Wolf on Wall Street

Friday, September 3, 2010

Major Post Coming... Don't miss it

False Breakout

OK, I'm going to give your inbox a rest for now before you report me for spamming. This appears to be what we've been looking for. We'll have to see how it reacts at support levels and watch the volume

Another Piece of the Puzzle

UUP which has drifted down today is also showing a leading positive divergence here on the 5 min chart-to refresh your memory, 5 minute charts are the earliest timeframe that institutional activity is observed and in a change of direction, it's one of the first places you want to look.

Here's the UUP 1 minute chart (market maker territory) and note the positive leading divergence there-also note it started around the same time as the rally in the market. Remember, typically the dollar (UUP used as a proxy for intraday information) runs inversely to the market

Shift in character

This is the first major shift in character we have seen since this run up started around 11 a.m. It is a negative 1 min divergence. The current position of the last 3C reading is also negative and lower. One of the tricks they use to snowball a decline is a false breakout. Clearly a resistance area has been formed around the $110.80 area. A failure of a breakout above that is one of the tricks Wall Street uses to create downside momentum. Watch for volume at support levels and obvious areas such as the triangle breakout areas and whole numbers.

Update 3

Remember the post about the "Friendly Trading Environment"? When patterns act like technicians/traders believe they should and how we know in reality that often they break these patterns, but they had not the past few days. You see a clear ascending triangle, it has a typical expectation of an upside breakout-we got that with volume, no fooling around with it, then a continuation triangle, again no fooling around with it as Wall Street usually does. Like I said then, I'll say now, they've created an atmosphere that is welcoming traders and making them feel like they are making all the right moves as patterns act axactly as they have learned them and prices move higher.

This 3C has worked well with positive and negative divergences, you can see into this "Friendly trading environment" we have negative divergences, institutional selling into higher prices, though this is a 1-min chart which is the timeframe of market makers. This would suggest that market makers are closing out their long inventory and or going short into the rising prices. It's kind of like a trap, "Come on in" and then the door is shut in your face leaving you holding the bag. That's the impression I get here.

Wy back when we first talked about a malicious bounce, the purpose was to squeeze shorts out, draw in longs and then pull the trap door. Longs are at a loss and sell, shorts jump in and we get a snowball effect. This chart has been extremely accurate in the past on the 5 min SPY. It has shown the initial positive divergence or accumulation that took place at the white arrow to kick this move off, and since, there's been negative divergences suggesting they've been selling and shorting into the entire move.

Here we have a long position that is an inverse long-meaning a short on emerging markets, it's under heavy accumulation down here as this 1 minute chart shows. This is a substantial timeframe for Here's the 5 minute-we see the same thing activity.

Here's the 1 minute where market makers operate. Before a big move up they need to stock inventory to sell at higher prices, that appears to be exactly what is happening. A move up in EDZ would suggest a move down in the market. I think we are getting very close and personally we will be buying EDZ here.

Update 3

UUP is in sync with 3C-there appears to be a small positive divergence, this would be normal intraday volatility unless it continues to develop.

USO is seeing a little bounce off a relative positive divergence on the min 3C

Here are some signs for me, I would not go chasing this move.

GLD has filled the gap and appears to be putting in a negative divergence. Remember I'm bearish on Gold so I might consider using the strength to initiate a small short in GLD.

Update 2

Here you can see the opening gap being faded (sold off) and the positive divergence from 10:30 to just before 11 a.m. Now we have a negative "relative " divergence. Before making a strong reversal call I'd like to see 3C which is near the $110 level, break below the red line drawn around $109.85-that would give us a stronger leading divergence and more likely reversal to the down side.

And Here It Is... U6

This is probably the broadest measure of unemployment as far as unemployment's effect on the economy. The way the number is tallied for U6 data (and when you see it you will understand why it's not released) is the closest tally to the way it was counted during the Great Depression. The Great Depression topped out at 25%.

As you can see, U6 for August rose from 16.5 to 16.7-this time last year the numbers were 16.4-16.8 so you can see after a year, we haven't made much progress and the rate is headed higher. These are the kinds of things CNBC won't talk about and the government doesn't want to highlight. The fact is, it shows nearly 1 in 5 people who are unemployed or underemployed and that's important information. Here's where you can find the employment data.

The Mechanics of a Leak

Clearly the report is sent out, most probably to media outlets before it's release, the same as a President's speech, this how they are able to give analysis of the story so quickly, they already new what would be said, but it is "Embargoed", until after the actual event. I think Wall Street has a lot of friends in the media and a lot of money, obviously it wouldn't be too hard for them to get their hands on this information. Of course there's probably other avenues they have as well.

Click on the picture for an expended view

Update

Positive divergence for the run after 11-may still have some in the tank

This is a 5 min -the above represents market makers,this represents a blend of market makers and institutional money. There's clear distribution again today, first into the gap up and as you can see by the second chart, it's moving into a leading negative divergence.

Has anyone found the current U6 number released with the report today, I've been answering emails and haven't had time to look. I'd appreciate the link, especially if it shows last month's number.

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.