Sitting Still Can Be Profitable

All the newcomers, get your core short position together. We are over 50% of portfolio short, only UNG long, and 25% will remain in cash. The other 25% will be added as/if the SPY breaks below the $104.40 area. You can use the shorts I listed of actual companies, be aware that if they have a dividend and you are short when the go ex-div, you will be responsible for paying that quarters dividend which usually is not a big concern of mine.

I still prefer using the ETF UltraShort/3x Bear, but make sure your risk management accounts for the leverage.

If you are new to the site, this is the plan so make sure you have a decent short position in place because the break  of $104.40 could come very soon. Look at these two charts of the DOW

See any similarities? Look at the dates at the bottom of the charts, they are both the Dow-30

With all of this in mind I thought I'd share a little of tonight's Worden Report with you,

"Strong, Purposeful Selling

With fear of holding over weekends, Fridays have suffered the frequent effects of trader trepidation, with Mondays providing bounces. Friday last was a horrendous day. Bulls and bears alike probably expected today would be a bouncing Monday.
       However, it was not to be. There is too much shell-shock underlying the action, and the market was in the midst of a downside resolution on Friday. Today, we got a continuation of the slide, although the market may be ready for a mini-bounce before the end of the week."

I don't think I could have said it any better. If you are in position, then you need to just be patient and let your positions work for you. If you are new, you need to look at the ETF's I have on June's list and consider spreading some funds around in each of them, that will give you broad market coverage.

When we come to support at $104.40 a few things could happen, we could see some consolidation before slicing through it, the market may just make a huge move down on big volume through it, we could see a bounce before seeing downside below the level or least likely, the market could set off another rally from there and form a right shoulder in a H&S top formation, in which case we will take action to hedge shorts, jump into longs and wait for the final reversal. However, I'm thinking we will see a repeat of 1929 as posted above. The downdraft after the break of support on the 1929 chart is not visible, but it moved down 30% within a few weeks and within the next couple of years dropped another approximately 85%. Read my post at Trade-Guild, "How to make more than 100% in a Short"

I don't know where we are headed but I have maintained for over a year that this market will see new lows. If you are new and need help or have questions, let me know and I'll answer ASAP.

I listed a few decent shorts tonight. Most of these are pretty far from the stops on purpose, it's in case we get a bounce to resistance, then they all would be excellent add-to candidates.

When looking at the spread sheet remember I list the trades and put in the entry prices, I do not follow up after that. For instance, the trades of 6/2, a few made money, most didn't trigger, but the post for that night says specifically the are 1-2 day trades so whatever gains or losses they show now are irrelevant. *I CANT KEEP UP WITH EVERY TRADE I LIST, IT IS YOUR RESPONSIBILITY TO EMAIL ME IF YOU NEED CURRENT INFORMATION ON ANY TRADE YOU TAKE WHICH WOULD INCLUDE AN UPDATED STOP AND TARGET. I OFFER YOU THIS AS PART OF THE SERVICE FOR FREE SO TAKE ADVANTAGE OF IT AND EMAIL ME. I HAVE OBJECTIVE STOP SYSTEMS THAT WILL TAKE THE MOST OUT OF THE TRADE AS POSSIBLE.

ABOVE ALL, IF YOU DON'T UNDERSTAND OUR RISK MANAGEMENT PLAN, AND IT IS POSTED BELOW A FEW DAYS BACK, THEN LET ME KNOW AND I'LL HELP YOU.

Update

Well it looks like the false breakout repercussions in the NASDAQ took precedence over anything in the SPY.

I hope you newcomers took my advice last night and got your short positions together.

Here's why the NASDAQ situation exerts such a strong downward gravitational pull. When a stock or an average makes a breakout of a consolidation pattern, all eyes have been on the support and resistance level of that consolidation pattern, a breakout is considered by many to be a bullish even and it used to be a fairly reliable bullish event. Now that Technical Analysis is so mainstream, Wall Street knows exactly what everyone is looking at as well. It's like playing cards, but Wall Street can see yours.

So the average or stock breaks out, a lot of buy orders are triggered and a sense of "I don't want to be left behind" becomes overwhelming to many, so like sheep they follow and chase the breakout, this is why breakouts generally see high volume, not because Wall Street was doing a lot of buying. In fact they were more likely doing a lot of selling to those who were buying. A day or two above former resistance (now support) and it's time to let it fall and become a failed breakout, we see them now more than ever, but traditional technicians keep buying them making it an easy poach for Wall Street.

When prices fall below the breakout level, all that volume that represented buyers, now represents holders at a loss so a few with risk management plans start to sell, that creates downward pressure, which makes more sell as their losses mount and before you know it, you have a snowball effect. This is why false breakouts fail hard and fast.

Now things get much more unpredictable, which is why I had you get into your shorts a little at a time a while back. The market's volatility could bounce us, but we just saw a decent divergence fail, that's why I didn't say but, I said buy at trigger "A" and/or "B". However, now everyone expects volatility so maybe the market throws us a curve ball and just slices through all resistance. YOU KNOW WHAT TO DO THEN

The SPY's relative strength vs the QQQQ

Two Paths

Not it appears we have a bottom formation in place, which fits with my analysis. The breakout of the formation is at $107.25 on the SPY, the breakout to new highs is the $107.65 level on the SPY. The breakdown of the formation is below $106.25. Whatever long you use and I suggests a leveraged long ETF, you may want 1/2 @ the formation breakout and 1/2 @ the new highs breakout.

A Successful Retest? Yes?

And it looks likely to pass? Yes it does.

1 min, 3C v.II showing the level of the retest which has become an important level for the near term outlook. 3C is showing a leading divergence

a 3C v.III 5 min chart again showing a leading divergence.

Finally 3C v.III in 10-min, is showing another leading divergence suggesting the $107.50 area will be broken.

A good play on the breakout if it occurs will be to ride UPRO until we get a reversal, it shouldn't be a very long trade, a few days at the max and possibly today at the min.

You would enter UPRO if the SPY breaks above $107.65 and a stop would be around $107.20.  You may want to cut your exposure to 1% risk as this is a fairly tight stop.

Update

It appears we will get the retest of this morning's highs. The call on early strength was correct, then it was a bit of a mystery, but I said I thought Wall St. would try to take this market up (volatility-shake out the weak hands) and possibly re-enter the flag before letting it fall. If the retest is successful and breaks out, you could probably ride an Ultra/3x long up for a day or so, just don't be deceived about what this really is.

Take a Look at Trade Guild

I posted one of my indicators I use (custom), Price/Volume Relationships. Red is the worst, Green is the best, you can figure out the rest. Notice the Red in the recent consolidation and the orange on Friday on the daily chart. However, remember I said early strength on Monday, look at the size of the last green bar on the second chart!  I used 3C for that, I looked at this for the first time on a long time and it happened to confirm the 3C analysis. I have a lot of custom indicators for TeleChart and StockFinder. any re much more useful than I sometimes give them credit for.

Probabilities

***Update-futures are down overseas, which doesn't mean we will open down but makes it more likely. That does not negate the probability of early strength, if you are a nimble trader you may want to buy an ultralong like UWM at the first sign of it moving up and sell it, well that's your choice, but maybe in the $29 area or until it stops making higher highs/higher lows on a 5-minute chart.

Playing cards professionally and gambling are two distinctly different things. One entails risk management and having the probabilities on your side. The other usually has no risk management or something even worse-human emotions dictating the size of a bet (which is why Las Vegas hotels can build as grand as they do) and no edge. The edge is probabilities, the only sure thing is already behind you. Risk management is there for when your probabilities fail you.

So the probabilities have been stacked against this market pretty bad, the breadth readings for anyone listening to them (they are boring) have foretold all of this as we've gone.

Now below we have a series of very negative situations.

Click on the charts to enlarge. First the NASDAQ COMPOSITE: it broke out with the NASDAQ-100, the S&P and Dow didn't follow. Since the days of Charles Dow, it has been well known that this can mean trouble for the market. I posted as such last week. The breakout now has failed which means it's a false breakout-note where it failed-at that gap. False breakouts, because of the structure and emotions behind them tend to reverse quickly and deeply. STRIKE 1

All the indexes had this pattern in them, it's called a bear flag and it's a continuation pattern. This is the SPY and the implications which are laid out on the chart give us an "initial" target of $95. Wall Street's new volatility game will usually try to pull prices back into the flag, it could take a day, or two days, maybe more, but they want to wring out the shorts, get there bulls back in the market, set their shorts and then let it all fall apart again so watch for that possibility, but don't take it too serious. It's probably not worth betting on unless you are using 3C and watch the market all day. Note the diminished volume into the flag, the increased volume on the breakout and the nearly vertical drop that forms the flag pole (upside down).

And here's the bear flag target for the SPY.

I mentioned the divergences building last Friday, here we see a good example of a positive divergence in the 1-min SPY, suggesting that we will see early strength.

Here's a 10-min 3C SPY Chart, this divergence carries more weight.  However, note the negative divergence on Thursday and remember Thursday night's post and how much I talked about "key" negative divergences. With a chart like this, it was fairly easy to see where the probabilities were. However, if this 10-min divergence continues, then we may see more than just early strength and as I mentioned above, Wall Street would love to see prices back inside that flag for a few hours or a day. So the probabilities are increasing that our little bounce here may be more than just an a.m. event.

However, the 15 min, which is the rock vs the 10 min which is the scissors, ultimately wins out and says the downtrend will prevail. Again, the fall on Friday was fairly easy to see as of Thursday.

The plan for tomorrow is the last thing you probably want to hear because we as humans don't feel productive unless we are doing something, but there is a time to be still that will accomplish more than any flurry of trades you can throw together. Unless you do not have your 50% or so, core short position together with proper risk management which I talk about every post, then you have nothing to do tomorrow unless by some strange occurrence the market breaks below $104.40 (SPY) then you need to add 25% more to your short positions, whether they be the core ETFs or any of the shorts I've recently listed. You can always play any of the limit trades that have not triggered if you just can't sit still.

If you are new, then you have work to do and tomorrow if we see higher prices as probabilities say we will, then you should be looking at the core inverse Ultrshort and 3x Bear ETFs and shorts I just listed the last few days. Ultimately you have to do what you are comfortable with, but our plan is to be 50% short right now, many of us are. When the SPY breaks $104.40 we add another 25% of the portfolio short and 25% stays in cash.

So if you are new to the site, you may have some spring cleaning to do, selling longs into higher prices, selling short into higher prices, read everything I have on both sites on risk management and if you need help please email me. When this market breaks you do not want to be scrambling to get yourself positioned. We have been doing this since the SPY was well above $112-$114. You need to get caught up. Take a look at the core ETFs, it is what I am using. Also you may be able to buy a little UNG right on the open at market but only 25-30% of your intended position. It's already moved, the rest you'll probably need to wait for the first pullback to the 10-day m.a.

If you have questions, email me at BT46n2@Gmail.com

Silence is the sound of dignity, patience is the mark of a successful trader. Time to be still....
unless this market goes the other way in a big hurry. Remember, we are with the probabilities, not the fortune teller's crystal ball so RISK MANAGEMENT (new people, read the "2% rule" and both "position sizing " posts at Trade Guild under "Resources and Concepts" on the left side of the site.

Update

The move in the market and especially the QQQQ (look for a bounce soon intraday), has changed the outlook on everything. In 3 hours the charts have taken a dramatic turn for the worse.

Click on the chart to expand the view

Featured Trade: UNG Natural Gas

One of the nice features of TeleChart is the ability to send yourself an email when an event occurs, such as a breakout above a certain level. Unfortunately, I didn't do that. David from Trading to Win picked this one out a few months ago and asked me to look at the 3C chart. I concluded that it looked bullish, but it would be a bit before it was ready-at that point I should have put in an alert or threw it on a watchlist.

Lucky for us, UNG didn't get away, it just got started. Here are the charts:

Without even looking at 3C I could tell something bullish was happening even though prices continued to sink. What was it? Those two red trendlines form a "Descending Wedge" which despite consecutively lower prices into the formation, it's actually a bullish chart pattern.

One of my finer moments (calls) was the end of the uptrend in oil. We had 5+ years of appreciating prices, lets call it five years, that gives us 260 weeks, I had nailed that one within a week and even greater pride and joy was the same week Cramer was all over his audience to buy oil! What gave me that insight? The exact opposite of what we see here, an Ascending Wedge (bearish) confirmed by 3C.

Ascending Wedge in oil. Some of the ways to confirm include declining volume, divergent MACD and the actual pattern being drawn objectively. I also use 3C as it is a topping pattern I expect to see distribution.

Back to UNG:

Here we see declining volume right to the Apex, MACD isn't too insightful until late April. Also note the Head and Shoulders or inverse H&S bottom-very nice base. This stock broke out today on great volume.

Typically these patterns retrace their base, which means there's at least a 40% gain in the trend, it could be significantly more.

Here's a great crossover system that will dramatically reduce your whip-saws and false signals. The yellow line is a 10 day moving average. The blue line is a 22-day moving average.  In the middle window in yellow is a custom indicator (if you have TeleChart I can give you the code). This custom indicator has a moving average of 22 bars (in Blue). Lastly I have Wilder's RSI, period 30 (note it's double the length of the typical RSI setting). MACD is there purely out of ease of use, it does not figure into the system at all.

OK, that seems like a lot, but it's very simple. When in doubt, keep it automated and as simple as possible. There were 5 rallies and any one could have potentially been the breakout, however this indicator only gave one buy signal and that was today. All that needs to happen is the yellow lines (m/a and custom indicator) need to cross above their moving averages in blue. The last requisite is that RSI needs to be above the middle line or "50". During all of those crossovers in the bottom formation, only the real breakout was signaled.

How to play this... Typically after a strong day on INCREASED VOLUME on the breakout, we'll see a second day or two called follow through. If you like the trade, make sure you correctly asses and manage your risk and go ahead and buy some at market right off the open. If there's strong momentum this won't come back for a pullback anytime soon so you want to get your foot in the door. On average, the first pullback of a new uptrend will pullback to the 10-day price moving average, usually intraday so if you can't watch it every moment, each day estimate the level of the 10-day m/a and put in a limit order for the other half of the position. This could be at higher prices, it's a sacrifice you make for confirmation that the trade is moving in your direction.  Typically the next pullback will occur at the 22 day moving average. You can use the cross-downs as a signal (2 out of 3 is a sell signal) or a break of the 22 day moving average on the close (ideally on volume).

Out target is the base of the formation around $11, it's nearly a 40% gain. It may go significantly further then that. You can also use my Trend Channel as an effective stop if you have TeleChart, if not click on the TeleChart link at the top of the site and check it out.

Note the dashed red line, that is a VWAP or Volume Weighted Moving Average and Wall Street uses it to gauge the effectiveness of the market maker/specialist that filled the order to accumulate. If the average price filled at, is above the WVAP, that market maker won't be seeing anymore business from the institution. If they filled below the VWAP, then they did a good job (depending on the extent). So you can roughly figure out what Wall Street's average price is and you'll want a stop below that. I use my Trend Channel which accounts for volatility and the current stop would be $7.10 and the VWAP is at $7.20. If you want to trade tight, then a stop (on a  closing basis ) of $7.77 would be decent. Personally with all the volatility, I'd go with $7.10.

This is a fantastic setup and you should study it, the descending wedge, the inverse H&S bottom/accumulation in stage 1, a breakout moving into stage 2 mark-up. It's really a beautiful chart and not an easy one to manipulate for too long.

UNG is your Featured Trade. As always, RISK MANAGEMENT FIRST (see last night's post about it if you are new to the site). As always, any questions you can email me.

As for the rest of the market, make sure you understand and are aware of the post below, those are all fairly non-correlated ETFs that we are using as the basis of our short position (we are buying them long).

The Markets

Tuesday was an impressive down day that carried expected negative breadth readings. Wednesday was nearly the mirror opposite in all ways except the negative breadth reading remained (look at the last few posts on Trade-Guild). Today was a virtual wash, with another day of negative breadth readings. Today only 4 stocks on the Dow 30 closed bullishly (not to say that only 4 stocks closed up, but did it on rising volume as well).

By contrast, the much better acting NASDAQ 100 had 43, which is not surprising as it is only the NASDAQ 100 and Composite that actually managed to break out of the lateral movement-the DOW and S&P flirted several times, but buyers backed off at resistance.

3C (orange) detects accumulation and distribution through divergences, both negative and positive. I've added a blue arrow where there was a small positive divergence, the white box following is the reversal that 3C picked up on. The red arrows mark relative negative divergences and the white box shows the reversal. The largest red arrow that stretches from the morning highs until the end of day represents the SPY attempting once again to break through resistance, but this time we see major distribution considering the chart's timeframe of a minute. This is a key development. As I said last night at Trade Guild,

"As far as 3C goes, I don't have any consistency among the 3 versions or the averages I track . The only thing I see is some positive looking longer term action which could be just late to turn as those charts take a while or it could be warning of a right shoulder in a Head and Shoulders pattern that could develop from here. Other than that, I do not see organized accumulation or distribution, so right now there's no edge there."


Today was a strong development for the bears.

 This is 3c v.III (blue) on a 10-min chart. The first red arrow on top shows a relative negative divergence and most probably the reason the retest of the highs failed so badly.  The second lower arrow shows a LEADING NEGATIVE DIVERGENCE between the morning and the close, this is a significant development.

3C V.I shows several negative divergences to the left that led to lower prices. There were nearly an equal number of positive divergences that led to price appreciation. The bad news for the bulls here is 3C's leading negative divergence into today's close. The 10 min chart is fairly significant as it borders between market maker activity and institutional actions.

Finally the index that has shown the most recent strength, the NASDAQ 100 / QQQQ.
You can see, just like all the other averages, we are seeing a negative divergence brewing at the end of the day as the Q's make higher prices. I think we may be close to a reversal here. If the S&P and Dow can't break out soon, then I believe it will drag the NASDAQ down. It seems Wall Street may be preparing for that possibility.

So it seems we are moving into an area of distribution. There a a lot of leading divergences, which suggests to me that we will see downside. I think we will see early morning downside, although it would be typical of Wall Street to launch an expedition on the S&P and DOW above the consolidation zone, (a false breakout) and then we'd see downside from there. I have no strong evidence of this, I just have seen Wall Street's new normal and volatility. It would be a perfect situation for all of them, from market makers to institutions.

For the new comers, the list of core ETF's we are using to rough out a position was posted earlier today. The basic plan (unless we see a right shoulder and a head and shoulders top develop instead of the Broadening top that I favor) is to be about 50% in these stocks at this point. For those of you who are new, it would be  fairly ideal time to start those positions. You must absolutely use risk management, the 2% rule, proper position sizing and non-correlated equities.

We'll hold about 25% of the portfolio in Cash which can be used to take advantage of swings, opportunities and to hedge if need be. The final 25% of the portfolio (on the short side-and these are rough numbers, you must do what works for you) will be added when we have confirmation of our current bearish analysis and that will come with a breakdown below $104.35 on the SPY, at which point you should see volume increase dramatically.

*For a detailed view of my analysis, check the recent two videos I posted here and on Trade-Guild.net

Remember, I posted a lot of shorts (real shorts, not long inverse ETFs) and real shorts have the ability to allow you to use your profits before you close out the trade, unlike long positions, including the long Bear/2-3x leveraged ETFs. The ETFs have broad exposure, especially the core we have chosen. They also are not news specific like a stock. I'd suggest blending a mix of the two, with a few select longs like tonight's UNG.

Most of all, be patient, understand there's a lot of volatility in this market, 1) because it's the new Wall Street dynamic and 2) because of this being a top formation-volatility is inherent in a top. And before you enter any trade, make sure you understand the comprehensive risk management plan we use, last night's post covered some of it and there's more available at Trade Guild under "Resources and Concepts" on the left side.

As always, email me with any questions.

Areas of interest-Bearish
- the Q's breaking below $46.25
-The SPY's inability to close above $110.80
-SPY moves above $110.80 and falls back down on increased volume
-The Dow's inability to close above $10264.20
-or an intraday move above that level and a move below it gain on increasing volume
 -the Composite falling below $2281.07
-XLF breaking above $15.02 on the close
-The dollar index breaking out-around $87.50

Areas of Bullish interest
-The SPY breaking above $110.80 on the close, especially on rising volume
-The Dow closing above $10264.20, especially on heavy volume
-The Q's making a new closing high on increased volume and a wide candle body
-Q's filling $47.74
-The composite making a new closing high on volume.
Strong closes with dominant P/V relationships of Close Up/ Volume Up

Core Positions

Incase you forgot, here are the core ETFs we are buying: FAZ, TWM, EDZ, SRS, EEV, FXP, ERY, SSG, SMN