The Close and Predictability of Traders

I keep mentioning the predictability of traders not to point out something interesting, but to help give you an edge. Wall Street knows how predictable technical traders are and they use that against them, so if you understand what traders will do, where they will place their stop, what will cause them to buy/sell/short/cover, then you have a good idea of how Wall Street will react.

 This is the SPY vs the Euro (red) as you can see, the Euro making a lower high was also the top of today's intraday trade and with the 3C divegences in place, it was very unlikely the market could keep up momentum and more likely it would start to sell of a bit into the close. As mentioned earlier, today did nothing of technical importance other then fill a gap.

 The same chart as above, just for the entire day. Again, the Euro failed to make a higher high this a.m.  and the market reached an intraday high. When the Euro started trending up again, it boosted the market, when the Euro failed to make a higher high, that was the top for the market today and it roughly followed the Euro lower, although on an arbitrage basis, the market is a bit over-valued.

 Here's the trend line I showed you earlier, with no more momentum, that support was broken.

 As far as obvious goes, look at the break of the trendline (the two larger down candles) and then resistance at the trend line, this is what I mean by obvious. At the very least, you should see that you shouldn't place stops at these obvious levels.

The 50 bar m.a. on a 5 min chart, this is as old as the concept of day trading itself and look at volume when the moving average is broken-a lot of stops triggered.

I'm updating now, I'll be checking internals, industry groups, the C&Ds and anything else I can find of interest.

AEO Trade Update

AEO was a short trade idea from Feb. 2

Thus far, especially on a swing basis, AEO is acting very well.

AEO is still in good shorting position. The idea was at the red arrow, which as a swing trade, it continues to make lower lows with only 1 noise candle thus far.

The real trade we are looking for would be this...

This would start the next leg down, the first leg down was on that sharp gap down which is a breakaway gap and very bearish.  Thus far, the consolidation pattern after the first leg has failed and that's where we entered the trade, so the next leg down is what we are looking for here.


Here are the updated stops...

 This is the 2-day trend channel which is wider and is what I prefer initially...

Here's the 1 day, which is tighter and guarantees a profit is you entered on the day it was featured. AEO is just about breaking the trend channel to the downside which should accelerate the downside move.

I would just be patient with this one, especially if you are already at a profit, give it some time to do it's thing as it is moving in our favor and as we wanted to see. if you are considering this as a new position, which would give you exposure to discretionary if you are looking to diversify, I would prefer the wider stop at $14.25, but even there you still have a pretty good looking risk:reward profile. The tighter stop can certainly be used, or if you are treating this as a swing trade, it's already a swing short, the current swing stop would be a daily close with a low above $13.81

EXM / DHT C&D Trades pop

Both of these were trade ideas from Feb. 6th, DHT I believe I updated early this morning as well.

DHT Trade Idea

EXM Trade Idea

DHT is up over 7%, but it hopefully is just getting started, don't forget the rules of C&D trades.

EXM is up 43% since the 6th and 20% on the day.

I think DGT has more to go, being they are in the same sub-industry group, that would bode well for EXM as well. Remember though, these come quick and leave quick. PErsonally I prefer to take at least partial gains on any double digit 1 day move and set a tight trailing stop. Ultimately the idea is to be able to take your original investment off the table and let the gains run.

Closing Market Update

SPY intraday is close to breaking it's intraday trendline, the Euro weakness is not helping. In fact the Euro weakness is a sign of uncertainty regarding Greece. I think Sunday when the FX markets opened, they expected a much more positive atmosphere from the EU regarding the Greek vote then what we have seen and as such, the Euro is giving up its gains on that uncertainty, which certainly has a direct influence on the market, which did nothing technically important today other then fill some gaps.

 Here's the DIA which has worsened since the last market update.

 The Q's are a bit worse intraday, the bigger picture of the last several days though says more then today alone.

The SPY has probably seen the most significant afternoon deterioration.

Here's ES, which as I pointed out earlier today went negative pre-open, it's turned leading negative in the last hour or so and looks to threaten a new low later tonight, probably in after hours.

Energy Chart Request

Here's Energy/XLE

 XLE 15 min 3C

 Friday's gap down produced a bit of a volume surge, this is something to put in your tool box, very commonly a volume surge, especially on a positive divergence, whether it be 3C, RSI, MACD (depending on the timeframe and trend) and especially on a reversal candlestick like a hammer, is very often a short term turning point. Today the gap, as is usual for this market, has been filled.

Here are some examples on XLE's hourly chart, but this applies to most stocks that have fallen and hit a volume surge, it's sort of like "mini-capitulation"

On an hourly chart, there are several volume surges on pullbacks or a drop like Friday, accompanied by "Hammer" candlesticks or at least a long lower wick which may not qualify for the term "hammer" but has the same effect.  The extent of the volume surge, the extent of the pullback and the timeframe in which it occurs, all are contributing factors to what the reversal will look like, obviously the more extreme the capitulation, the better the reversal, but these tend to be short term in nature. If you saw this on a weekly chart, it may have more significance then a short term reversal, especially if it is afer a prolonged down trend or bear market.

Other then that, The correlation between a weak dollar and crude prices came in to play around 12:30-1:30 as the Euro gained (euro in red, XLE green) and you can see they moved in lock step. Toward the close, if the Euro continues on this path as it is diverging and weakening, it will be hard for Energy to maintain momentum and may very well start to reverse.

Being the Euro just broke an important support zone, I would suspect it will remain moving down for awhile longer through the 4 p.m. close, but more importantly, likely overnight and given the market's correlation with the Euro as well as the Market Update and 3C stance, this of course would have negative implications for the market. That being said, who knows what or when the next European rumor comes out.

 EUR/USD 5 mi longer term breaking intraday support and moving toward closing the gap.

A close up view of the same chart.

Here's the inverse correlation between the Euro and the $USD, a weak $USD is good for stocks and commodities in general, that means a strong Euro is good for them, a strong $USD/weak Euro puts pressure on stocks and commodities.

Euro in red, $USD in green, the trend all day has been subtle, but in the last 10 minutes has become more pronounced.

The other thing to note is that XLE has performed about the same as the SPX today and given the car bombs at the Israeli embassies today, Energy "Should" have outperformed on increased uncertainty about geo-political risks, it did not, that is a hint in and of itself about the health of the energy sector.

Market Update

This is the first market update thus far today because there didn't really seem to be much going on that was hinting at one direction or another until I looked at it with a bit longer perspective.

Thursday 3C clearly warned about Friday's drop...

 SPY's negative and then leading negative divergence on Thursday warned of Friday's drop. A small positive divergence late Friday formed, I assume this may have been part of a gap fill set up, however today the 2 min chart CANNOT confirm the gap up and remains at Friday's levels.


 Here's the DIA also warning on Thursday and a late day positive divergence, again probably connected to a gap fill as no gaps are left unfilled anymore, however the DIA is moving this afternoon toward a new leading negative low, below that of Thursday/Friday.

 Here's a closer look at the same chart intraday today.

 That chart has leaked in to the next timeframe at 2 mins, you can see the severe deterioration on Thursday followed by Friday's drop and a negative divergence today in the afternoon. The fact that the faster chart is worse and bleeding in to the slower chart is significant.

 Here's a close up of the same chart intraday.

 Here's the DIA 5 min that warned Thursday, again on Friday at intraday highs in the mid afternoon and again today.

 I have pointed out the IWM's 5 min trend as it is leading negative, you can see that the IWM is still not in line, but on the same trajectory as the 3C trend.

 QQQ 2 min wanring on Thursday and is leading negative today with a relative negative divergence this afternoon, still in leading negative position.

Here's a close up of the same chart today.

I'm going to take a look at some of the Industry groups next as well as GLD/SLV.

The EUR/USD Chart

I meant to include this chart in the last post...

This week's FX opening gap up on news of the Greek vote and subsequent leak lower on the lack of really any response from the Troika except hints that they will continue to set the hurdle higher and higher until Greece finally cannot live up to the terms.

The European Close-What You See, What You Don't

I often repeat the trading maxim, "What everyone knows is not worth knowing". Such is the case in European markets as they close. On the face of it, equities did well, that is what everyone knows. Dig a little deeper though and some disturbing trend are emerging and continuing.

I often post the Credit/Risk markets relative to the SPX, this is because the credit markets are much larger and they are traded by smart money, how many retail traders do you know who invest in Credit (Sovereign or otherwise)  or Corporate Credit? It is for this reason that what happens in the credit markets often leads the equity markets. On an intraday/multi-day basis, I showed you proof of that in the Credit/Risk Asset Update earlier. The longer term performance is what is scary.

Last week European Financial Credit started to deteriorate, then we heard about the S&P ratings agency downgrade a slew of Italian banks, more downgrades of EU financial institutions are on the way as the S&P gets them out as fast as they can (being they looked at sovereigns first and downgraded a handful of them and then were to look at financials next which we are seeing now). I doubt it was coincidence that European Financial credit sold off last week before the Italian bank downgrades.

Today Senior (higher quality) and Sub (lower quality) financials both closed significantly lower on the day despite what equities did, in fact they closed wider then Friday and at two week new lows.

Interestingly, earlier I showed you the 3C negative divergence in ES pre-market, it was at the same time that sovereign debt/credit took a plunge, but almost exclusively in Italian 10-year BTPs.

As I showed you in the earlier Credit/Risk Asset update, not only are we seeing High Yield Credit and Corporate Credit under-performing, but this is the case in Europe as well, with both closing at losses today. A true risk on rally should see credit performing well with equities or in fact, leading them.

As I first speculated last week and then received confirmation the next day, the performance between EU financial institutions that took LTRO money and those who have been especially vocal about the fact that they did not, is seeing a spread and deterioration among the banks that DID take LTRO money. This is the EXACT same situation that occurred here in the US during 2008 when any bank that borrowed from the F_E_D's discount window was immediately seen as suspicious and as likely in trouble, those names were shorted and the F_E_D had to 1) create a facility that banks could borrow from without their names being disclosed (which were later disclosed a after a couple of years) and 2) force banks to take money, some of which maintain to this day that they did not want or need it, like JPM who continues to tell Wall Street this years after it happened. The point was, the F_E_D was trying to remove the stigma of borrowing as the financial markets had frozen up and credit was not being extended as banks were loathe to do so as the market would immediately punish them. The same thing is happening in the EU right now via the LTRO which has another operation this week.

Senior Financial Credit Spreads are at the widest levels in two weeks with the biggest deterioration since Thursday in over two months. As expected, the gap between those who borrowed from the LTRO and those who did not is widening, which may have implications on the next operation this week as banks needing the money are being punished in the markets for taking it.

The main point being, what is seen (via equities) does not mesh with the larger credit markets which are diverging from equities; we have seen the same trend here as well in both credit and other risk assets such as commodities.

The FX market, specifically the EUR/USD is declining from this week's opening print which came on the heels of the Greek vote to agree to austerity measures. However the lack of enthusiasm from Greek's potential saviors is making the market nervous and the Euro is dropping, now having taken out the next support level I mentioned earlier. In no way does the Greek vote being passed guarantee the Greeks will recieve the next bailout tranche needed before their March 20th debt service comes due. Furthermore, the agreed upon tranche of $130 bn is no longer enough to keep Greece from default as their economy has fallen apart faster then anticipated in October when the $130 bn trnche was agreed to, they now need at least $15 bn more and there is no talk of that happenng. The only talk coming from the Troika is (not what the market expected) talk about "Passing the vote is one thing, implementing the measures is another" and the creditors want to see action apparently before they approve the next tranche, yet as I pointed out last week, while March 20th is the deadline for the payment, it will take a lot longer to take care of the logisitics, such as votes in Germany, the Netherlnds, Luxembourg and Finland to name a few. This does not include the PSI debt negotiation and bond swap that would have to be completed, again something that takes time. There are many other issues on the table as well, but I suspect what is sending the Euro lower after the knee jerk reaction to the Greek vote yesterday, is the fact that rather then adulation coming from the Troika (who we may now count as the Northern countries that are still AAa rated as well as the IMF/ECB) or a positive tone, we are hearing more and more today that the vote alone IS NOT ENOUGH. At this point, there has been no formal submission of what the Greeks need to do that will be enough. It seems as I said earlier, every time Greece moves toward Troika demands, the demands become more and more absurd. It seems to me they have already decided to cut Greece loose, but are searching for ways to save face and say, "We gave them the opportunity, we didn't kick them out, they just didn't want to make the sacrifices".

In other semi-frightening news, the German Foreign Minister was quoted in an interview today saying,

"It's undoubtedly a moment of truth for Greece. If a sustainable and correct course is set in Athens now, Greece can expect our support -- but only then. There will be no more advance payments. Only actions count now."

"I am more than dissatisfied with the political impasse in Greece in recent weeks. I'm also addressing the German opposition when I say this: You can't solve a debt crisis by constantly incurring new debts."


and finally, when pressed by the interviewer,


 "I don't want a German Europe. Q. What do you want?  A European Germany." 


All of which confirms everything we have suspected both since the Greek vote and on a longer term basis as a matter of German policy.

On the Long Side: C&D Update

On February 8th, I ran an extensive scan looking for C&D (Cats and Dogs) trades, I described what I found in the following terms...


"I've run about 6 different scans, went through 300 charts, came up with a 1st round of 64 candidates, narrowed that down to 32 and that down to 14, out of those 14, I found a mere 5 trades that look good, I will say that I'm pretty shocked, I expected to have more like 30 or so, but going through the 32 stocks in a narrowed down watchlist, I found a lot of these Cats and Dogs trades are already burned out, meaning they drove them up and got the heck out of Dodge taking their profits with them, not at all what I suspected I would find."


As for what C&D trades are:


"these are trades that can move very fast and put in some spectacular gains, very few are lasting trades so I generally take at least partial profits on any double digit move, especially if it comes in a single day. The rest of the trade (if it still looks good-decent volume, closes near the top of the range, etc) should be put on a tight intraday trailing stop. The ideal situation is to get enough profit to take your original investment off the table and let   the profits run. Don't underestimate their ability to move, they can easily make 30-50% 1 day moves and several hundred percent in a run, but don't fall in love, know when to take your winnings."


Friday, as suspected, many of the C&D trades that had been leading the market and dominated the top 25 percentage gainers last week as well as the top 150 percentage gainers, quickly reversed and as I had found in my original scan, many were burnt out and were now the worst performing 25 and 150 stocks.

Most of the candidates still have the original set up in preparation for their breakout move, so they for the most part, still look very interesting. I had to cull a lot of candidates to come up with these 5.

The original 5 trade ideas I posted still look pretty good. Here's an update on where they stand.

DHT is a shipping company, generally these are not doing well, but have been in rotation among the C&D trades, breaking out, pulling back and breaking out again. None of these trades are meant to be anything more then trades and I explained above how I treat them, however at the same time, I believe in taking the opportunities the market offers where you find them.

 DHT has advertised it's mark-up intensions with a series of volume spikes which are picked up by momentum traders running volume surge scans. The recent breakout and pullback has been on light volume and DHT HAS NOT collapsed like many of the other C&D trades did late last week. It's showing a little momentum today, watch volume carefully, even a seemingly minor uptick in volume can be a sign it is getting ready to pop. DHT stands at about break-even from when it was mentioned on the 8th (up .88%). The fact it has not crashed like many other C&D trades is proof of some relative strength there.

 The hourly 3C chart was in near perfect confirmation of the down trend and recently saw a positive divergence and on an hourly chart, it still looks good here.

DRRX-Drug Manufacutrer

 This one saw at least 1 capitulation event and then formed a nice, quiet lateral area before volume picked up. The volume pick up may not look like much, but it is the little movements that most don't pay attention to that are often the hints we are looking for. The pullback of the last several days has been on light volume. This one is only down 3.5% since Feb 8th which is nearly unchanged for a C&D trade when others are down 40, 50% or more. There's some slight interest brewing today that should be watched.

 The 30 min 3C chart shows a positive divergence in that flat quiet period as I would expect, accumulation is done quietly and in a stable price environment. Volume only starts to surge when the accumulators start to move the stock to stage 2 mark up, announcing to momentum traders that this stock should pop up on their watchlists.

GERN

 Here's another capitulation event and a rounding bottom-like pattern. It is also forming a symmetrical triangle (which considering the preceding trend is viewed as a bullish consolidation) right below resistance, which seems to indicate it is gathering strength for a breakout. Volume has been light on the consolidation as we'd like to see.

 GERN's 5 min 3C chart at the bottom with a positive divergence and in line during the ongoing consolidation.

GSIT (semiconductor)

 This one is a little more volatile, but it has held the 22 day moving average with a hammer candle thus far today indicating that it has most probably found support right where we'd expect to find it.

 The hourly 3C in a flat and quiet base-like environment.

SCHS (Education & Training services)

 This one has an interesting pattern, a breakout move and a bullish ascending triangle consolidation on lighter volume which is very close to a support level at the bottom trend line.

 The 60 min 3C chart before the break out move and a current leading positive divergence in the consolidation.

The 15 min chart has also gone from distribution/profit taking on the first move up to some positive divergences as the consolidation has formed, this may be my favorite among the candidates. If you didn't already, make sure you read the original notes on these trades from Feb 8th which are linked at the top of this post.

CRR, RES, VAR & XOM

All of these have been recent short ideas, all with the exception of VAR (Medical Appliances/Equipment) are in Energy, CRR and RES are in the same sub-industry group (services) so you want to keep that in mind as you don't want too much exposure to any 1 group. However you can trade all 3 in the Energy group, but they should be treated as 1 trade for risk management purposes. All are offering a slightly better entry today for those of you who may be looking at phasing in to these trades, which is the approach I favor.

Let me know if you need the specific trade idea date, all of these are recent and can be found in the 2012 archives, all I believe in February, but if you need the exact date, just shoot me an email.

 CRR's long term trend on a 5 day chart and its volatile top.

 Friday CRR broke below the last major support area, whether it can produce the commonly seen volatility bounce or not, is hard to say. Usually I would say yes, but we are in a different environment now. I favor 1/3rd positions, maybe 1/3rd in this area, leaving enough room in your risk management to add on a volatility bounce/shakeout and finally the last 1/3rd on a break below the recent lows. Of course there are many different ways to phase in to a trade, but this appears to be one that will trend well in a stage 4 decline over the coming months.

 Viewing CRR a little differently, you can see, while volatile, it is already trending lower.

 RES is right at it's final major support area, RES is in the same industry group / sub-industry group as CRR, which is good for confirmation of the group' weakness, but for risk management purposes, if you are trading both, they should be treated as 1 position as they will likely move together.

 VAR is breaking it's sub intermediate up trend and has bounced a bit off support I mentioned Friday, I would leave some room as I favor wider initial stops which can later be tightened in case VAR sees a shakeout, again this is another trade that can be phased in to so long as you set up your risk management in anticipation of phasing in to the trade.

XOM is near  small top which appears to be within a larger topping formation seen on a 5-day chart. I would leave some room if you phase in to XOM for it to fill the recent gap from Friday's gap down. You can also wait for a gap fill rather then phasing in or wait for a break of the trendline.