Momentum Stocks

Last night's post Dow Closes Red for 2014, SPX Makes it Back to VWAP had a Breadth chart, it's a Worden T2 series chart which uses the NYSE stocks to gauge breadth. I love breadth charts because they don't lie, there's no interpretation (except forward looking), they give you the facts as they are.

This chart's ticker is T2112 and this is what it looked like as of last night....

There are 3 categories in this form of breadth chart that Worden tracks with their T2 indicators as that's what this is, a breadth indicator; they are the #1) Percentage of All NYSE stocks trading above their 40-day moving average #2) Percentage of All NYSE stocks trading One Standard Deviation above their 40-day moving average and #3) Percentage of All NYSE stocks trading Two Standard Deviations above their 40-day moving average.

The last one, #3 are typically momentum stocks like PCLN, NFLX, TSLA, etc. These stocks are the ones featured in the chart above, they were trading at 30% in March, that's down from their typical 42% and as of last night, there were only 10% trading 2 SD's above their 40-day moving average, what this tells us is that momentum stocks have taken it on the chin very hard over the last two months.

It's only natural that these stocks are the ones to lead a bounce, the kind we are looking at in today's data as posted earlier, EOD Market Update.

So, if we are to look at any hitch-hiking longs, the obvious place to look would be among momentum stocks that have been beaten down. I may post some more, but taking a look around at some of the usual suspects, I have found some 3C signals that are outperforming the broad market averages, thus rather than trade something like SPY long on a hitch-hicking long, I may prefer a momentum stock.

Here are a few examples and if we get a decent pullback that looks like a high probability, low risk entry, then these might be some of our best options.

 AMZN has been on my radar, I've been watching it the last several days and I'm starting to like what I see for a short duration long trade that follows a market bounce as it seems we are setting up for, likely with USD/JPY leading the way once again and taking what would likely be a last shot at $102. This 15 min chart of AMZN with a positive divegrence shows much better relative underlying strength than the broad market which are largely at 5 min positive divergences.

AMZN's intraday chart looks similar to the 3 min charts of the market averages posted in the  EOD Market Update , suggesting a near term pullback that can serve two purposes, 1) allow us a better entry at lower risk and 2) allow final confirmation that a pullback was accumulated as this would give us very high probabilities that we are very near the bounce I have been talking about.

Since the market has the most directional influence on any given stock (about 2/3rds of a stock's direction is determined by the overall direction of the market) followed second by Industry group performance, a pullback in the market would most likely cause a pullback in any of the following equities, giving us some good choices.


FB has a nice looking 15 min chart that is out-performing the broad market's underlying (3C) trends.

FB 3 min, is not even really in much need of a pullback so this would be on the list, as any pullback would just make the position more favorable.

 PCLN 5 min probably wouldn't be my first choice, but I wanted to show it as it is among the group of momentum stocks.

SCTY I looked at pretty closely today and it too would be a candidate.

I'll likely go through my momo watchlist and pull some other names out that may be interesting,  however don't forget that these are for short duration, "Hitch-hiking" (meaning to follow the market or draft it) trades.

EOD Market Update

I have a little time this weekend, likely tomorrow in which I'll post a more complete analysis of the market with breadth readings and such that I can't get until after the close. However as of now, the formation of the bear flag continues, yes the market is advancing, but that's what a bear flag is, a consolidation that moves in the opposite direction of the preceding trend which was down coming in to the flag.

The 3C charts still suggest very strongly that we see a head fake breakout of the flag to the upside and while we haven't seen the head fake below as of yet, there are still good signals to suggest that probability as well, I assume it would be very early next week, however this is a smaller probability than the upside move.

The only reason this would really matter is if there were signals strong enough to warrant a hitch-hiking trade (long market) for the head fake move and then switch to shorting in to price strength.

Here are some examples...

 SPY 3 min still has a relative negative divegrence suggesting a break below the bear flag in the VERY near term , unless 3C goes on to make a higher high which it hasn't here or in any other 3 min average.

 QQQ 3 min is the same as the SPY, this is good as confirmation, however the larger move that "Should" follow (assuming we do get a Crazy Ivan shakeout with a break below the flag first) is the larger breakout above the flag which is not expected by the rules and precepts of Technical Analysis, thus it is a head fake move.

The 5 min charts are higher probability, but also would be the second move with the earlier charts representing the first.

5 min QQQ definitely has strength enough for an upside breakout, if we did get the head fake below the flag that formed a bear trap and a "W" base, this chart would only get stronger and "may" make it worthwhile to open a hitch-hiking, long trade.

IWM 3 min also confirms as does...

The IWM 5 min

As far as the FX aspect goes, the $USD still hasn't done much...

 However the intraday USD/JPY does suggest a move lower in to the close by both the USD/JPY and the market averages, or perhaps very early Monday, but I doubt this chart would hold water as a 1 min Futures chart as it would have to go through Sunday night, Monday morning and in to the open, very unlikely.

However,

The negative divegrence on the 5 min Yen is still not fulfilled and it looks like 3C is getting uglier. If the Yen comes down, as long as the $USD can at least hold in position or gain, the USD/JPY moves up and take Index futures with it, THIS WOULD BE CONFIRMATION OF OUR 5 MIN CHARTS WITH POSITIVE DIVERGENCES.

That's what I see going in to the close, if anything pops up in the next 10 mins or so, I'll let you know, but that's where probabilities rest as of now, a pop above the bear flag formation which is useful to short in to and perhaps a Crazy Ivan which may open a second trade, a short duration long hitch-hiking trade to ride the head fake move above the flag, but we'd want that pullback or break below the flag to reduce risk and make it worthwhile.

Market Update and Some Probabilities

Now that we are getting more data in since we saw the first positive divegrence yesterday after the move lower, we are starting to get a few possible scenarios , which I like to try to put out there as it may help you with closing or opening certain positions, whether they be short term option trades or core positions entries/exits.

I still want to see how the USD/JPY plays out in its divergences and correlation as well as checking Leading Indicators and getting an overall feel for the market by going through watchlists and seeing if there's a consistent theme within them which is very useful and the way I'd judge the market before I was created and learned how to use 3C, of course that meant looking at several hundred stocks a night (I thumb through them quickly, about 2 seconds per stock unless something is really standing out).

Here are the intraday charts and a couple of scenarios I see as probabilities.

 This is the bear flag / bear pennant (bearish consolidation / continuation pattern in Technical Analysis that consolidated against the preceding trend in a parallelogram or a slanting pennant as FXI turned in to yesterday). Technical traders see these and expect them to resolve to the downside as I have drawn in because that's what nearly a century of Technical Analysis has taught which worked great before everyone started using Technical Analysis once the internet could support the streaming data that allowed discount online brokers to make their appearance.

It's incredible how quickly Technical Analysis (which I was using at the time) went from being mocked and called, "Voodoo Analysis" with many people finding it inconceivable that trendlines and moving averages could tell you anything about future price action. Suddenly as people switched from classic brokers to discount online brokers, they needed a way to do their own homework and Technical Analysis went mainstream as it was much easier to learn and apply than fundamental analysis. It wasn't long after that I started to notice T.A, concepts were failing more often than working which was a huge change, but as more and more people lazily followed the rules of TA, Wall St. knew and still does, exactly how traders would/will react to any particular price pattern or other Technical Analysis concept.

I didn't expect the flag/pennant in FXI to break to the upside today as I usually would expect as a head fake move because I figured FXI is not as popular as the GOOG's, AAPL's and PCLN's of the market, but it does have considerable volume and it appears today is a head fake move, which would have been likely known in advance as it's not possible for Wall St. to manipulate the Chinese market to force a head fake move in a single asset tracking that market, but it is possible for them to know what the order flow looked like the day before and create a technical price pattern that would allow a head fake move to be created in advance.

 This is the EXACT same concept in SPY, except this is watched by every trader and head fake moves are much more common here.

TA expects a bear flag to resolve to the downside as I have drawn in, but at an ever increasing pace since about 2000, Technical patterns have been manipulated to create head fake moves,  the thing is, Technical Traders who largely chose Technical Analysis because of it's simplicity and ease to learn (you could say choose TA out of laziness) are still following precepts that haven't worked well for 15 years, not like they did before 2000. I suspect it continues to be laziness that has caused Technical traders to keep following these rules rather than adapting to what's actually happening in the market.

So, the point here would be, the appearance of a bear flag alone suggests a high probability of a head fake move which would be to breakout to the upside first, however while they can manipulate short term trading action, they can't hold the manipulation long, there's a reason there's a bear flag forming and that's because of the strong sell off of the preceding couple of days, that trend almost always re-emrgers despite a head fake move, thus they are excellent to use as entries, in this case we'd short in to the head fake breakout above the bear flag.

 SPY 1 min with the leading negative divergences that were forecasting a drop in price as well as the same in USD/JPY and the positive divegrence started yesterday.

"If" this were a real bear flag, I would not expect to see positive divergences in to its formation, I'd expect to see distribution in to the correction to the upside, thus the case for a head fake move above the bear flag just got stronger.

 SPY 3 min leading positive

SPY 5 min leading positive with some near term weakness intraday which introduces a more complex probability.

 SPY 10 min, just to keep things in perspective, the bear flag is to the far right at the red arrows, the leading negative 3C divegrence is the perspective I wanted to remind you of so if we do have an opportunity to short in to a head fake move, you have a strong basis of objective data to feel comfortable doing so.

QQQ

 1 min intraday leading positive with some recent weakness, as we pull in to the 2 p.m. hour and options expirations pins are removed, price tends to move a lot more, but it's the 3C signals the last 2 hours that give us the best data as they tend to pick up right where they left off the next trading day which would be Monday, however, this is also introducing a slightly more complicated head fake pattern that is more effective.

 QQQ 3 min is showing the same

QQQ 5 min is fairly strong overall and the intraday charts in the 1-3 min range aren't reflected here because the "slightly more complicated head fake move", still puts the emphasis on the upside breakout of the bearish price pattern, only the intraday 1-3 min charts that we typically use for intraday direction would need to be effected to steer price intraday.

The concept would be a Crazy Ivan Shakeout.

In this case the first move out of the bear flag would be as traders expect, to the downside. Most Technical traders won't short a bear flag itself without the confirmation of a break below the flag's support (bottom trendline), however on the break below the flag they will chase price and enter a short position. If the larger head fake move is actually to the upside, catching some shorts in a bear trap and forcing them to cover as price moves back above the flag and forces a small squeeze just adds more upside momentum to the head fake move.

A Crazy Ivan Shakeout will shakeout both sides of a price pattern (first catching the shorts and forcing them to cover, then catching the longs in a bull trap and forcing them to sell as price resolves back to the downside, but the increased momentum on the upside head fake adds more demand and allows more shorting in to higher prices (which is what we want anyway) as they need that volume with the size of their positions.

So the Crazy Ivan would look as I've drawn it above, a bear trap first on a downside break down which is what I suspect the 1-3 min charts recent weakness is depicting and then a breakout to the upside, which is why I think the larger 5 min positives haven't moved negative as this is the direction expected ultimately for the head fake move, allowing them to short price strength and more demand/volume before price naturally falls back down.

 The 1 min IWM is showing the same concept, however this introduces a third probability...

 IWM 5 min, there's a clear positive at lower prices and not much going on at higher prices as 3C is inline, this brings us to the 3rd probability...

As price makes the first minor head fake below the flag as traders expect and they short it, it opens up more supply, allowing accumulation at lower prices and with plenty of supply (from sellers and shiort sellers) to accumulate for an upside break, essentially forming a "W" base pattern, thus the IWM 5 min chart would not go positive again until prices are lower as they were yesterday around the lows of yesterday or even below them.

As of now, this is what I see as the highest near term probability, but there are a few other assets/indicators I want to check in to. Either way, we've been looking for a bounce higher to open short or fill out short positions in to, this may give it to us.

FXI JUNE $36 PUT UPDATE

This is a new position entered on 5/14. Yesterday the position was at a double digit gain of +16% for less than a day of exposure. I typically use options as a tool to leverage a trade in which there is a good signal/set up, but the duration may not make the profit potential worthwhile, I don't use options as a lotto ticket, trying to hit triple digit home-runs (although I wouldn't scoff at one). I also use at least 2-3x more time (expiration) than I think I'll need and typically in the money, in other words buying quality over a lotto ticket and have turned around my options trading after years of swearing them off from not very impressive to a very useful tool.

As for FXI, FTSE Xinhua China 25 Index (long) , the put position is a shorter term trade. You could use FXP FTSE Xinhua China 25 Index Ultrashort (long) to achieve the same directionality with the less leverage as FXP is an UltraShort (2x leverage).

I do like FXP as a longer term position and we have been in it recently for that position, but closed the trade when it looked like it was going to pullback. I will look at re-entering FXP on a longer term basis (the options trade is typically for a shorter term duration position) soon.

As for the charts this morning as FXI did gain +0.73% today, I'm still not concerned about the position on a short term basis and will leave it open. If I felt stronger about the position I'd probably add to it here, as for a new position, it may be worth a look in the area.

 FXI 1 min leading negative, on an intraday basis the 1 min looks like this...

The bounce this morning has moved to a flat range where we often see distribution (or accumulation) just when price action seems the most uninteresting.

 The 2 min chart is leading negative and displaying a PERFECT example of a divergence, price moving one way, 3C the other, suggesting strong distribution in to the bounce.

The 3 min chart is also leading negative and hitting new lows today intraday, thus migration of the divegrence from the 1 min intraday chart seems to be strong thus far, meaning the distribution is getting stronger.

And the 5 min chart leading negative.

If we had some intermediate charts in the 10-15 min range that were as negative as these, I probably would have entered FXP long rather than FXI short (puts), again it's about the duration and leveraging the trade to make it worthwhile when the duration of the trade looks to be shorter.

So far, I'd say so good.

FXI puts may be worth a look or an FXP long if you are not a fan of options, however I'd rather wait on the FXP long until intermediate charts are as ugly on FXI as the 1-5 min charts.

MCP Update

Yesterday I put out another MCP Update which was interesting because of a stop run that did hit stops and some orders as was apparent by volume, there were also larger positive divergences in the area and especially on shorter timeframes suggesting that those stopped out shares were accumulated, this is to say nothing of the "RIMM Scenario" I have outlined in recent posts.

MCP is nearing an area or scenario where I would consider filling out the half size spec. position to a full size or if I was not involved in MCP I would certainly be considering a position as the risk is much, much lower now for new positions.

Here are the charts this morning and what I'm going to be looking for and at what levels I'll be setting some price alerts.

This is the break of $3.00 and the volume surge where stops would have been hit and some orders likely placed. $3.00 is significant because of the whole number, psychologically our minds gravitate to even/whole numbers (just think about retail sales, you'll never see a product for sale for $3.00, almost always it will be $2.99, there's a reason for that just the same as there are psychological reasons for the colors companies choose, take fast food for example, Burger King, McDonald's and Wendy's all use the same color scheme, red and yellow because red is the first color your eye focuses on and yellow is associated with hunger/appetite). 

What was interesting about the break of $3.00 is not just the supply it creates. In last last night's post, Dow Closes Red for 2014, SPX Makes it Back to VWAP I gave a few examples of some position sizes for David Tepper's Appaloosa Fund, moderate size positions like GOOG were still a nearly half a billion dollars and larger positions in SPY Calls were $1.1 billion dollars in this single fund alone according to the Q1 13-F filing for the quarter ending March 31st, of course that was 45 days ago and his positioning is likely very different by now, but that wasn't the point, the position sizes were.

And the point of the break of $3.00 and volume it created was the supply it created at lower prices and the positive divergences that indicate to me that this supply was absorbed by a large buyer, the first 1 min bar that broke below $3.00 saw volume of 1,0596,000 shares alone, again the point being, accumulating a position for a large fund is not a simple issue and being on the other side of the trade with a stop run like that raises very little suspicion about who's on the other side of the trade accumulating.


Here are the divergences in the area...

 1 min

2 min leading positive. Note there's a slight relative negative divergence as higher prices this morning did not produce a higher 3C reading, this is VERY minor, but suggests an intraday pullback that can be used to buy in to price weakness and underlying strength.

 3 min leading positive and another small relative negative divegrence within the larger leading positive.

And the 5 min chart.

It's not that the longer charts aren't important, but I covered them yesterday and they likely haven't changed in such a short period except to improve with these timeframes all being positive.

I'm setting price alerts for a move in MCP BELOW $2.84, $2.80, $2.77, $2.74 and $2.71 so I'm reminded to check and see if it looks like a reasonable area to look at entering some more MCP as it is still a partial position.

Quick Market Update

There's some slight improvement in the averages, a corrective bounce would not be surprising at all after Wednesday's late day and yesterday's early action. As mentioned last night, there was a longer lower candle wick on higher volume, the art of reading volume has been lost in a sea of new indicators, but it remains one of the most useful, subtle forms of market analysis. 

If I could only choose two conventional indicators (not including custom indicators like 3C, MoneyStream, TSV, etc), I would choose Candlestick (analysis) and Volume. Unfortunately, so much about reading volume, dominant price/volume relationships, etc. has been lost to the point that technical traders can't figure out what is a legitimate price pattern and what is not simply because they don't know anything about the volume confirmation that gives you this information.

If you look at this Daily chart of the SPY (and remember the concepts for volume analysis are fractal as well so they can be used on a daily chart, a 5-day chart or a 5 min chart and tell you the same things), you'll see white and orange arrows.

The white arrows are a form of short term capitulation, you'll notice volume is higher on those days than the preceding day and in all cases there's a bullish candlestick, either having a small body that often means momentum on a move has run out or a long candle wick on the bottom which means lower prices were rejected intraday and the increase in volume is like the macro concept of capitulation, a selling climax and often marks a short term bottom or reversal point.

The orange candles have higher volume as well than the preceding day, but the candles are bearish in that they have large bodies and very small candlestick wicks. In each case, the white arrows/candles were a short term bottom or reversal point, this is what I was pointing out about yesterday's candlestick, although not a bullish hammer, the psychology of the longer lower wick is the same, lower prices were rejected on higher volume.

As for the signals, also as mentioned yesterday we saw 1 and 2 min 3C signals go negative in to the close, that is being repaired a little this morning.

This is the DIA, 3C just took a swan dive before prices followed, but yesterday found some short term support and accumulated a little, the EOD negative divegrence is at the red arrow to the right and this morning there's a slightly more bullish tone, it's easier to see on the other averages.

Take the 1 min SPY this morning...

Or the 1 min QQQ which is probably the best performer thus far as 3C goes intraday.

There's not much to see in intraday Index futures, but NQ (NASDAQ 100 Futures) are showing a similar positive divegrence intraday. This is not a significant signal by itself, but may lead to additional movement or migration.

The green arrow is just a point of reference, that's the 9:30 open.

Still, not much going on, but this is typical for Friday's since weekly options have grown in popularity.

A.M. Update

Some of the FX affficinados are claiming that the Yen Carry Pairs were unsuccessfully ramped last night with each attempt failing in multiple pairs, I really don't see evidence of that when we consider what 3C has told us and is telling us, to me it looks very much like USD/JPY which is still the dominant carry pair is simply ranging as the activity in both the Yen and USD are at lows we haven't seen for about 2 weeks, which isn't surprising since the first task was to break above $102 which occurred, we could tell by longer charts it wouldn't hold which it didn't and then as is typically the case there are several tests as the currency pair loiters in the area of support/resistance which is the psychological level of $102 and that's all that's happening now.

There's also an argument to be made that there's so little 3C activity in both $USD and JPY , therefore USD/JPY, and that is simply a reflection of the Friday op-ex pin as  we opened right around yesterday's close which is typical for an op-ex Friday, but don't get complacent and assume that will always be the case. The QE-mavens have long maintained that POMO Tuesday's will result in a market ramp, however I have suspected that the banks are putting those diminishing (nearly) risk free profits back toward their balance sheet rather than in the market and the evidence is pointing in that direction, take the April 30th 1-day Federal Reserve Fixed Rate Reverse Repo that saw the second highest usage ever as banks plugged holes in their balance sheets for end of month window dressing. Beyond that, look at this Tuesday with a fairly substantial POMO on Deck, the SPX closed up 0.04%, hardly market moving, the NDX down -0.04%, the Russell 2000 -1.10% and the Dow up 0.12%. The previous Tuesday was far worse, SPX-.90%, the NDX down -1.35%, the R2K down 1.62% and the Dow down 0.78%. The point being is the market is ever changing and assuming things will stay the same is a big mistake.

So far looking through all of the futures, about the ONLY thing I see that may lead to something is some movement, only intraday so far, in the $USDX that just started

This positive 1 min divergence is just starting, but considering the typical pin of an op-ex Friday, it might be able to build something that has some effect on the market by the end of the day for early next week.

The 5 min $USDX is still in negative position, the Yen 1 min is inline, the 5 min is in negative position, but improving so we'll have to see which way the FX pairs are going to lean and if the market is going to maintain its tight correlation with them.

This Yen 5 min negative still hasn't moved so I can only assume that the start of improvement in the $USD might bring the Yen down as this chart is forecasting.

As for the Index futures, they are all in line intraday with 5 min positive in NQ and ES and TF in line.

Market action this morning is EXACTLY what you'd expect given the 1 min negatives in to the close yesterday. We'll see where we go from here.

Usually on an op-ex Friday the action doesn't pick up until 2 p.m. and that's where we get some of our best 3C data of the week surprisingly.