Wolf on Wall Street

Tuesday, August 9, 2011

KCG Follow Up

KCG was a long idea from Friday, 8/5

The pullback yesterday remained contained and KCG has shown excellent relative strength.

Original Trade Idea post

My X-over system, remained long on yesterday's pullback

3C added to the positive divergence at yesterday's lows- 30 min

15 min

10 min

I still like the potential of this trade a lot, I would view any pullback as an opportunity to evaluate an entry f you aren't already in the trade.

Small multi-day base...

Both the SPY and QQQ look to be working on a small "W" type base.

The TICK Index is supportive with some of the best readings seen this morning in a VERY long time

Perhaps some news coming re: AIG vs BAC?

Both are in the Green today, AIG up 3.5%, BAC up 1.18% from an 18+% rout yesterday. Perhaps BAC will spin off the Country Wide unit, which will be backstopped by the Fed? This is one of the reasons I think Hank Paulson and Geithner made the market more dangerous by taking TBTF Too Big To Fail banks and making them bigger with toxic assets, the BAC chickens are coming home to roost now. As always, the Fed's law of unintended consequences-at least we hope they were unintended.

Miners Trading System Signal

Both systems are still giving a long DUST signal, even though we were stopped out of the trades on the 3% stop-loss rule. I would consider a new position if DUST were to make a new high crossing it's 50-day moving average.

Overnight Futures

Also interesting s the turn around in overnight futures which were set to make today the worst day of all in this decline, however, they turned on a dime to gap the market open higher.

Here's a look

Ban Short Selling and Maybe, Rating's Agencies For Good Measure

Is it ironic that after the G7 and to some extent the G-20 have pledged to work together to restore faith in the markets and on the day the Fed meets, a 2-month short selling ban goes into effect for Greece and South Korea?

Now there's rumblings of banning rating's in some EU countries.

I think it's just about as interesting as the Fed's meeting over a week ago on Friday with the 20 Primary Dealers (Major Wall Street firms) and the fact the sell-off really started the following Monday.

Market Wrap

Today may be called historic by many standards, the loss in the Dow-30 was the 6th largest 1-day drop in history. The Downgrade of the U.S. Aaa credit rating is a historic first. The Senate launching a probe in to the actions of a rating agency is probably a first, in the US anyway, Italy started down that road with raid on S&P's offices last week. Gold hit a new all time high.

As for an oversold/capitulation type environment, I don't think I have seen one this pessimistic EVER!

Here are the internals:

Total Volume made today the most active day in over a year.

The most common Price/Volume Relationship was Close Down/Volume Down except for the Dow and the NYSE Composite, which were both Close Down and Volume Up. Remember, this s not the relationship for the average, but the dominant relationship for component stocks in each index.

The S&P 500 closed with all 500 stocks down, not 1 gainer! The same was true of the Dow-30 and the NASDAQ 100! I don't think I've ever seen that. The Russell 2000 had 44 gainers. Of the 500 S&P stocks 426 fell 5% or more!

Even though US debt was downgraded, Treasuries rallied in a flight to safety

Financials took the biggest hit, XLF lost 9.53% with BAC -18.36% leading the way on news of a pending AIG lawsuit, C wasn't far behind at 15.79%-so much for John Paulson's portfolio.

Even though GLD would seem to be the trade of choice, redemptions in large hedge funds that need to produce liquidity are likely to sell their GLD holdings to meet redemptions. Today Morgan Stanley's ClientServ was knocked offline... hmmm.

Tomorrow the Fed meets and it is not whacky to think the Fed may intervene with some emergency action, this was one of my scenarios posted Friday night.

Remember, the thought has ben the market would need to see a huge decline before the Fed could justify stepping in and interestingly, The Fed met with Wall Street's biggest investment firms on Friday, July 29th, the sell-off started in earnest the following Monday. I would like to have been a fly on the wall during that meeting.

So we have massive capitulation like trade to the likes I have never seen and the Fed meeting tomorrow, it may just be a recipe for a big surprise and with margin maxed out, if that surprise heads upward, we could see a neck snapping short covering rally, that's one of the reasons I updated our open short stops.

Short Position stops update

I've had some questions about stops for existing shorts, just in case anything surprising happens with the Fed tomorrow, I have updated the stops on all of the open short positions I can recall, if you have one that I didn't cover, email me.

The first chart is the entry with the link to the trade, trade date, approximate entry and approximate gain to date. The second has a range with represents a tight to a loose stop, of course these are just my suggestions.

BJRI Entered on 7/21 @ $53.46 and 7/22 @ around $52.50 22% Gain

BPT Entered 7/15 @ $114.50 11% Gain

CNQR Entered 7/13 @ $50.54 29% gain

DKS Entered 7/12 @ $38.40 with a second entry at the $40 area 22% gain

ERY Entered 7/27 @$13.09 77% gain

FCX Entered 7/21 @ $56.17 25% gain

FDX Entered 7/8 @ $97.36 20% gain

FXP Entered 7/21 @$27.74 33% gain

HBI Entered 7/22 @ $31.13 18% gain

INTC Entered 7/20 @ 22.98 on an earnings call 12.5% gain

LEN Entered 7/8 @ $18.48 23% gain

MCD Entered 7/22 @ $88.56 7% gain

MRX Entered 7/15 @ $38.58 13% gain

NFLX Entered 7/18 @ $277.88 18.5% gain

PNFP Entered $7/21 @ $16.01 22% gain

RRGB Entered 7/8 @ $38.17 22% gain

SDOW from 7/21 @$21.19 Aprrox. 114% gain

SPXU Entered 7/21 @ $14.74 Approx. 62% gain

SQQQ Entered 7/21 @$22.26 Approx. 50% gain

SRS Entered 7/27 @ $13.78 49% gain

SRTY Entered 7/21 @ $16.14 Approx 96% gain

VXX Entered 7/13 @$22.20 Approx 57% gain

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.