Wolf on Wall Street

Thursday, September 6, 2012

Added A Small Long Position to FAZ

I already have exposure there so I just topped it off. I may consider something along the line of an options position, I'll be a little more patient on that.

Futures Falling Off

As mentioned earlier, there was an accumulation signal right after the European open, now the opposite in ES.

The same for NQ (NASDAQ mini futures)

Financials

I do have some an opening in the Equity model portfolio after closing CAT yesterday, I'm considering FAZ, but not as a core position, more along the lines of a swing trade.

Financial's trend can't even be scaled properly, it would be lower, not a great signal with non-confirmation on the fastest timeframe.

A closer, intraday view.

The 3x leveraged Bull Financials, FAS also leaking off on a negative 1 min chart, no opening confirmation at all.

FAZ 3x leveraged Bear Financials, this would be the potential long.

Financials, Tech and maybe Energy

Financials and Tech are showing the same loss of momo in 3C on this parabolic move, Energy is still a bit stronger than the other two, but it seems to be turning as well.

AAPL losing momo too

AAPL is underperforming to start, you saw the opening charts for AAPL already...

More damage by the minute, we'll see if the pressure stays on, I suspect it will as I did yesterday

Dow/DIA isn't far behind

First the QQQ and now the DIA/DJ-30 (both show the same) seem to be running out of momo.

DIA

Closer view

Parabolic Reversal in the QQQ

The first signs are showing up in the QQQ

Getting worse each minute.

I'm not a big believer in 'V" reversals, but parabolic moves are another story.

Some Differences in Response

ES accumulation just after the Euro open, the volume was decent as well for 3 a.m., currently relative negative at the recent highs of this capture.

While Draghi spoke, ES didn't rally, it saw volatile moves to the downside like this 3.75 point move in 1 minute, sometimes we don't see that in an entire overnight session.

The Euro (EUR/USD) since yesterday's 4 pm NY close, not a good reaction to the ECB policy statement followed by Draghi's comments about the bond purchase program, there was a dissenting vote who Draghi would not identify, you can guess I'm sure as he voted "Nein!"

A closer look at the Euro's reaction, ECB events started at the 12:00 mark.

NASDAQ mini Futures negative already.

QQQ 1 min not too different from the NASDAQ futures.

AAPL 2 min

AAPL 5 min

DIA, "Buy the rumor/Sell the news"?

IWM 1 min

SPY 1 min Again, Buy the rumor, sell the news? That's a very parabolic move thus far very early in the day.

There are further diverging markets.

The Knee Jerk and Getting Lost in the Lines

First we have the mandatory Central Bank Knee-Jerk reaction, in some cases this stems from a real case of unknowing, processing, looking at the angles and finally repositioning.

In this morning's case (and it has been a VERY long night for me as I was watching the European markets until after 4 a.m. this morning to see if pre-emptive comments would be coming out), the Bloomberg leak yesterday on what Draghi would present was VERY close to being right on. In other cases the knee-jerk reaction is simply about taking advantage of others' current positioning and repositioning; when you are offered an opportunity you may have a strategic view, but the environment presents opportunities to further that strategic positioning via tactical movement (short term market action to effect longer term goals).

When I managed a high end custom furniture division's finishing department, one of the things I use to say day after day to my finishers who were creating all kinds of effects was, "Don't get lost in the lines". It becomes very easy to become fixated on detailing a small area to create an effect when what is needed is much less and the finishers simply needed to move from working from within 1 or 2 feet of the piece and step back to a distance of 15 feet and look at what needed to be done to create the desired result, they were lost in the lines.

Because the market is an emotional creature and our decisions, biases, hopes and fears are often driven by emotion more than they should be, we often become lost in the lines, when all that is needed is to step back and look at the picture in full; artists probably understand what I mean.

Right now we are in the mandatory Central Bank announcement, "Knee-Jerk" period, but understanding what kind of knee jerk it is (grappling with understanding the issue or positioning using the issue as the catalyst) is the first step.

Yesterday my inclination was toward, "Buy the rumor and sell the news", this isn't immune from the knee-jerk effect as we have seen so many times with the F_E_D.

So I'll be looking at the flows, diffrent markets/assets and presenting a composite that we can work from to take advantage of the knee-jerk effect.

I also want to touch on the issues as I did yesterday to give you a basic grasp of the fundamentals, EU actions are plagued by unintended consequences.

We'll know where the opportunities are shortly, I suspect many are opening up as I write.

Try to withhold emotional judgement for the moment, don't get lost in the micro or the lines, step back and look, the opportunities will materialize and I believe they will materialize today, perhaps soon as the signs are already there (hint-compare the EUR/USD reaction to Draghi vs the market reaction, you are seeing two very different opinions)

Still listening to Draghi-OMT... OMG!

However, so far there aren't many surprises from Bloomberg's leak yesterday. I would guess that the most likely outcome will be and has been, "Buy the rumor/Sell the news".

It has been interesting to see ES move 3 points in 20 seconds.

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.