Wolf on Wall Street

Friday, August 26, 2011

Leading Indications

Yesterday I published this VXX chart (remember the VXX trades inversely to the market).

Here's what I said about this chart...

" Here we have a 1 min positive divergence in the VXX, I used to describe this 1 min timeframe as the playground of Specialists and Market Makers, until HFT firms have made them nearly obsolete. Still the short term signals here can often tell us something about the next day's open. Looking at this chart, I would think we may see a gap down and if you are interested in the trade as described n the link above, it may be a good entry point."

It seems that it was a good leading indication of the market this morning, this should tell you something about the true nature of the market.

I also posted this chart on the 24th

It's a positive divergence of TLH 10-20 year treasury ETF on a 10 min scale, you have to see the rest of the charts for the context, the link is above, but here's what I had to say about this chart...

"There was a positive divergence on this TLH 10 min chart, which makes me wonder f the market will be off tomorrow and we'll see some safe haven buying. We never did get that head fake that I had expected."

This chart too was predictive as we saw by yesterday's price action. The longer term is negative.

AAPL

I've explained before how important AAPL is to the NASDAQ 100 because of their proprietary weighting, AAPL s the heaviest hitter. They use to be worth about 20% of the NASDAQ 100 or about the same as the bottom 50 stocks combined, so the move up today (while the weighting is now a bit less) is very important for the NASDAQ 100/QQQ.

Here's this morning's action

It looks like AAPL is going to pullback a bit or consolidate according to this 1 min chart.

I don't want to say anything before we see how this market is going to play out, but I'm seeing some very unusual things that are quite bullish, I'll address them later as I don't want to jinx anything here.

By the way, XLK/Tech is also doing quite well today.

Trade Idea VHC (long)

VHC is in an obvious bear flag, traders expect it to break down, more then likely, it will break to the upside in a head fake, but one that may be worth following long for a quick trade.

Here's the hourly chart with good accumulation in the flag.

The 30 min chart shows the same

As does the important 15 min chart.

Here's the long term Trend Channel stop, but if you prefer to wait for a breakout of the flag, the stop could be tightened considerably.

TLT-Treasuries; Another Safe Haven Trade

The hourly 3C chart

This morning's action.

The Dow is now 237 points off it's lows with an overall swing of 260 points so far in the first hour and 20 mins of trade.

FXF-The Swiss Franc

The Swiss Franc has been a traditional safe haven trade when the market was being hacked to death, take a look at the Swiss Franc this morning...

GLD/SLV Update

Both are progressing as expected from yesterday's updates.

GLD 1 is continuing its negative divergence seen yesterday

Same with the 2 min chart

The 5 min chart is also showing a negative divergence

And the 15 min continues, we are not at a reversal quite yet, but moving through distribution.

SLV 1 min continuing to grow the negative divergence

The 5 min is getting worse

As I said yesterday, I would expect a little more upside today, perhaps a flat trading range, we are apparently in stage 3 Distribution, stage 4 is decline.

Very Early Market Update

The response to Bernanke's speech hasn't been that bad, it's worth remembering the last FOMC meeting, the FOMC sounded like they admitted failure and din't give the market anything it expected, the market did go on to rally from there, so keep your eyes open.

DIA 1min

IWM 1 min

QQQ 1min

SPY 1 min

Short term positive signals

Currencies

The dollar is selling off... This is usually equity positive.

EUR/USD after GDP was released.

USD/JPY

FXE positive divergences yesterday 1 min

5 min

10 min

Yesterday's negative divergences in UUP/$USD 1 min

5 min

10 min

GDP

As you probably know Q2 GDP came in at 1.0 on average consensus of 1.1 and down from the preliminary 1.3. The final revision will be in late September. The SPY premarket dropped about $1.50 from the highs and is now about $.22 off the lows. Next up, Bernanke at Jackson Hole at 10 am.

The Closing Wrap

You could say there was palpable fear in the market today. There was a co-dominant P/V Relationship of Price Down/Volume Down and Price Down/ Volume Up, it leaned toward the latter. Unlike yesterday's subIndustry and Industry group strength, we had a complete reversal with only 11 of 239 groups trading in the green. The candlestick pattern today was a bearish engulfing pattern, even though the market is not even close to oversold, I attribute much of this to fear in the market over the GDP number and Bernanke's Jackson Hole Speech, which has been painted by Wall Street as a no win situation.

Gold and Silver both saw the bounce we called for yesterday and look like thy both have some room left on the upside.

We still have some very strong daily positive divergences that would suggest something is up beyond what we have been constantly sold over the last few weeks about Bernanke being painted in the corner with the market having no where to go but down, so tomorrow we should have some resolution to this Jackson Hole ordeal, but as I always warn, beware of the first knee jerk reaction when it comes to FOMC/Fed statements, it's almost always wrong.

As for the miner's system, DUST ended up pulling back right to our target zone

I suspect we'll see some late day strength in DUST tomorrow.

Be up early, the action starts at 8:30 and 10 am

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.