Wolf on Wall Street

Tuesday, October 19, 2010

Bounce tomorrow

This is a 1 min positive divergence I mentioned in my last post, an adept and nimble trader may be able to cash in on a quick move. I'm guessing we see a gap in the a.m., perhaps a close higher, but that's way to early to tell. The bounce is normal so don't be too concerned with it at this point.

As for AAPL, this is a dangerous trade to embark on going long. There were a lot of people today who have been conditioned over the last month or so to believe the market will act a certain way-for instance, AAPL will rise forever. When there's that kind of an attitude, Wall Street brings the pain to the masses.

Here's the positive AAPl 1 min divergence

For a swing trader, this is the trend channel and the red box is the stop you want to watch for, then it's much safer to enter the trade short.

This is also my trend channel, this time it is set for a trend trader or investor, and in the red box, this is the stop where you should feel comfortable entering a trending/longer term position.

End of day ramp

There are 1 minute positive divergences in the Q's, the SPY and AAPL. You may see that bounce I mentioned or a gap up tomorrow, this is normal behavior.

Technical Analysis is About Going with the High Percentages

As I said, 85% of these patterns are recognized by black box trading systems and broken up. A bear flag should break down, end of story, this one did and then re-entered the bear flag. This is not commentary on the direction of the market, but how pervasive this event is in the market now. The popularity of technical analysis has made it easy for Wall Street to take advantage of "What traders THINK will happen". So traders see the bear flag, it breaks, they enter a short and put a stop in the bear flag, so they are taken out in a matter of minutes. Do not fall for this trap-it happens every time there's a common technical pattern. So a tool (technical analysis) is now a weapon, just used against you.

The Dollar vs. Euro

A lot of the weakness we are seeing across the board is attributed to the strength in the dollar, specifically today, but last week we saw the first warning signs of the Euro trend breaking with 3C showing dollar accumulation.

Please read annotations.

DIA as an example

We now have a bear flag in the DIA, experience tells us that the black box systems are likely (85%) to create a false breakout/down or two. The area to watch right now is the resistance level I've drawn in with the trendline. 3C doesn't look like an upside breakout is coming, but it can change quickly on a 1 min timeframe. A break above resistance is not automatically bad, it depends o what 3C looks like if or when that happens, but this is a serious break and the flood of margin calls could force the market lower.

Always Try to be Open Minded

The market is as dynamic a place as you will find, more dynamic then a, well never mind.

In any case, 3C has been saying distribution in GLD-IT MADE NO SENSE!

3C has been saying a reversal in the dollar- IT MADE NO SENSE!

3C has been saying distribution in the markets VERY HARD TO BELIEVE WATCHING DAY TO DAY!

I'VE BEEN SAYING THAT THESE MAJOR CALLS FROM 3C NEVER MAKE SENSE, THEY JUST SEEM TO WORK OUT IN THE END.

Smart money rarely gets caught with their pants down in the market, that is why 3C shows distribution, they sell into strength, as we saw before the rally started, more then a week before we saw an upside reversal, smart money was buying into the decline. That's just how the market works.

Here's the Dollar Index...

recent 3C signals have called for a reversal in the dollar, today the Dollar Index broke the downtrend on a big move for that index.

GLD seemed like the impossible short bet, and I'd still wait for further confirmation unless you just get your toes wet, but here's GLD...

This is a big time daily chart, they don't get more important then this, right about the time GLD hiccuped, 3C was negatively divergent-distribution and as GLD has made higher and higher prices, 3C has refused to confirm the trend-meaning there seems to have been distribution in GLD each day as GLD marched higher. Again, that's a big drop in GLD. For those with good risk management, I think you can get your toes wet, but I might wait for a bounce and 3C confirmation before committing serious capital to any shorts on GLD. Price action is the final judge.

The DIA, SPY and the QQQQ reversals-again, toes can get wet, but defense is the name of the game and there's plenty of room below. Bulls make money, bears make money, pigs get slaughtered.

DIA 10 min chart. Remember last week or so I said there was negative divergences on the 1 and 5 minute charts and they will get more serious if they migrate to the 10 min chart. Here you can see, yesterday was used by smart money to GET OUT OG THE WAY-distribution and maybe some short selling. They aren't called smart money for nothing. Note the increase in volume as the trendline support is taken out.

The QQQQ on a 15 minute chart, again, yesterday, "GET OUT!" was smart money's actions according to the negative divergence we see here. In the red box you can see a serious leading negative divergence forming. A break of the $50 level in the Q's will be a very important event, volume should be huge should that come as it looks like it will soon.

And as we saw yesterday in the SPY, higher prices into a negative divergence, this seems like a nasty bull trap. Prices were nearly vertical and 3C was going the opposite direction.

So we'll continue to monitor trends. I implore you to get up to speed on the risk management article posted on this sight at the top right corner with the other links. There's no need to rush into anything, let the market continue to confirm. WE WILL HAVE BOUNCES and those may provide excellent opportunities to enter positions.

On the Fed front, there were some serious speeches today from Fed members questioning the Fed's actions, I'll show you later. It was rather astounding, the degree of dissent and the language used.

Despite the ALL OUT RAMP ATTEMPT in AAPL

It seems 3C was right on, showing distribution in the 5 min chart as AAPL just broke an important intraday support level around $309.50

I'll be keeping an eye on this one.

IBM, I guess no one cares.

Remember, the CROWD was buying AAPL, I can't imagine how many margin calls are going out today?

AAPL Update

1 min 3C AAPL

5 min 3C AAPL-now in a leading negative divergence. Distribution seems to be occurring now.

Financials about to reverse....

FAZ positive divergence

XLF negative divergence-1 min 3C charts

Update

DIA 1 min negative divergence

QQQQ 1 min negative divergence

SPY is inline on the 1 min, the 10 min chart shows a negative divergence.

More updates soon.

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.