Low Risk, High Probability Trade Set-Ups Using 3C

For those of you using 3C, I try to give you real world examples. Last week I thought TLT would be a great trade opportunity, today we are 2/3rds of the way to confirming that trade and entering it, but this isn't about TLT, it's about using probabilities and 3C to set up high probability, low risk trades.

For example, last week (Wednesday) I posted negative divergences in TLT and suspected it would be coming down soon. I said I didn't particularly like the idea of TLT short (TBT long-2x short TLT) although you could have taken that position. Wherever you first see a pretty serious 3C divegrence...

Using last Wednesday's chart from the post, TLT / Treasuries we can see it's around the $117.50 level, even though the divegrence may guild as this one did over the next couple of days, price will almost always surpass the area you first saw the divegrence once there's a reversal such as we saw today in TLT, meaning the probabilities of TLT pulling back to at least $117.50 are very high.

Today TLT pulled back to $116.75 so it already surpassed the target concept just mentioned above. While you could have entered TBT to rise TLT down, it's trading against the highest probabilities.

From today's post, TLT Update I posted these charts...

 The daily positive divergence from last year is a large, strong base and the daily chart is showing very strong underlying flow so this is the chart of highest probabilities and since it's still in line and not negative, it's still the highest probabilities which we want to trade with.

Just to make sure nothing has changed, the 60 min chart also shows 3C in line with price, thus the highest probabilities are for TLT to resolve to the upside.

Thus we look for a shorter term (smaller underlying flow) divergence like we saw last week.

This 15 min negative tells us a pullback is likely, we already knew this from last week.

 Confirmation is a very important concept when using 3C, so the 10 min chart tells us the same thing, a negative divegrence, a near term pullback which we already knew from last week's charts again.


Since we are in a new short term trend, we look to the fastest charts to see a change in character or in this case, accumulation since the highest probabilities are for a resumption to the uptrend.

At this point we have no position, we have no risk, we are just waiting for confirmation. The 5 min chart tells us that there's likely more downside as there's no positive divegrence there yet.

 Once the intraday 1, 2, 3, nd 5 min charts start going positive, we should see a reversal process start to form, at this point we know that the pullback is being accumulated to once again make a move higher along the lines of highest probabilities which are on the daily chart, then the 4 hour, 2 hour and 1 hour chart which all agree.

We don't enter until we see the pullback is showing strong accumulation and then the concepts of a reversal process and head fake move come in to play.

We now have signals telling us the pullback has been accumulated, it's not a downside reversal. We now have strong short term probabilities confirming the pullback was just that and we have a better entry at lower prices and thus lower risk. As long as the longer term charts still tell us the probabilities are to the upside and our short term charts agree, we can now enter long, trade with probabilities at the best price possible and thus the lowest risk possible.

As for targets where this may happen, I look to our custom Trend Channel which has held the entire uptrend of 2014 and should continue to do so.

The current stop for the uptrend is $112.50. I confirm using a moving average of the trend...

The 100-day works fine for this purpose and is around the same area, $113 or so. Now we know it's probable that the pullback will end somewhere above the Trend Channel and 100-day moving average, but even if it doesn't, as long as we have strong confirmation, we still have a strong trade. The Trend Channel holding the pullback just makes the trend and trade on a pullback that much stronger.

So we don't enter any trades, we have no risk until the probabilities that we expect to see, are confirmed. At this point, we have a high probability,low risk trade with an excellent entry.

Daily Wrap

I wanted to keep this a bit shorted to have more time to go over the watchlist, but after seeing some of the strangeness today, I don't think anything is going to change from last week's expectations and while certain assets will be ready before others, for example Transports looked like a good short today (even if only a partial or add-to position), others like NFLX & AAPL (two I featured earlier today), look close, but not quite there while tip-toeing on a cliff. In other words, there appears to be a very fine line between a nice head fake upside move and entry and falling off a cliff. I often say that once Wall St. puts a cycle in to motion, there's very little that will happen to cause them to abandon it and all cycles have a purpose. 

The thought last week that the reversal process will end like 80% of them, with an upside head fake move that is the best place to enter a short, which was also this week's "Week Ahead" forecast on Friday, seems like it's still on track, but from a number of small oddities in the market showing as I have said several times, this cycle, this market are very weak and need all the help they can get and it appears with credit in retreat and the carry trades failing to hold the market together, they've resorted to some interesting new tactics out of desperation, but as I said, there's very little that will stop them from completing the goal which is the purpose of a cycle.

Where to start? 

Global PMIs gave a bleak outlook for major manufacturing countries. Australia and Italy both fell in to contraction with readings below 50 (above 50 is expansion, below is contraction). Some of the core countries in Europe saw significant declines such as Italy, France, Spain and GERMANY. While not especially significant, China also saw some contraction in their PMI, which is interesting given the action in commodities today, even though the $USD hit a 14 month high while gold hit a 3 month low. Silver and Brent/WTI crude were also smacked down.

The question is, at least in some of these commodities, whether it was the strong $USD (strong on JPY and GBP weakness sending the $USD to 14 month highs) which would mean after years of largely ignoring it, the Legacy Arbitrage between the $USD and commodities may be back or on the other side, global manufacturing slow downs and contraction is slowing the demand for raw materials. This is just a flash for now, not a trend, but it will be very interesting to follow.

Commodities vs the SPX (green) fall out of bed. However...

In the US, ISM Manufacturing came in at a nice beat, the best in over a year,  printing at 59 with strong construction spending and new orders, Employment was the dark area. An interesting divergence. In any case, the initial response seems to be positive, but once again, the European close effect reared its head and the market was pretty much downhill from there with USD/JPY carry that lifted Index futures overnight...

 USD/JPY (candlesticks) vs SPX futures are lifted overnight, but...

Right around the European close the two (and all JPY carry trades) dislocated from SPX...

And on a 5 min chart you can see how much SPX futures dislocated from the only manipulation lever in action today as HYG was smashed on the open.

There's still a significant negative divergence in the $USD (remember CITI closing all $USD longs last week expecting a deep pullback...

We've seen other signs recently (last week) , remember the TLT divergence was last Wednesday and it took a major beating today so perhaps the $USD's turn is next which  will anser a lot of interesting questions on the true depth of changes in character such as the legacy arbitrage trade with $USD.

The averages... While the SPX held on to +2000 today with some help, there certainly isn't anything resembling follow through and the averages themselves are fractured, a sign of weakness. For example...

While the Russell 2000 and NDX closed up + 0.44% and +0.32% respectively, the SPX and Dow closed down -0.05% and -0.18% respectively. In any rue breakout or risk on sentiment, the averages move together and they follow through on strong moves of 1% or more (at least that's what they use to do, now a +0.05% gain is big news if it prints a new high on lowest volume of the year...again , something traders will look back on and say they saw the warning signs coming the whole time).

If you understand Dow Theory, than the outlier today, Transports +1.29% puts a big hole in any kind of market strength and gave us a nice looking opportunity today to take advantage of price strength on market weakness.

I mentioned last week the signs/signals that Treasuries, specifically in the long end/TLT and the 10-year looked like they'd pullback soon and offer a nice buying opportunity. Oddly for the 7th time in 8 months since February, Treasuries started the month on a down stroke with TLT down a whopping -1.95%...perhaps the market and yields will revert to the mean (stocks down, yields up?) 

Most of the afternoon there was quite a bit of weakness as I mentioned, HYG was not there as it gapped lower...

 As I've shown, HYG l;ed the market higher both at the base and the rally, then led it to the side for 10-days (the market has followed), now to the downside,  this is why we use HYG/Credit as a leading indicator.

Even though HYG, VIX and the carry trades decoupled today, you can see late in the day HYG gave a little helping hand to the market so 2000 could be held and maybe more importantly...

ES could close at VWAP, a lateral, slightly downtrending VWAP as shown again last week as the market is in the reversal process (HYG leads it as usual).

The market got some other help as well at the lows of the day, namely from VIX which decoupled right around the European close...

 VIX (red) vs SPX (green) looks as if it were suppressed, not quite monkey hammered, but obviously a helping hand,  although VIX short term futures were right in line, obvious VIX manipulation, but nothing like the monkey hammering of the past.

Speaking of VIX since it has had a near perfect reversal process, on a head fake move it would look like the mirror opposite of the "Igloo with a Chimney", something like this, a head fake move down before a reversal to the upside...  This is where I'm interested in a possible VXX long as the charts there have looked spectacular since last week.

However, this was not it as far as market manipulation and help, here's a new one... From the guys who track EVERYTHING in the market in micro-seconds, NANEX, I caught these tweets from Eric (one of the few people I follow)...

The correction is actually 1 out of 4 trades was less than 100 shares, a record since odd lots began reporting in December of 2013.

The interesting thing is, a bunch of 1-share orders and a record number of odd lot orders went through, I suspect they were a bunch of small orders hitting the ask and raising prices without actually spending much to do nothing other than regain SPX 2000 and...

close ES at VWAP. I've seen quote stuffing before, but this is a new creative way to push the market up or keep it from falling apart until the cycle is complete, thus I do think the head fake move will come as they have resorted to some interesting tactics to keep the market alive another day.

Some other indications that make me believe the head fake move is still on track other than the evidence that's what they are shooting for in transports which was probably a bit easier with Energy down, some leading indicators such as Pro-Sentiment, they moved to the upside at the day's lows.

Also the 5 year yields which are a short term magnet for equity prices were up as treasuries were down (remember the first of the month correlation with treasuries 7 of the last 8 months, there may be something there)...

The short term pull on the SPX is to the upside as these two almost always revert to a mean and yields pull the market toward them, taken with the pro-sentiment leading indicators.

One market (other than HYG) that is not interested in taking on that short term risk is HY Credit (again HYG made that clear this morning, but HY is a bit different than HYG as it's not manipulated like HYG...perhaps the fact HYG gapped down says more...?

High Yield Credit was in agreement today when the SPX was heading down and disagreement as it pushed back to VWAP (despite a red close). Again as I said above, " In other words, there appears to be a very fine line between a nice head fake upside move and entry and falling off a cliff."

Assets like 5-year yields short term, pro-sentiment short term, a little VIX suppression short term all argue for a short term head fake move higher while HYG and HY Credit argue for falling off the cliff, actually those are just two of many indications, but we were on the subject of credit, I thought it would be reasonable to point out why I said what I said.

Market Breadth... Which is what I mentioned , actually spotlighted in the Daily Wrap on July 31st, in my view was the entire reason for the August base, bounce and topping process now, here's the post...Daily Wrap July 31st. I think it's interesting and you can learn a lot by going back and seeing what we saw in advance, in fact every "Week Ahead" post since we have called exactly what the market would do the following week. However, back to breadth, it was bad back then which is why I was arguing for a base and a bounce on the night of July 31st, the base started the next day through Aug 8th and the bounce August 11th.

At one point during the base's construction, the percentage of NYSE stocks Above their 40-day moving average was at a mere 20%.

Look at what has happened to breadth since...

Market breadth has barely moved at all the last 10-days as you can see by the "Percent of NYSE stocks trading ABOVE their 200 day moving average".

From the lows as the base was being made we saw breadth improve by 20% in 10-days, the last 10-days breadth has only improved by 3%, a huge difference. Almost all breadth indicators haven't moved for 2 trading weeks now. This is bearish, these are hard numbers and if stocks aren't regaining their 40/200 day moving averages, they aren't gaining ground and the bounce (as I've been saying) is essentially already over and in the reversal process just waiting on the final head fake which is not something we have strong 3C evidence for, it's a concept that we have strong historical evidence for, including the start of the bounce as it started with a head fake move on 8/8 before the next day when the move started on 8/11.

Also of interest today, Home Depot with a security breach...

See if you can pick-out the security breach news today over the last 6-days on this chart, with HD down -2.51%. One of our recent stocks of interest, FEYE, a cyber security company was up +8.48%, anyone still in that one long?

As for the other nightly internals, there were several Dominant Price/Volume Relationships, again in this fractured market and highly unusual for this indication, there were no Dominant relationships among all averages. 

In fact, the Dow was Close Down/Volume Down at 13 stocks, which is the relationship with the least next-day effect and the thematic relationship of a bear market. This is the one I call, "Carry on" as it really doesn't suggest a short term oversold or overbought situation.

The NDX was totally different with Close Up/Volume Up, which is the most bullish of the 4 relationships, but often creates a 1-day oversold event with a close lower the next day, this was 42 of the NDX 100. The R2K was the same relationship with 1084 and the SPX had no dominant relationship at all. We don't always have a Dominant P/V relationship, but when we do, usually all of the averages are exactly the same relationship... just more fragmentation of the market.

Of the 9 S&P sectors, 4 closed green with Financials leading at +0.30% and Utilities and Energy lagging at -1.04% and -1.33% respectively.

Of the 239 Morningstar Industry/Sub-Industry groups, 150 of 239 posted +0.01 or better, the rest were red.

One of the easiest to see indications of a reversal process other than price action itself (ROC) is the 10-days of market breadth essentially exactly thew same with no more gains, it looks like beyond a head fake move, that's the best the market could put together which is a bit scary for bulls as a 4% correction on the downside sent breadth (stocks>40-day) to 20% which is worse than most bear market readings.

The single share and less than 100 share (odd lot) action today (record setting) was also fairly indicative of the lengths they'll go to when all else fails (HYG, VIX and carry trades) to ramp the market.

I think we still have some good entries (NFLX and AAPL were two examples I showed you today), there are quite a few more, but like transports today, I think they'll come up at different times, especially with the fragmentation in the market. I don't see the head fake process lasting through the entire week, however it may last until the ECB meeting Sept. 4th.

TLT Update

This is just a quick update for the moment for any of our bond friends. Last week I posted a TLT (20+ year Treasuries) update, TLT / Treasuries with the bottom line being, after a big run up most of 2014, 

"Here's TLT, it looks like it's going to pullback, but I don't see this as a TBT (20+ year UltraShort) trade opportunity, but perhaps a treasury pullback buying opportunity if you are looking for something very long term."

Today TLT is down a significant -1.86%. This is what the longer term and the near term look like, put them together and it looks like more downside for TLT, but probably a great buying opportunity on the pullback in the near future. *I also looked at 10 and 30 year Treasury futures, all look the same at least as far as the pullback. There's not quite enough history on the TOS platform to show the longer term trends that are positive, in any case I expect most of the treasuries to act in similar fashion.

 Here's today's TLT drop which is significant for the asset.

 The long term daily 3C chart has a huge positive divegrence /  stage 1 base of 6 months so it's no surprise it has supported the 2014 trend and it's still in line so additional gains in the near future are very likely.

The 60 min chart is also still in a confirmation mode of the uptrend despite shorter term charts warning of a pullback,  this is more evidence of the probability of an upside resolution making buying the  pullback a high probability trade at some point.

TLT's 15 min going negative right at the top.

And the more detailed 10 min also leading negative in to last week's highs.

The 5 min chart turned negative at the exact perfect timing and is still in line.

I'd say expect more near term downside here, but as these shorter to intermediate charts start turning positive (as the long term charts suggest they will), TLT looks like it will be a fantastic buying opportunity on the pullback.

MCP Quick Update

MCP is looking like it has put in a reversal process, what's interesting is that almost 6 months ago we forecast that they were going to get financing and someone with deep pockets or possibly an investment bank who put the deal together had let word slip on the street, this seems to be the most plausible explanation for the continued positive 3C divergences despite price action which is a similar situation we had in RIMM, but in that case it was about a major shake-up in management.

In any case, after they announced they got the financing (which we called correctly), the market acted like it was a surprise and pulled back as if to accumulate the news which happens when news isn't discounted, but in this case it seems it very much was as we were able to call out the exact reason we thought the positive divegrence was there and it came to fruition. In any case, whatever is actually happening, a shakeout, etc the positives are still there longer term and the intermediate to short term are looking stable and solid. I consider MCP a hold at this point.

 There are quite a few support and psychological magnets that can create the kind of volume larger players need to accumulate, there are several. As far as an upside move, I think the psychological levels are pretty darn close to the former support (stops) so I'd be looking for moves above $2, $2.50 and eventually $3 before I felt we were on a serious path to the upside.

 The 2 hour chart has held together which is interesting as most moves down would be confirmed rather than divergent.

More recently, since the financing we have the move down and the kind of intermediate term (30 min) divegrence that looks like accumulation of that news as if it were a surprise.

The divegrence is all that's really important to me though , the rest is just detective work that really doesn't change much.

And near term the 5 min is looking very good in a bowl/reversal process area as well as short term...

2 min showing a couple of areas where stops would have been accumulated and it looks as if they were.

Like I said, for now I consider it a hold, if anything additional develops I might upgrade that outlook.

Trade Idea (Longer Term Position Trade) IYT / Transports

Instead of the normal Daily Wrap tonight, I'm going to try to give you some assets that look close and approximate price areas.

However last week (Friday) I said I'd open a partial position or add-to position in Transports (DJ-20) IYT on just about any strength from where we closed last week. We have a +1.2% day up today and while I suspect transports can add to that with market participation and backing, I still have no problem adding to the IYT partial short opened in July.

As far as completing it (this will bring it up to about 3/4's from about 1/2 size), I'll be looking for some daily candlesticks, some more 3C signals and most importantly the signal the market has either put in the head fake move and it about to roll over or convincing enough evidence that the market doesn't have the ability to get this head fake move expected this week, off the ground and rather is likely to just roll over.

The update and charts from Friday afternoon, Trade Idea / Set-up: Transports  are still relevant so I'll just update some of the shorter term ones that are a bit different today. As far as a head fake target area, we are in to it today, that doesn't mean we are at the end of it, but this is more than enough for me to add to the position.

Waiting on the right entry last time we entered back in July allowed me to hold this with very little draw-down, as of today only -1.09% which I could have booked as gains at the bottom before the August rally as we saw that coming nearly a week in advance, but once again this is a longer term position trade, not a trading position.

Here's the minimum head fake move I was looking for that we've hit today.

For the longer term charts and why I like IYT/Transports short, see Friday's post linked above as it has more charts.

Intraday I see resistance and I'm interested in adding at this point.

The 1 min intraday shows the positive Friday afternoon and a leading negative today so this is worth a partial position or add to for me, what the broad market does will determine when/where I fill out the last 25% of the position.

HLF Position Management / Possible New Trade Set-Up

HLF is probably one of the last stocks in the world anyone would want to short with Carl Icahn, Buffet and some other big players long as well as some of its behavior like the day the "Knock-out blow" presentation to prove HLF was an Enron scam that was going to zero by Bill Ackman sent the stock up for it's largest 1-day gain ever, the same day we shorted / added to an existing short. However if you let all of the talking heads and your emotions get involved, you miss some good opportunities that may otherwise be giving you solid objective evidence, that's what happened when we took the HLF short.

I do see somethings worth mentioning. I took on HLF as a long term core short, not a trading position so I probably won't make any changes unless there's more that develops. However if this is a trade that you like, but just never had the opportunity to get in to, there may be a chance so set those price alerts on the upside just in case.

This is the current short position in HLF with a +22.6% gain, there's room to add here, but only at an advantageous spot.

 The daily chart shows a H&S top that first caught my attention, it is volume confirmed. Here you can see the 3 places I'll short a H&S and how these technical price patterns are used against technical traders, but knowing that, you can use it to your advantage.

The first place I'll short is the top of the head. The second is the top of the right shoulder. Unlike what Technical Analysis teaches about price confirmation,  I WILL NOT SHORT A H&S AT THE BREAK OF THE NECKLINE , traders who short here seem to always get shaken out as H&S tactics from Technical Analysis textbooks are no longer how these price patterns behave. 

There's almost always a shakeout of the new shorts with a move back above the neckline which in traditional T/A is not suppose to happen, price is suppose to fail at a test of resistance/neckline and that is the second spot TA teaches you to short a H&S. However, as you can see, more often than not, they run price right through resistance and shakeout all of the shorts, THIS IS THE 3RD AREA I'LL SHORT A H&S AND USUALLY THE LAST.

In fact our last entry was at the shakeout.

Looking at the shakeout to the right on a daily chart, the day HLLF was up +25% is the day we entered, it's also the pivot for the 3rd area I'll short a H&S, the shakeout move.

If you look at price in the yellow box it just looks like a sloppy sideways consolidation and no upside threat.

However, to make money you have to, "See what the crowd missed". Using a 5-day chart, price action looks a lot different doesn't it. In fact it looks like a clean reversal process for an upside bounce.

 The 30 min chart even has a positive divegrence through the area so I think there's a good chance of an upside bounce,  if you are interested in an HLF short, this is the time to look at setting upside alerts and looking for the entry.

I do see the same positive divegrence on a 10-min chart, but it looks to have deteriorated recently which has not hit the 30 min chart yet and it may never, but I'm not worried about a counter trend bounce in a long term position trade and with the recent deterioration, I'm not even sure we get it.

You can always play it safe and take your gains off the table and see how it works out, but I'll just set some alerts and leave the position in place and trade my plan.

Quick Market Update

We have some intraday positive divergences in all of the major averages, but they're still in the 1-2 minute range which really looks more like an intraday bounce from the early afternoon decline.

Inces futures are about the same. I think what the USD/JPY does here will be important, if it fails as $USD 3C charts are starting to look like, unless another lever like HYG takes over, the market is going to have trouble holding bounce gains, much less putting in our head fake move.

This at least gives me some time to go through the watchlist and find any potential candidates here and now.

USD/JPY Lever-(not that it's working), May Be Ready to Break

Here's the USD/JPY correlation to ES, you may recall pre-market, it not only lifted the SPX futures (and others) overnight, but as I pointed out, since late last week it has been in risk on mode so it was likely not the announcement of the change of command at the Japanese pension fund from overnight.

 This is USD/JPY (candlesticks) vs ES (purple), you can see the correlation overnight lifting Index futures, however the lever of USD/JPY has not been able to stem the downside from ES at all this afternoon.

Now it looks like the $USD may seen some downside and the Yen, may see some upside sending the $USD/JPY lower.

The assumption is GLD, GDX, USO are down on the stronger dollar, if the $USDX drops as the divergence suggests, we should find out soon.

 The Yen intraday divegrence (positive) is not that sharp, but it is there.

The $USDX however has a much clearer negative divegrence that seems to be effecting price already. This would pressure USD/JPY and that wouldn't be of any help to the market at all, not that it is now.

Gold, GDX, USO, etc (legacy arbitrage assets like most commodities), "should" rise if their drop was truly due to a stronger $USD overnight.

Gold has some initial signs this may be what's going on, although I'm not making any changes (still holding NUGT).

 GLD 1 min

GLD 2 min looking more impressive, at about 5 mins I'd consider acting on this, otherwise just sitting tight with NUGT long.