Wolf on Wall Street

Monday, December 20, 2010

Good Examples of False Breakouts

Earlier I posted the negative divergences that made me believe these were false breakouts, each one was breaking out above a level of some technical significance, some more then others such as the QQQQ

DIA shows 2 recent examples on the hourly chart, today's is the second red box. The technical level of significance here is resistance at a gap-both failed the breakout, note today's increasing volume on the failure.

The QQQQ's were trying for a breakout high, it also failed-again see the 3C divergences posted earlier. The second or last bar is the failure on increasing volume.

Here the SPY was trying to take out a resistance level that has held a couple of times, again the last bar on the hourly chart shows the failure on increasing volume. Given some more time, we'd likely see a move to the downside. We still may get that tomorrow.

The SPY and DIA are trading down significantly in afterhours.

Market Update

The DIA broke support and then completed a failed test of new resistance.

Now, look at the volume

NFLX

Above, NFLX has made a recent series of lower highs/lower lows which= a downtrend. While most of the S&P 500 trades at a P/E (historically) of about 15-16, NFLX is trading at a very rich P/E valuation of 67 trailing and 46 forward. A break on a close below the red trendline will represent a lower low or downtrend. In other words, should selling take hold in NFLX, as it has the last month, this one has a long way to fall.

FAZ Entry

Continues to look good, even at the 2 p.m. ramp in the market, accumulation remained steady in FAZ and now it's approaching a breakout of the bullflag.

False Breakout Follow Up

It loks like the earlier post suggesting the 2 p.m. parabolic move up may have been a false breakout is increasingly looking that way.

QQQQ has broken the support level I mentioned, volume is increasing on the downside as well.

The SPY has also broken support and 3C is now at the lowest levels of the day.

False Breakout?

The probability of this recent move at 2 p.m. being a false breakout looks pretty high. False breakouts tend to move the other way (down) pretty quick when they fail ( meaning below the support trendline).

DIA 3C still negatively divergent and not confirming the move.

Same with the QQQQ

Here's the Q's resistance level taken out by the move up, a move below that will create a false breakout and most likely a swift move down. Note the volume did not expand on te breakout.

SPY negative divergence

SPY false breakout? Both volume and 3C tend to lean that way. A break below (maybe you should set some alerts at the support level) could be a decent quick short trade using a leveraged ETF.

LVLT Reversal

LVLT appears to be putting in a reversal.

LVLT 30 min positive divergence into the pullback

LVLT 60 min positive divergence

LVLT held support at the hammer from Tuesday at $.92

FAZ Pullback/Entry

FAZ is now at a very god risk:reward area for long positions.

FAS -long financials, showing a negative divergence.

FAZ is in a positive 5 min divergence

Here's the daily FAZ chart, the bullflag pullback is near support, that combined with the positive divergences suggest that this pullback is about done, thus making this an ideal low risk area to be long FAZ.

Market Update

This is the first set of negative divergences in the averages

DIA 1 min

QQQQ 1 min

SPY 1 min

We should see a reversal intraday shortly.

SRS Update

There are some initial early signs that the pullback in SRS may have run its course. Don't forget to check out the REIT/Real Estate shorts on the trade list as well as this may be an opportunity to buy a dip.

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.