Wolf on Wall Street

Friday, September 24, 2010

A lot behind the scenes...

3 countries are now in a war to devalue their currency vs the dollar. What the effect of that and th US response will be are both unknowns. The only thing that I can see with surety is 5 min charts on the 3 major averages continuing to decline into negative divergences.

This is without a doubt one of the strangest days I've seen. By the way, it's not just the 5 min 3c charts that are negative, but every index, every timefame with the 1 minute vacillating.

I DO NOT like the price action I'm seeing playing out, I also trust my indicator as I have been in similar situation in which it has always come through. So for now, I'm not making a call to a bull market or anything like that. I'm just going to wait this out until I see something that suggests otherwise.

The second SPY b/o attempt...

With the currency devaluation and the head start the market got today, I'd think if smart money wanted it higher, it wouldn't be much of a challenge, instead we see a rather high amount of sell-side volume. Interesting.

3C seems to confirm this view.

And it doesn't stop there...

Peru and Brazil have also jumped into the currency devaluation war. This could get volatile.

This seems to be the phantom behind today's move

This is also why 3C would not have seen it, it's something they do not want to admit, so they certainly wouldn't have given Wall Street a head's up.

BOJ Intervention for the second time, which sends the dollar plummeting-

$JPY: Kyodo New is citing an unidentified market source for reports Japanese authorities intervened again.

Read more at: Forex @ DailyFX - Real Time Forex News http://www.dailyfx.com/real_time_news/#ixzz10TRjehjx

$JPY: The move to intervene now may have to do with markets being closed for the Autumn Equinox holiday, creating thin liquidity conditions

Read more at: Forex @ DailyFX - Real Time Forex News http://www.dailyfx.com/real_time_news/#ixzz10TRrpFxR

$JPY: We noted interventions may come either Mon or today around Japanese holidays in our weekly fundamental monitor: http://bit.ly/9BuMIL

Read more at: Forex @ DailyFX - Real Time Forex News http://www.dailyfx.com/real_time_news/#ixzz10TRxfesn

BLOOMBERG: JAPANESE GOVERNMENT OFFICIAL DECLINES TO COMMENT ON FX INTERVENTION

Read more at: Forex @ DailyFX - Real Time Forex News http://www.dailyfx.com/real_time_news/#ixzz10TS17csp

$JPY: Japanese Yen Plunges on Second Intervention - http://bit.ly/9BuMIL

Read more at: Forex @ DailyFX - Real Time Forex News http://www.dailyfx.com/real_time_news/#ixzz10TS5TGne

JAPAN INTERVENES IN YEN AGAIN, SAYS KYODO NEWSPAPER

Pieces

I've been looking for the connections, which stock was moving the averages, breadth, ect. Here's the charts.

This indicator is a measure of momentum and money flow-at new highs it should be leading the way.

Here's the A/D line for the NASDAQ, fewer stocks participating in the move up

This is a pure momentum indicator, again a loss of upside momentum opens the door to a reversal

The bigger picture on the SPY-10 min chart.

As I mentioned, the DIA is not confirming at ALL

And the Q's are in effect, in a leading negative divergence.

This move, while substantial, doesn't seem to have the foundation needed to be considered anything more then a manipulated bounce-where exactly the manipulation comes from, POMO or something else, or just the last ditch hope of bulls at 3 very serious trendlines, I don't know.

GOOG

It seems today that GOOG has been the market's Patron Saint instead of AAPL

The pattern in the trendlines is an ascending triangle which is a bullish continuation pattern, the idea is that it is supposed to breakout to the upside, again another false pattern break. If this holds though, it should confirm the SPY break out as false as well.

It seems that is will stay down based on the 3C chart below.

Volume Analysis

The volume in this area is going to be key to watch. That level was tested 3 times and volume increased significantly before it broke out there. So the obvious key word is "False breakout"?

When 3C gives a signal other then confirmation, although relatively it is still much lower, i'll update that. The 3C DIA has remained negative throughout the advance.

Clarification

In my last post I mistyped, it said

"Here we are at 3 support levels all in the same area, it makes sense for a bounce to occur here, I wasn't expecting this magnitude."

The red is the correction, I WAS NOT EXPECTING A BOUNCE OF THIS MAGNITUDE

sorry.

POP! There GO the BULLS

Sorry this is late, I had a router die on me this a.m.

Last night I wrapped up the post with,

"As for tomorrow, today's internals again were much weaker then price action showed, so this market continues to deteriorate. I imagine the bulls will put in a final stand soon as we are close to several support levels, but ultimately 3C is headed straight down."

Here's why..

Here we are at 3 support levels all in the same area, it makes sense for a bounce to occur here, I was expecting this magnitude.

A friend of mine who has been a floor trader fro decades wrote me this morning and said,

"Nothing can predict they will do this. To think so is foolish. It gets

worse each week."

So a bounce that was lined up in any case, got some good news and it seems the bulls ran with it. In their minds, this is still very much in the pullback stages (If you ignore recent volume).

3C is showing the first negative divergence now-nothing toward the close yesterday.

DIA on 1 time frame showed a slight bounce positive divergence, nothing indicating anything of this severity, it would take a leading divergence for that.

Here the Q's showed a slight positive divergence EOD yesterday and now a pretty negative divergence.

The only real good news here is the rounding shape of price and volume, both are typical of rounding tops and taken with the 3C divergences, I'd expect to see some downward movement soon. Watch for volume to pick up when price curls down, from there where have to see where this will close. a close up is not to be unexpected even last night, the Bulls were starting to see substantial losses, and getting close to decision time, that support level is the "decider" in a past President's vernacular.

So we'll keep an eye on developments. I'm not too concerned at this point considering the early nature of the move.

Results

This is the first simple backtest I ran on a watch list of 22 ETFs. This is purely 3C signals and there are no stops, the system is either long or short, it's in its rough stages. Of the 22 ETFs, 7 returned 300-400% a year and 2 returned 400+% a year, there were 2 losers that were down -68% and the other down 200%. The average return can be seen below. Remember, there are no stops, just swing trades and in the market the entire time, so there's still a lot of risk management to work out and it's a simple list of ETFs-not cherry picked.

Here are the equity lines for 1 year returns.

The top line is the average of the 22 stocks in the trading system, as you can see, it has a very positive slope. The second line is buying all 22 ETFS and holing throughout the year.

So in this case, taking the signals from the trades, which will be culled, you'd have made 54% for the year as opposed to a loss. Most Hedge Funds can't return 54% a year. This is the start of the first of four systems I want to put together. What's the most encouraging is not the return, that can be juiced with the right stock selection, it's the trajectory of the equity line during a choppy market and the validity of 3C. I tied a lot of trading systems other then 3C, most couldn't beat buy and hold. Several were replicated from published books by respected authors!

As for tomorrow, today's internals again were much weaker then price action showed, so this market continues to deteriorate. I imagine the bulls will put in a final stand soon as we are close to several support levels, but ultimately 3C is headed straight down.

I've been working with this all night, so if I missed your email, I will get to in the morning. I have already started analysis for a few of you who requested it while I was waiting for the tests to run.

Until the morning, sleep well-and dream-risk management!

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.