Wolf on Wall Street

Wednesday, August 8, 2012

EIA Petroleum Report / USO

Here's today's weekly EIA petroleum report

Released On 8/8/2012 10:30:00 AM For wk8/3, 2012

	Prior	Actual
Crude oil inventories (weekly change)	-6.5 M barrels	-3.7 M barrels
Gasoline (weekly change)	-2.2 M barrels	-1.8 M barrels
Distillates (weekly change)	-1.0 M barrels	-0.7 M barrels

A drop of 3.7 million barrels, we also saw a drop in domestic gas production.

This is the 2nd consecutive large draw in a row and a draw 6 of the last 7 weeks, but even taking that in to account, inventories are still at their upper range. Gasoline demand remains soft.

As for USO which has the Syrian (and everyone else involved from Iran to the US to Russia and more) remains a fundamental problem that has been marking oil up vs what we would expect from normal correlations.

While crude has a correlation with the $USD, although inverse, the fact the Euro makes up 50% of the Dollar Index makes it a suitable proxy currency that does not have an inverse correlation, meaning the Euro and USO should be closely correlated, here we see the Euro in red vs USO and totally out of correlation, USO looks rich here and that has everything to do with event risk in the Middle East.

Looking at the longer term charts and considering probabilities, for now, I want to look at trading USO from the short side, I'm not saying it's a short right here, we want a good tactical entry, but I don't want to trade against probabilities.

For example...

As price breaks above resistance (head fake move?), the 30 min 3C chart is in a large negative divergence.

At the same area, the 15 min chart shows the same conclusion. These are the probabilities I want to trade when looking at USO.

As USO crossed resistance, look what happened to the 3 min chart's trend, it went leading negative!

The 1 min trend was in line or 3C/Price confirmation until USO crossed resistance, then leading negative, this is why I suspect there may be a head fake bull trap being set up here.

The 1 min chart on an intraday basis shows a negative divergence on the release of the EIA report this morning at 10 a.m. and it hasn't looked much better since, this is one we want to keep on the radar as a possible short set up and maybe on a bull trap.

Gap Filling

So far there's nothing on the 3C charts that suggests we are seeing anything more intraday than some gap filling, but it doesn't matter how we open, it's how we close. The indications on the charts have been VERY clear since Thursday and a move down is what has been indicated, thus setting up all those shorts the last few days.

I'm still poking around and it is no time for a victory lap, but so far so good.

Early Indications

As you know I'm not crazy about morning trade, but thus far on the open we have pretty good confirmation...

DIA's negative divergence, we have a small intraday positive divergence on the 2 min timeframe which has filled the gap, but looks good.

The QQQ shows confirmation

As does the SPY.

I still expect very volatile intraday trade and stop/limit order hunting, but it appears we have at least started to move toward our trend expectations.

I need to look at a lot more charts, but the Credit divergence showed yesterday with the $AUD in our Risk Asset Update were two big ones that I think were pretty good signals in addition to what 3C has been showing us.

Tuesday, August 7, 2012

European Market Closed Up-Credit and Rates, Not as Happy

Since Draghi gave his "Everything to save the Euro" speeches, it's almost as if the market totally forgot that when it came time to act on those words, Draghi took a pass. I say, "almost" above because I find it interesting that the day after the ECB punted last week, it seemed GS had Euros and quite possibly stocks to sell (being they pretty much move together) and GS, the company that trades against their own clients, came out and gave us all free trading advice and told us to buy the Euro; to me that sounds like GS has some Euro's to sell after Draghi's sharp words were met with a wet blanket and the F_O_M_C didn't do much the same week.

Can GS sell a large position in a day? No, it would likely take several days and they aren't selling in to weakness, they are only selling in to price strength and demand as that is the Wall Street way.

So maybe that explains in part why the much better informed bond and credit markets are not as enthusiastic as the much less informed equity markets, as they say, "Credit leads, equities follow" and on that note...

European Equity markets higher, Credit dislocated and headed lower.

In fact, from our own Risk Asset layout, take a look at the very liquid High Yield Corporate Credit vs the SPX..

On an intraday basis, HY Corp. Credit is trading below yesterday's close as it comes dislocated from the SPX, this has traditionally been one of the better leading indicators when it diverges from the SPX, but this didn't just start today, it just got worse today.

Since July 31, HY Corp. Credit hasn't made a single higher high while the SPX has made lots of them, yet today's divergence still stands out on this chart.

Even though the Australian Central bank didn't move rates last night, take a look at $AUD, one of my favorite currencies as a leading indicator for the stock market...

That's the first real negative divergence between the two that I can remember in at least weeks, maybe more.

We'll see how some of these indicators end the day, but HYG and the $AUD dislocated as well as European Credit vs equities, it smells like change is in the air.

IWM 5 min

I think similar to financials that had not yet broken above support, the IWM was seeing similar support or at least was not seeing as sharp a negative divergences. Now the IWM has crossed that threshold, look how fast the 5 min chart went leading negative and took out the last 2.5 days in 2 hours.

MCP

Yesterday was one of those days in which MCP put on a real show for us, it was similar to our very profitable FB long when everyone hated FB, but much shorter in terms of accumulation, it was how spectacular the accumulation was that made MCP hard to ignore.

I closed the long MCP position from yesterday I believe around a 7% gain, not bad for no leverage and 1 day. I said I'd definitely close it if the negative divergence reached the 5 min chart, it has. Here are the charts and a couple of stop ideas if you are still long MCP.

Based on this 5 min ultra-leading positive divergence, I wouldn't be surprised if MCP pulled back and constructed a bigger base that can sustain a longer move, we'll certainly keep it on our radar. Earlier I mentioned this chart hadn't seen a negative divergence, but was getting sloppier.

The same chart intraday has now put in a negative divergence, up 5.4% today, plus yesterday's gains.

For a tight stop, the 5 min Trend Channel has it at $12.20-about 5 cents more than earlier.

If you are looking at MCP longer term, the 60 min Trend Channel has a stop at $11.90 which is still a profit from yesterday's entry.

XLF 5 min looks NASTY

Finally it looks like Financials have broken, I'll bring you the charts in a sec

Charts that count

I don't know if you saw my ES post last night in multiple timeframes, but I thought it was interesting.

Here are 2 charts from the major averages, 1 long and 1 intraday/short.

As I said last night, trading is about a lot of things: risk management, seeing what the crowd missed, patience, but it's really a lot about probabilities and putting the probabilities on your side. We can't control what the ECB does or what the F_E_D does, we can only react to what they do and exercise good risk management and decision making, but when it comes down to it, we have to make decisions with the best information we have at the time. With these charts looking the way they do, there was no way I couldn't finish adding to those positions. Or in other words, when there are divergences like this, I can't ignore them.

DIA 15 min in the worst leading negative divergence on the chart.

DIA 5 min, compare Thursday's accumulation to the last 3 days of negative divergence -leading negative.

QQQ 30 min in the worst leading negative divergence since at least May.

The 2 min intraday chart leading to new lows.

SPY 60 min leading negative divergence, again the worst on the chart.

2 min leading negative at new lows

BIDU Positions

I'm also going to fill out the BIDU core short position in the equities model portfolio and add a speculative $135 September BIDU put position in the Options model portfolio.

One last UVXY Call position

For the options model portfolio, I'm going to go with some September $5 calls.

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.