Wolf on Wall Street

Wednesday, June 23, 2010

Back into the Blender

The Fed's very soft and cuddly stance on the economy seems to have gone over well with traders, we have positive divergences from 1-15 minute which formed quickly. Remember my earlier warning that the initial reaction is almost always the wrong reaction. Later tonight I'll show you some charts that seem to indicate the news may have been out before it was "out".

In my view, this still changes nothing and I'll elaborate later tonight.

Update

We have seen the bounce from the 10:02 update, half of the 3C indicators are calling an end, the other half are still inline, but this was a bear flag and its target implications are for a move to the $108 area.

UNG

That was a close one, but I hope it imparts a lesson on patience and non-emotional/objective decision making. At no time did I get emotional about the severe dip in UNG in a few days, it all made sense, nothing on the charts changed and today it's off to a healthy start and ready to take on its first reistance level at $8.25, which it just broke through as I write this. I feel it's still a decent buy here or add-to. Take a look and see if the trade is for you.

Wednesday, Fed Day

The Fed is widely expected to leave rates unchanged, but the markets know that. What the markets are looking for is any hint that the language has changed. Even one word that most of us would miss or dismiss could be the catalyst the market is looking for to go in one direction or another.

In the past the Fed has been very willing to step in with some tidbit to halt a market's slide, like the slide we have seen the last few days, thus the Fed is known as the "Plunge Protection Team". So today is a bit of a wild card, but as far as I can see with 3C, there is not much in the way of high hopes. The markets do not look like they are i a holding pattern, they look bad and this may be part of the market's ploy of playing possum to get the Fed to move when they'd otherwise maintain course, even if it is just a few words changed in the policy statement.

"The Fed Effect"- There is a tendency for the market to react or overreact to a Fed statement the day it comes out, within a few days the market seems to have slept on it and goes in the complete opposite direction. I don't know what's in store as Fed policy announcements are not as easy to spot with 3C as are government reports and earnings. However, if you see a wild move after the Fed decision, don't be so fast to react to it, give it day or two.

Either way, we'll know around 2:15 we'll know

Small Bounce

When I say small, I mean just a small move up. Right now the market just hit a hole and went straight down, but there is a 3C min divergence building.

Tuesday, June 22, 2010

Not much to do

If you have your shorts in place, there's not a lot to do right now other then manage the trades and take advantage of any countertrend pops we may get to make some extra cash along the way. The price action the last 2 days is significant and plays right into our core positions. It appears we will see a Head and Shoulders top unfold, s of now, the first or minimum downside target for the SPY should be $87 which makes sense on the charts. However, such downdraft is likely to bring more downside momentum and I have maintained for months now that I expect to see new lows in the averages. Remember, Fear is stronger then Greed so the market will fall a lot faster then it rallied.

The only unfinished business is UNG. The trade is precarious, but it did hold the line in the sand I drew last night. Here are a few charts and we do have a few positive divergences suggesting upside tomorrow and that may build.

Above is the Trend Channel I use for stops, UNG held the line today which was very encouraging

This is a 2-day 3C chart and very significant in the leading upside divergence or extreme accumulation

This is a 1-dy 3C chart written with different code, but the same leading divergence

The 15 min 3C chart suggests the downside is over as accumulation has begun again

The 10 min chart confirms this as does the 5 min chart below.

Here is my proprietary crossover system, all 3 parts of the system still are calling this a long trade. As I mentioned, note the first pullback to the 10-day moving average in yellow and the second to the 22 day in blue, I see this time and time again. Also MACD is positive and the VWAP is in good position as the average price paid over the last 30 days weighted by volume is just above $7.50 (VWAP in red, the top window is a 10 day ma in yellow, 22 day in blue, the middle window is a custom indicator in yellow and it's moving average in blue. With MACD in white is a 22 period RSI which is above 50. All 3 components are needed to place a long position and hold it. Despite the volatility, I continue to believe in this trade. I think it is at an excellent Risk:reward level to initiate a long trade in UNG or to add to it.

Look for updates tomorrow as the market events unfold. I'll be adding selective shorts, but for the most part we already have everything we need to take advantage of the market's stance. Trades will be issued as opportunities arise, most will be quick counter trend trades, there may be some tomorrow night listed. Keep an eye on the site.

Update 2

We have 1 very minor 1 minute positive divergence, it may not amount to anything, it may be day traders covering shorts, but in any case, all the other timeframes are solidly bearish at this point. Yesterday's bearish engulfing candle is known in western terminology as a "one day key reversal" and it appears it was exactly that.

Remember that UNG's stop around $8.08 (actually below, but that is just a recommendation) is only for the end of day, not intraday. All stops found here are the same (both recommendations, not written in stone and for the end of day).

ANO

Keep an eye on ANO from last night's list, it's looking like it wants to breakout.

Update

At 10:3 I posted a chart at Trade-Guild that 3C 5min was forecasting one more move to the upside, we got that move. However, the positive divergence on the 5 min chart persists, there may be more upside coming. The longer term charts are still solidly bearish so this may be of some use in entering short positions at better pricing with less risk as they are closer to natural stop out levels.

The Gap Was Helpful

As a way of entering shorts at a better price. See Trade Guild, it looks like we'll get another upside attempt soon.

UNG has a 1 min positive divergence right now, that's about it. It could develop into more, but if it closes below the Trend Channel at $8.08, I would close the position just before the end of day. However, as I mentioned, the second pullback in a new trend is usually at the 22 day moving average which is at $7.94 (it may rise a little later today), normally the Trend Channel is inline with this concept, in this case it's a bit higher so it is not unusual to see a move to the 22 ma, you'll have to decide how you want to handle it. If I see anything that is relevant to UNG today, I will post it.

3C Quick Start

Many of the charts you see here at WOWS are my proprietary indicator 3C which reveals underlying institutional money movements and often contradicts price. To understand the annotations made on charts, you must first understand that 3C has no numerical value, it is a pure divergence indicator. Positive divergences represent accumulation by smart money, negative divergences represent distribution by smart money and when 3C trades with price, that is trend confirmation.

The chart annotation system is simple; white arrows represent relative positive divergences, red arrows represent relative negative divergences and green arrows represent trend confirmation. When 3C is in a white or red box, that represents a leading positive or negative divergence, leading divergences are the most powerful.

We analyse 3C in multiple timeframes, the longer the timeframe the stronger the accumulation. 1-2 min timeframes represent intraday moves, a 5 min timeframe can represent a day or two and 15 min timeframes average trends of a swing trade nature. 30 and 60 min charts can move the market for a month or more and daily charts can be over a year.

You'll get use to seeing the charts and understanding how the multiple timeframe analysis works and works well.

Welcome to Wolf on Wall Street.

The trades featured here are meant to maximize returns with the least risk and highest probabilities. Unless otherwise mentioned, all trades are meant to be executed at market. I prefer long-term trending trades which perform well in rising markets, but really stand out in declining markets. However, we get occasional one day gifts 30,40,60% 1-day gains. I'd urge you to consider taking some or all off the table in such cases, the markets don't give gifts like that often or for very long. Most of the returns that make the system outperform so well come in short-entry trades. If you are opposed to short trades, this is not the system for you, unless you are ok with buying an inverse ETF. If you would like more information about the truth about shorting stocks, just email me.

Risk management. I recommend a specific and consistent risk management approach to all positions. In most cases we try for 2% risk money (2% of portfolio) unless such a position size exceeds 15-20% of overall portfolio in actual position size. Each trader is different and each has a different allowance of open trades. I like to keep the overall money in the trade around 10-15% of portfolio per position in case of gaps against you. Stops are generally executed at the end of day and I personally never place a stop order, all my stops are mental; remember, the middle man gets to see everyone's cards. When you are not in tune with the market or opportunities just aren't that spectacular, I take my risk per position down to 1% or even half a percent of portfolio value.

Each trader is different and must determine their own level of comfort with risk. I do have a channel stop which I provide to TeleChart/StockFinder users for automated stops, I appreciate you using my links to sign up if you do. The Trend Channel catches trends and works well as it automatically adjusts for each stock's volatility. Arbitrary exits based on nervousness about the markets WILL decrease the portfolio performance dramatically. This system will not ever get you in at market bottoms or tops. The recent 1 year performance against the Russell 2k buy and hold had the system beating it by 3:1. Ultimately it is up to you as to how you proceed, but I'm always available to help you determine what might work best for you.

I do use other scans and systems when market conditions warrant their use and may change strategy with market conditions.

The MOST IMPORTANT tool you have to bring you long term success is RISK MANAGEMENT. There are plenty of articles linked at Trade-Guild.net on Risk Management. We can be wrong 75% of the time and still outperform the market with solid, consistent risk management.

Position Sizing

The position sizes noted in the positions @ 2% risk of portfolio are based on a $20,000 portfolio-adjust as needed. Due to tight stops, there is the possibility, even probability that one position could take up the entire portfolio. You need to decide how many positions you want to trade and reduce the position size according to that. For instance, if you want to trade 5 positions in a $20,000 portfolio, no one position should be valued at more than $4,000-not risk money or 2% rule, but share price entry x shares.