BIDU Continues to be a Model Position

BIDU is one of the Core shorts in the equity model portfolio. I remember right when we had made plans for how, when and where we would enter BIDU, we had a new member join us and he was long BIDU on its breakout from a large triangle, this was the same area we were expecting (a head fake move as the triangle was already showing a large negative divergence) and the same area we entered BIDU short. I think maybe he might have been a little surprised, but I believe I told him, "Just give it some time and you'll see why we are short BIDU", I believe he's still with us and if anyone ha been paying attention to BIDU, you can understand the method to our madness. Shorting BIDU at breakout highs is 180 degrees opposite what Technical Analysts would be doing and most would have a hard time following us on this trade, but BIDU is already at a 25% gain and as a short equity position, I just added to BIDU as being short a real equity rather than being long a bear ETF has some real advantages, such as, YOU CAN MAKE MORE THAN 100% IN A SHORT and my recent add to was following in that method of making more than 100% in a short (see linked article I wrote some years back at www.Trade-Guild.net).

BIDU made another move today, down 3.25%, while that's great for the core short, it's not what I was hoping for as I closed BIDU puts last week for more than 100% gain in days as it was clear BIDU was about to consolidate/bounce; had I held the BIDU puts through the consolidation it is likely they'd b worth less right now even though price is lower because of the time decay on options. I went from consistently losing money on options to fairly consistently making money with options by understanding that options are a Wall Street derivative product set up so the House eventually wins just like Vegas, but play by different rules, do what instinct tells you not to do and you can make good money with options. However if you play by their rules and you use options in a way that seems to make sense to you and you'll either have worthless options or options worth a lot less than they could have been. True to our motto, "Wall Street is full of sheep, be the wolf!", we do everything, including options a little different. Our trades don't make emotional sense, they aren't usually emotionally easy to enter and exit, but since when have emotions served us well in the market?

 To the left is our original entry in the $150 area, this is now at a 25% gain, the newer positions added at $134 give us about a 16% gain, but the profits from BIDU were used to add to the position which is a benefit of being short, you don't have to sell first like you have to with a long to put profits to work for you, ultimately making that 25% original gain on the original position worth even more.

Here's something to remember, there are two mechanisms that drive price, most people would say supply and demand, but this is much more fundamental, plus supply and demand don't take a 24 day uptrend and tear it apart in 7 days. The mechanisms that move the market are Fear and Greed and as you can see with the latest cycle up and down, FEAR IS STRONGER THAN GREED. Need more evidence? Look at the last true bull market in the SPX from 2002-2007 (5 years); from 10/9/2002 to 10/11/2007 the SPX gained about 100% in 5 years. From 10/9/2007 to 3/6/2009 the SPX took back the entire rally plus another 110 S&P points and that took 17 months vs 60 months and took back even more! 

So do you think that was driven by supply and demand or Fear? This is how you understand the market when looking at historical charts, not with moving averages and fancy indicators. I see people with so many indicators on a chart that I can't make heads or tails of it, but if you look back at historical charts and PUT YOURSELF IN THE MOMENT EMOTIONALLY, you will learn more about the market than 10 Technical Analysis books combined.

As for BIDU...

 Here's the daily 3C chart with 2009 accumulation and 2011-2012 distribution, BIDU HASN'T EVEN BROKEN THE TOP YET! From a simple price-pattern measured target implication, we get a target on BIDU of about $45 and in my experience, these measured moves usually are more extreme than you think, so from our opening position that's about a 70% gain, consider the profits used to add and the original invested amount will probably gain more than 100%/, if we keep pyramiding BIDU, who knows!

 The 60 min chart clearly suggests BIDU has already entered a primary downtrend and this last move up was nothing more than what we originally thought it would be, a counter-trend rally and it's on these rallies that we want o use BIDU profits to add to the position, try that with a long position!

 Again, we are seeing this EVERYWHERE, BIDU sees distribution once it breaks a resistance level, in this case June resistance and the psychological $125 level, the psychological $130 level which is also 2012 top former support and finally, a break above local resistance formed above the yellow trend line at another whole number-$132. My put position that made over 100% in 4 days was entered on 8/16 which was also the breakout day to new counter-trend rally highs. How many retail traders do you think would short a new breakout high on a move of 2.74% (3% intraday)? Emotionally it's not something we are programmed to be comfortable with, but that was the day to enter Puts as they were cheap, even though the next day closed 0.24% higher, Puts were cheaper on the bigger price move on the 16th. This also was the least risky entry available (inside the yellow box).

 The 5 min chart shows the same theme that we see over and over, slight accumulation to push the stock through resistance and distribution on that move higher as demand increased on the breakout.

I wanted to enter a new put position on price strength, we saw 2 days of bounce, but it wasn't enough for me to take the risk of 10x leverage so I waited. It looks like the 5 min chart is suggesting there's still another move up coming and hopefully we can use that.

 Even though we saw a 3.25% slide today, the 1 min chart is also positive in to that move.

 The 2 min chart is leading positive today as well.

 So is the 3 min chart.

With the 1, 2, 3, and 5 min charts all positive intraday on today's price weakness, I'm willing to wait for a move higher to enter a new put position, hopefully it will cross the $125 area, but if it doesn't I still have the core short. Either the Put trade comes to me or I look for a new one, but I'm not chasing price. Technical traders chase price on confirmed breakouts and breakdowns and with this market's volatility, they usually get knocked out of the position.

Using the Swing Trading "Clear Method", the recent low (at the red arrow) was not taken out today so today' move, as impressive as it was, is still considered a noise candle. Patience also does not come naturally to most traders, emotionally we want to make something happen, we want to make up for losing trades and often we want to make the money back in the stock we lost it is, even if it's not the best place to do it.

Patience, letting the trade come to you on your terms, deploying capital only when the probabilities are highly in your favor are all advantages YOU have over Wall Street. YOU DON'T HAVE TO BE IN THE MARKET EVERY DAY, YOU CNA PICK AND CHOOSE YOUR BATTLES,  that's your advantage over Wall Street, use it, make it work for you. We don't have many edges over Wall Street, but patience is one of them, USE IT!

USO SET UP A TRADE, NOW OFFERING A SCSO

SCSO="Second Chance Shorting Opportunity".

Lets take a look at USO, the VERY likely head fake move and how you can enter the trade at lower risk and higher probabilities.

USO was added to the equities model portfolio as a core short position at the price of $35.16 at a current loss of -0.64% on the position and approximately less than 1/10th of 1% portfolio risk, even though I almost never have time to figure out risk management in these positions, I do have several rules and have a rough idea from years of trading, approximately what position size is appropriate for risk management purposes which I try to stick to as a matter of habit.

So where was the trade in USO, where is the trade and what is the situation for USO.

First of all, most traders go about picking a trade in the absolute wrong order and look at the wrong things when picking a trade. I should not have entered a position in USO from a portfolio management perspective, but I'm not using the model portfolio to do anything but track trades and provide examples.  The reason why USO was not a good trade from a risk perspective is because I already have 2 Energy related trades in XOM short and IOC, while USO is a bit different, it's still in the same Industry group and 3 full size positions is too much correlation.

Now, what I like about USO:

Oil is usually very correlated to currencies, specifically the $USD which oil trades in $US dollar denomination the world over. Because the relationship tot he dollar is an inverse relationship, unless you are very good seeing divergences even in reverse, using the $USD is difficult for most people to spot correlation or FX legacy arbitrage correlations. Since the Euro (EUR/USD) by far has the most weight in the Dollar Index (50%), the Euro makes for an excellent $USD proxy that trades with oil so divergences are easier to see.

Example...

USO is green, the Euro (FXE) is red, note the negative divergences between the two that have led to a downside correction until the two reach  "reversion to the mean". The Euro is weaker than it should be considering the USO trend up since the June lows, meaning the $US Dollar is stronger than the price of USO reflects. When the dollar gains in value crude loses value due to the higher value of the dollar, when the dollar falls, the price of crude must rise to compensate for the reduced buying power of the dollar. We have a clear divergence. As shown earlier in the currencies post Euro weakness/$USD strength should continue making the value of USO rich compared to the FX (currency) legacy arbitrage correlation.

Furthermore the weakness in China is evident and has been for some time, this means demand for crude directly from China should be soft and that flows down the line.

A 2-day chart of the SPX (green) vs the Dow Jones/UBS Commodity Index, changes were visible in 2011, I mentioned the weakness in commodities generally and how I thought it reflected weakness in China, within two weeks of that post we had evidence of a softening Chinese manufacturing sector via PMI, both manufacturing and services. It only makes sense as the EU is China's #1 trade partner and the EU has financial problems. Further evidence can be found in the Baltic Dry Index-even though this is the price of dry shipping, it is evidence of the economies world wide.

Over the last 3 years the BDI has seen a decline of 80%, while the BDI is notoriously volatile, the trend and the 80% decline in 3 years is a clear sign of economic activity.

Further confirmation can be found in simple Dow Theory, Industrials vs. Transports; this is not only a sign of economic activity falling off which is not good for oil prices, but this also is confirmation of our bearish view of the market as this measure of Industrial (actually the Dow-30 is much broader than just Industrials now, but the same effect is still relevant).

The Dow 30 is in green while Transports (IYT) are in red. Clearly from the August 2011 low through the February 2012 area, there was good confirmation between the two, that fell off in March- May of 2012 where we were busy shorting the market and it has once again fallen off badly since the June 4th market bottom.

If you also pay attention to the weekly EIA petroleum report, than you'll know even though we've had a recent string of draws from reserves, the level of reserves are near the historic highs, which does not bode well for additional near term demand. In truth it has been fundamental surprise risk associated with Iran and Syria that has kept oil at a premium, however as we near elections, it is doubtful that starting any kind of military intervention with so many countries now involved and elections just around the corner, the chances of intervention have diminished as starting a war is not likely to benefit Obama at the polls.

Technical Indications...

The daily chart of USO looks a lot like a primary downtrend with a recent counter trend rally, I know BIDU has been a frequent example, but it is a similar trend situation. Volume dies off in to the counter trend move as well. The yellow vertical arrow appears to be the head fake high.

 The retracement of the downtrend is almost exactly 50%

 On the retracement there was a gap resistance area filled, from there we had a higher volume reversal candle that was already part of a bearish Engulfing reversal candle above the head fake level.

 If you like MACD Histograms, you can see both the positive divergence at the bottom and negative divergence at the top.

 On the 4 hour 3C chart the original top is called out as is the positive divergence at the bottom and the distribution at the head fake area, this is a VERY long timeframe and an important signal, there's little detail and mostly trend at the important areas.

 Even a daily MoneyStream chart calls out the first top (see relative price/MS levels at the yellow arrows) and the head fake negative divergence (see relative price/MS levels at the red arrows).

 The 60 min chart shows a positive and leading positive divergence at the end of June lows, then confirmation (green) and a large negative divergence at the head fake area.

 The 30 min chart is more detailed, I highlighted dates as well with accumulation/distribution signals, the August area is leading negative.

 The 15 min chart has even more detail showing a parabolic gap that was distributed (these are areas that offer excellent price levels to average out distribution), again a leading negative divergence around the head fake trend area.

 The 5 min trend shows a decent accumulation area at extreme lows fro the trend, a relative divergence as price crosses the head fake trend line and that turns in to a stronger leading negative divergence.

 The 3 min chart's trend shows more detail, especially interesting is the positive divergence right before the breakout to the head fake area and leading negative divergence or strong distribution once above that level. Like so many charts seen this week, the crossing of the head fake trendline shows very strong changes in the underlying accumulation/distribution.

 Again, more confirmation of what appears to be a set up to push USO through a particular price level and then sell the price strength above that level with another leading negative divergence.

 The 1 min trend doesn't show as much history, but the divergences are clear, no accumulation above the head fake trend line.

Here USO shows a small bullish close at the white arrow followed by what would be considered a confirmation/downside reversal candle, a bearish Engulfing candle at the orange arrow followed by a move below the head fake trend line.

 I'm already short USO equities as well as September $35 puts. I have a little room to add to puts, I would consider doing so around the $36 level if possible. If you are interested in some short exposure to Energy via USO, this area seems fine to me if you are looking at an equity short which has some advantages over a leveraged long bear ETF. If you would be looking for a put position, I would try to get a better entry at higher prices as it reduces risk and gives you better probabilities, but I still would consider phasing in to such a trade to make sure you get some coverage as soon as possible and then leave room to add, this can be accomplished in 2. 3 or 4 entries (1/3, 1/2 or 1/4 entries).

Overall I do like USO short, right now I don't see a strong signal suggesting a significant move to the upside or above the recent highs. A head fake move above recent highs would almost certainly need a more well defined resistance area or a price pattern intraday such as a triangle.

Feel free to email me with any questions.

QQQ/IWM Update

Since these have been the leading averages with regard to underlying trade, I thought we'd look at them.

 IWM 2 min showing the earlier underlying strength from last week mentioned many times and that strength falling apart in to higher prices off that positive divergence in white.

 The next timeframe, 3 min shows the same area of strength, although this is very minor strength as the timeframe and the length of the cycle are both very small, also we see the same deterioration in to higher prices.

 IWM 5 min with a relative positive divergence last week at the lows and a relative negative divergence in to today's highs. This is the chart I want to see deteriorate the most.

 QQQ

 QQQ relative positive divergence from last week as mentioned since last week and price lifting off those lows in to a deepening leading negative divergence.

 However on an intraday basis of today only, we see the negative divergence I reported earlier and said it was likely to cause at least a "consolidation". If you look at the linked post from earlier today, it was posted at 2:05 p.m., note the QQQ did consolidate the rest of the day since then.

 I believe that underlying trade in AAPL is apparent to smart money and thus the QQQ looks the way it does. AAPL has a 1 min leading positive divergence, this is a short term divergence, a pretty good timing indicator and AAPL just broke below support of the triangle which is larger today due to continued consolidation.

Take a look...

This is what I'd say is almost certainly an example of  head fake move on a 1 minute timeframe, as I always remind, "Head fake moves occur on every timeframe before significant reversals", usually th head fake move is the last thing to occur before the reversal and "significant reversal" is obviously relative to the timeframe being viewed.

I backed the chart up a bit, it is clear that traders were watching the same triangle I drew, it is the most well-known technical pattern and very misunderstood, it makes for an excellent pattern for Wall St. to manipulate technical traders. BIDU's largest reversal came out of two such triangles, almost the same situation AAPL is in now. The reason I backed up the chart is so the volume is not skewed by closing volume, I want you to see how many stops were triggered as AAPL broke below the triangle and then below the late day intraday low which was being used as the next stop level. One of the reasons head fake moves or shakeouts like this occur is the "snow-ball" effect.

To the detriment of technical traders, Technical Analysis dogma teaches that if you are long a bullish triangle like AAPL and it fails as we saw late today, you should reverse you position and go short. While I doubt too many AAPL longs (who love the stock) went short, the idea stops out the trader on the long stop and when the trade reverses to the upside, stops out the trader on the short side; this covering in addition to new longs entering the market on a move up in AAPL creates upside momentum and smart money barely has to do anything. The exact opposite principle can be sen in BIDU's recent breakout above resistance which failed, as a result, BIDU's snow-ball effect moved the stock down well over 14% in 5 days. This also gives market makers, HFT algos and other short term institutional traders supply to buy AAPL in size on the cheap and no one suspects anything as someone has to take the other side of the trade, it raises no suspicion.

I am absolutely bearish AAPL and look forward to adding to Friday's partial put position on AAPL short term price strength, I ENTERED THE CALL POSITION AS AN EXAMPLE TRADE ONLY TO SHOW YOU THAT MONEY CAN BE MADE ANYTIME USING THE MARKET UPDATES, YOU DON'T HAVE TO WAIT FOR A MODEL PORTFOLIO TRADE.  

 Here's AAPL as of the close, it reversed the downside momentum after the stopped out shares could be accumulated by short term traders, there's always some meat on the bone if you are comfortable taking such trades. As I firmly believe, the market is always offering something if you use the right tools to take it; let the market tell you the tool. A straight long position in AAPL wouldn't make the trade worthwhile, but an out of the money call does make it potentially very worthwhile.

Another concept, on a 15 minute chart AAPL puts in a bullish candle on volume, these are excellent trend reversal signals, THERE IS NO MEASURED OR ASSUMED MEASUREMENT FOR THE REVERSAL BASED IN THE SIGNAL ALONE, it could be a few bars, a few days or a major or very minor reversal.

QQQ cont...

 QQQ 2 min shows the positive divergence from last Wed/Thursday and even Friday as 3C intraday went leading positive in to the price lows, as QQQ has moved up the divergence has gone leading negative, making a new at least 7 day leading low. This is exactly what I want to see.

 QQQ 3 min Wed/Thursday leading positive intraday accumulation, current leading negative divergence in to a move off the lows.

Remember that those are short term/intraday signals, the trend as can be seen here is more important to the bigger picture we are trying to capture, clearly the QQQ 2 min trend is leading negative, it all depends on what kind of trader you are as to what signals will be most meaningful; I'm happiest in a longer term trending trade, but I saw an opportunity in AAPL on a short term long trade and took it as an example that bearish and bullish are relative to the trade and also as mentioned to show you that almost any update can be traded so long as the right tool for the trade is used. Finally the long AAPL Calls (for a short term trade) WERE NOT CHASED ON AN UPSIDE MOVE, I LET THE TRADE COME TO ME AND ENTERED AT A LOWER RISK LEVEL.

More to come...

AAPL September $675 Calls

Remember this is a speculative, VERY short term trade only.

If you look at this trade, remember Regulation T for your account stauts

AAPL Day Trade

If I have time to pull it off, I'm going to try to get some AAPL calls for a DAY TRADE/VERY SHORT TERM TRADE. This changes nothing about how I feel about AAPL and wanting to add puts at higher levels, just a quick trade if possible.

 Larger triangle

These are intraday positive divergences, the longer term or trends of these charts are just as negative as they were earlier, this is short term reflection only.

Currencies...

Yesterday I described the Euro strength (market positive) as transient and $USD weakness as the same, these are part of the closing window of opportunity to sell/short this market. Take a look at the changes .

 The $AUD is very weak today on the SPX move, this is probably the worst sign for the market among currencies.

 Longer term, every time I can recall that the $AUD has dislocated from the SPX trend negatively it has brought a downside reversal, once at the June 4th lows the $AUD dislocated positively and the market reversed to the upside. This is not only reflective of carry trades on or off, but like commodities, shipping, etc, the $AUD is a good barometer of the health of China and Japan.  I like FXP (short China, but I'd wait for a pullback first).

 The Euro's support of the market isn't there today as it runs in the opposite direction from the SPX.

 Damage seen yesterday in the Euro, which is why I called it a closing window, continues today. Gold, equities and oil should be among the assets that will feel the pain from a lower Euro.

The Euro 5 min chart, weakness throughout longer term.

 The $USD (rising is a market negative and for oil as well-also tends to be a QE-off sentiment indication) , the intraday chart is seeing more strength building from yesterday. Oil is one to take a look at, USO (short)

$USD 60 min broke just under support, great for clearing stops and a head fake move, the 60 min chart is leading positive.

Again, this is a broad risk asset negative for stocks, commodities/oil, and typically precious metals. A move above the $22.50 not only moves above support which we are already above, but knocks out the bearish descending triangle price pattern.