goes very wrong here, which I don't think is high probability. This looks like it's been set up and it should run, it's also where we will likely find VERY high probability trades (shorts/Puts) at excellent entries with little risk.

I'll be watching and let you know as well as adding some charts for you to see how things have progressed.

 ES at VWAP

AAPL's Bollinger Band Squeeze.

USO Setting up ???

I do believe it is. I already started a full position equity short in USO, I think we may get a decently timed move to enter Puts if you like, it would also be an area in which a longer term short position in USO stock would be interesting.

Here's what we have from macro to micro...

 On a Swing Trade basis using the 60 min Trend Channel, USO is VERY close to breaking the channel and becoming (on this chart, but there's more to the story)  a swing short.

 This could be a little miniature Island top, but chances are greater the gaps get filled, if they don't something very bad has gone wrong in the market, if you may be looking at  Put position, that's your set up, as for a longer term trending short in equities without leverage, this is really close enough that I wouldn't be concerned about a little draw down on a gap fill, or as always phasing in to a position is another option.

 On a 5 day chart you can see where USO is running in to massive overhead supply or strong resistance. You can also see where it has its head fake top in place and I only mention this because it's such a regular feature of a reversal.

 This is the daily Trend Channel and the concept of Channel Busters, they seem bullish in the near term, but again, price is deceptive, they almost always lead to a pullback and reversals. We also have a confirmed Candlestick reversal in orange, a break below the red trendline will be very strong evidence against USO as the channel is based on USO's own trade and character.

 On a long term MoneyStream chart (The guy who created this is the Father of All money flow indicators), it is very clear how the end of Quantitative Easing changed the outlook for oil and the perception among money managers, with QE oil is a buy, without it, it becomes harder to justify the prices given the economy. With an election coming up, oil/gas prices will be front and center, you've already heard the Strategic Reserve Release stories by the sitting president. Money Stream is not great with short term signals, but great with trends. For example, 3C called the top of a 5+ year run in oil to the week in yellow, MS missed it as it unfolded quickly-again before an election, but the QE trend is clear.

 The 4 hour chart is pure trend, not detailed, not noisy. I think it speaks for itself.

 The 30 min is more detail, this also speaks for itself, you can see why I wanted a core short in oil I hope?

 And the 15 min is quite clear, that's a lot of confirmation on important timeframes. That sets up the trade direction, now it's just the type of trade and execution.

The 5 min chart, very negative, but a small relative positive divergence, this is along the lines of a gap fill move.

 The 1 min chart here tells us nothing, but the trend does...

 Slightly leading positive, good for a gap fill move perhaps.

 The 2 min chart seems to tell us intraday that a positive divergence is building, again good for a gap fill move, but the trend tells us more...

It is leading negative. So we have about 3 very weak positive divergences, along the lines of a gap fill move, this is would probably make sense for a Put position as we could enter it in to price strength, but underlying weakness, it could also be used to time a core short in the ETF itself.

However, I am partial (at least for a non-leveraged short) to phasing in as the market seems to be at a very transitory spot, just like I entered a partial position in AAPL Friday even though I thought probabilities were for more upside, I wanted to get my foot in the door just in case. With options I think timing is more important and if you miss the trade there's always another.

Finally just look at commodity and oil's recent relative performance...

 Commodities in general are in a total risk off mode while the SPX makes good on that positive divergence of last Wed/Thurs., a clear set up, not based on strength, but games.

Oil doesn't look much better.