Wolf on Wall Street

Wednesday, December 29, 2010

The Cats and Dogs

It all started last week with our 4-day 215% gain in XOMA. As I've been saying though, this rally won't last long and when the trades trigger, you need to be on top of them pretty quick using good risk management. I prefer not to risk more then 1-1.5% of portfolio value (as per risk management formula-which does not mean you can only buy 1% worth, in some cases, you could invest your entire portfolio following the risk management plan-however, that would not be prudent and if you read the link at the top right about risk management, you'll see that I prefer to never invest more then 15% or so of my portfolio in any one idea).

In any case, obviously the CATS and DOGS are working, when you don't risk more then 1-1.5%, you can afford to try the trades and the way it's been going, you're pretty likely to nail a few of them.

The other component is knowing when to take a gift. With the Cats and Dogs trades, these should be considered gifts, not so much trades because as I've said, they rarely last more then a few days. So my rule is any double digit gain, I take either most or all of it off the table, consider it a gift and wait for the next one.

The winning trades that triggered just today and yesterday have shaped up like this-

XING doing great today up nearly 32% triggered yesterday

CFW made a 1 day gain of 30% triggered yesterday, but you see in this trade, it's a gift and needs to be taken or your gift will be taken from you. There's little room for greed when you get a gift.

WEST seems to be doing pretty well, I'd like to see a strong close on volume for potential follow through

EEE is up 19% and as high as 30% today-a gift

FBP was a trade from last week at $.33 it's currently up 42%, intraday as high as 60% . I think I'd be locking this one in or at least a major portion of it.

FTK triggered today, again we're looking for a solid close on good volume, if that happens, we might just get that follow through buying.

I've placed a few more trades on the list today and I'll be looking for more tonight, but this C&D rally seems to be winding down. If you decide to let a trade ride, be sure that you have locked in enough gains so that it does not become a losing trade for you.

Market Update

Some interesting charts below...

DIA isn't negative on the 1 or 5 min, but is showing a negative divergence on the 10 min which is more substantial, but not as timely.

The Q's on the 1 min are in confirmation with the price trend, meaning we haven't seen much in the way of institutional money trying to push it around in one direction or the other.

The SPY 5 min is negative here. I'd expect to see some selling pressure relatively soon. I don't think it will be a clean reversal because the TICK Index is kind of all over the place showing a lot of volatility. However, the longer term charts are building negative, perhaps it's for year end selling as the trading year is just about over.

THERE ARE A FEW NEW TRADES ON THE LIST I JUST ADDED

Be sure to set alerts on them.

FTK from the Trade List Just Triggered a Breakout

GNK charts

I just told you about a triggered alert for GNK on a break of support, here are the charts:

Here's the daily chart showing an area of support that has been falling apart.

This 10 min chart shows the intraday price action around that support level, we saw a break on heavier volume, a test of what is now resistance (when support is broken it becomes resistance) and a failure of that test on heavier volume again.

The 3C 1 min chart shows 3C is trading inline with the decline, confirming it and more interesting, the attempt to break above resistance in the red box shows a 3C negative divergence at that moment meaning there was distribution/selling on the attempt. This area now becomes stronger resistance and we saw a pretty fast move down from there on an intraday basis. Ironically just last night I showed you the rates shippers are receiving for Dry Goods shipping, which made them a target for me and I put several on watchlists with alerts.

Take a look at the trade, it's not in bad position at all, of course it is a short sale trade.

Take a Look at GNK Short

Last night I showed you the Baltic Dry Index -this directly affects shippers, GNK is in that space and just triggered an alert on my watchlist by breaking some recent support. I'll try to get a chart up in a bit.

SRS UPDATE

SRS 5 min positive divergence

SRS 15 min Positive divergence

Yesterday I suggested SRS may be near the end of its pullback, we are seeing some positive divergences and it's at a low risk entry (using risk management of course). I'd maybe put a stop below yesterday's lows on a closing basis, this way the risk is pretty minimal and you can take a shot at what appears to be a reversal in SRS which is a leveraged short ETF on Real Estate.

EEE Just Triggered

This is another of the Cats and Dogs Trades that I listed Monday night and that have been giving us double digit 1-day gains. EEE just triggered, check it out.

BAC Still Can't Take Out Resistance

I've mentioned BAC, a bank that I would think still has large troubles ahead of it. I've been talking about the resistance at $13.40 and BAC's inability to close above $13.40 or breakout through that resistance level. Before the recent rally BAC has seen, it saw a nearly 7 month downtrend, uninterrupted; a real nice trade.

BAC may offer up another trend down, but we are at a critical point and $13.40 is the level in which we have to watch.

Here 3C 30 min shows the negative divergences at the tests of resistance at $13.40-right now we see a negative leading divergence. I like the trade short if it breaks below support at $13, but you can also enter the trade in this area with a stop above $13.40 on a CLOSING basis, no intraday. In this way your risk is fairly low, the break of $13 is higher probability, but the trade up here is lower risk as it's only several cents from a stop. I would not place the stop at $13.40, it's too obvious and once stops pile up at that resistance zone, it may be tempting for the market middlemen or HFT's to run those stops and take BAC above $13.40 for a day or two on a false breakout. Remember, they are still chasing volume to make their money. So a stop with a little more room makes sense, maybe $13.52 or something that's not so obvious and is not a whole number like $13.50.

On an intraday basis, we see at least 6 attempts to hold above $13.40, all failed.

Update..

The SPY and DIA have small 1 min negative divergences, they may grow, but I'd expect some temp. intraday weakness 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.