Wolf on Wall Street

Thursday, November 8, 2012

Market Close

At the close of the regular hours just moments ago, the S&P and NASDAQ E-mini futures still had a large leading positive divergence.

I'm going to take a look around at some other asset classes and earnings

Treasuries

Besides the Euro ETF being positive and the $USD ETF being negative, as I mentioned yesterday from the charts it looks like a high probability stop run in the EUR/USD, I also looked at Treasuries as they tend to be another good confirmation indicator.

Treasuries are a flight to safety trade, they'd be up on a day like today, but lets take a loom at the charts...

Even on the fastest timeframe TLT (long dated treasuries) are not only negative, but there's no hint of a positive divergence sending them higher today, it's just a correlation effect.

Broaden out the same chart to see if there was a positive divergence earlier that would explain it and there isn't, but there is a trend that is seen among other timeframes.

The 2 min chart negative-this is a good example of a relative negative divergence as price is near the same level at the highs so you can make a "relative" comparison.

3 min leading negative, note the trend around the 5th and the leading negative today.

5 min with the same trend

15 min with the same trend.

What does this mean to me? Well first there's no positive divergence in Treasuries, a flight to safety trade and today there's no confirmation in them either, in fact they are negative which suggests they should see downside, being they trade opposite the market, that's why I put the charts up.

MCP

MCP is reporting tonight after the bell if I'm not mistaking, based on the recent charts I will be holding MCP.

1 min

2 min leading positive

3 min leading positive

5 min leading positive

10 min leading positive.

I just can't look at a signal like that and trade against it.

GRPN Earnings Follow Up

I showed you GRPN earlier today, they report tonight. What we look for in an earnings play in something way out of place as in the entire market is moving up and ha 3C confirmation and the stock in question is moving up with heavy distribution and leading negative divergences in most timeframes, then we know something is not right, we have a likely leak.

Lately we've been looking at a few and have had a lot of them right, but they weren't earning's plays based on leaks, they weren't even earnings plays, they were best guesses. These have been coming through pretty accurately lately, but it is more based on what I'd call conventional analysis than seeing a leak.

I don't like to play earnings at all, I never use to because you don't have an edge, it's a wild card that market perception can take either way no matter what the earnings are. We only started playing some when I did the quarter of earnings to show you there are leaks and we had something like 95% right, those were real leaks.

I don't think what I see in GRPN is a leak, but it is more positive than I'd expect. As with AMZN, don't go by the after hours or pre-market reaction, we called AMZN positive and it was down 12% in AH, but up 7% the next day in regular trade.

Really not much has changed since I showed you GRPN this morning, I personally wouldn't take the trade, but that's up to you.

The 5 min shows a recent change in character, although so does price, but 3C is more positive than the change in price and this kind of flat area is where we usually see positive divergences.

The 15 min chart is what is interesting about GRPN. Based on this and best guess, I'd say GRPN reacts well to earnings tomorrow.

Futures

Both ES and NQ are adding to the leading positive divergence.

Futures Update (SPX/NASDAQ E-Mini)

The futures also gave a stronger signal more recently...

ES 1 min (SPX)

NQ 1 min (NASDAQ)

This is the example I was trying to describe yesterday when we saw the 1 min intraday negative divergences, first that a "V" reversal is unlikely as it takes more time and second that price would come down somewhere around yesterday's low and allow the indicator to stay higher or put in a positive divergence, rarely do you see positive divergences or institutional buying in to higher prices, it's either in a flat range or falling prices.

Even though the divergence is leading, I use the white arrow to illustrate the "relative" positive divergence as price is lower and 3C is at the same level which is actually an improvement if price is lower, on other timeframes it's higher than yesterday.

Went with GOOG December $650 Calls

GOOG looks pretty interesting to me here timing wise

1 min leading positive near vertical.

GOOG Calls

From the GOOG post earlier today, as a hedge and a potentially decent trade, I'm going to open some GOOG December Calls (in the money).

Quick Market Update

I think we are very close to that intraday reversal, I looked at the currency charts and then some currency correlated assets and they all look like they are ready to turn form here.

MCP and AMD Update

With that divergence I pointed out in the Tech post as well as the IWM's very strong leading, I'm having trouble not pulling the trigger on an AMD add to.

In any case, here are the updates for both AMD and MCP.

AMD's long term charts are what sold me on AMD long, but this 3 min chart's momentum is really something else and right where AMD is just below support. I have to look at what's available, how big the position is, etc before I make a decision on this, but if I were just looking at AMD, I wouldn't have any problem starting a long position here, albeit a little more speculative in size.

We've looked at the volume/support breaks in AMD and these longer term charts don't look surprising at all, these are what I'd base the probabilities on, such as what happened on this 5 min after the support zone was broken.

Or the 10 min

Or even more clear, the 15 min. These are the types of signals I don't ignore.

MCP

Speaking of a break of support and a divergence on the heavier volume-1 min

1 min intraday is positive at the dip here.

2 min is in a leading positive divergence, but this is a good example of how to look at a relative divergence, being relative between 2 points with price lower at the second and 3C moving up when confirmation should see it at a lower low.

3 min MCP leading positive.

5 min leading positive, I also marked the divergence at today's lows.

MCP 10 min is leading now, there's good migration in both averages.

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.